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Letter to Congress on Replacing ACA

Dear Majority Leader McCarthy,

I offer the following comments and recommendations in response to your letter dated Dec. 2, 2016, as the House of Representatives moves forward with the repeal of the Affordable Care Act and offers meaningful healthcare policy suggestions that place the best interests of the consumer and the market ahead of continued government marketplace meddling.

As the Oklahoma Insurance Department surveys the private individual health insurance market in Oklahoma, it is apparent that consumers, insurers and providers are in a combined state of distress. We see the expected marketplace failings, because of government intervention, of limited competition and consumer choice in both benefit plans and provider networks that have led to ever-increasing premium costs. Consumer confusion and dissatisfaction is prevalent and is shared by other marketplace stakeholders.

It is time we start thinking differently and move toward more innovative solutions that are working in other countries. We don’t know what health insurance is going to look like in 10, 15 or 30 years. We have to start putting the processes in place at the state level to allow for real innovation in this sector, one that has been totally hampered by government intervention for decades. To that end, one thing that has recently come to our attention that we think would be of interest to everyone is contained in the attached memo [at the bottom of this article] from Dr. David M. Dror, chairman of the Micro Insurance Academy and executive chairman at Social Re Consulting (pvt) Ltd. The memo focuses specifically on “health insurance to the uninsured and lessons from delivering microinsurance in low-income settings in India, Asia and Africa.” This memo is an example of innovative thinking that we need to consider for certain microsegments of the population in the U.S. We need to look for new solutions similar to microinsurance that have yet to be considered in the U.S. but that are working in other countries.

The current landscape presents us with a real opportunity to examine the principles on which we want to base our health insurance markets. For far too long, health insurance has drifted away from traditional insurance concepts (like fortuity) and has turned into a cost-sharing program instead. It is no wonder that health insurance premiums are spiraling out of control when every health insurance policy is required to pay for a very costly menu of benefits without regard to preexisting conditions. Health insurers should be allowed to underwrite for fortuitous risk and should not be forced to assume known chronic claims. Imagine how much we would pay for auto insurance if the policy was required to pay for all damage occurring over the life of the vehicle and even before the coverage was effective.

We have in front of us now a chance to reject this creeping sentiment that health insurance is an entitlement rather than an insurance product.

For the nearly 300,000 eligible Oklahomans who look to the individual market for coverage — including many of the citizens of tribal governments — Congress must take action that (a) stabilizes the marketplace for policy year 2018; (b) returns to the states the flexibility to self-determine the scope and depth of insurance coverages that best serve the citizens; and (c) restores the regulatory authority to state insurance departments that protects consumer interests and enables issuers to deliver value-based, affordable policies that best serve their constituents. 

See also: Obamacare: Where Do We Stand Today?  

A free market, grounded in fair and limited regulatory oversight — which is predicated on constitutional freedoms and rights — presents the best possibility of delivering sustainable access and affordability in this marketplace going forward. As we move forward, a properly designed policy must target improvement of health outcomes along with control of healthcare costs, reduction of administrative and regulatory burdens and advanced system sustainability.

Marketplace Stabilization

Vice President Mike Pence and Speaker of the House Paul Ryan recently discussed their intentions to have a “smooth transition” to stabilize the health market. Their approach will marry the White House’s planned executive orders with legislative approaches to stabilize the market as our country begins to repeal and/or replace the disastrous ACA. This approach, formulated and led by Congress and the White House, will be difficult. The states stand ready to do their part to ensure the transition is as smooth as possible. Promises by the federal government under the Democrats’ control have placed this country on a very dangerous path that will take time to unwind through a budget-neutral approach. Saddling this burden on the citizens without the funds to back it up is reckless and irresponsible.

There would be no more significant signal by Congress and the new administration of their intent to stabilize markets than to fulfill the payment obligations made by the federal government under the ACA Risk Corridor program utilizing any existing money to avoid deficit spending. These promised safety valve payments are not bail-outs of insolvent companies but rather the fulfillment of a promise previously made to insurers. Further stabilization initiatives for carrier participation in policy year 2018 and beyond would include an immediate fix of the Special Enrollment Period (SEP) eligibility problem using robust verification and documentation criteria and waiting periods for market re-entry; repealing ACA fees (PCORI, HIT and FFM issuer fees) that will reduce consumer premiums; and providing a clear decision on how Advanced Premium Tax Credits (APTC) and the Cost Sharing Reduction (CSR) programs will be administered under a replacement program. These initiatives will mitigate market instability and future issuer exits.

Moving Forward Initiatives:

My colleagues on the regulatory and state government side will be enumerating multiple initiatives that have been identified as important components of a replacement package. The following list represents concepts and changes I believe are essential to the repair/replace effort that Congress will undertake:

  • Permit sale of insurance across state lines under state regulatory enforcement.
  • Adopt policies that expand the use of health savings accounts coupled with more affordable high-deductible health plans.
  • Repeal the federal individual and small-employer coverage mandates. Consider a meaningful continuous coverage premium discount or a surcharge and waiting period for interrupted coverage.
  • Allow states to pursue innovative healthcare delivery mechanisms including, telemedicine and the expansion of the technologically based Project ECHO for rural America.
  • Support transparency in pricing for medical delivery like the Surgery Center of Oklahoma has done by posting prices for elective procedures on its website.
  • A federally supported but state-administered combination reinsurance and high-risk pool program that addresses the risk management challenges of high-risk enrollees.
  • Permit employers to extend transitional “grandmother” group plans beyond the planned 2017 expiration as changes to the individual market are implemented.
  • Cap monetary damages that can be awarded in medical malpractice lawsuits.
  • Repeal rules on short-term health plans that limit policy duration.
  • Replace the 90-day premium grace period with state-based grace periods.
  • Eliminate the dual regulatory scheme currently existing at the federal and state levels. Return all regulatory authority to the states.
  • Provide flexibility through state-based innovative pathways using 1115 and 1332 waivers to create affordable health insurance coverages for the uninsured.
  • Implement market-based deadlines for submission of insurance rates and forms
  • Establish a federal initiative to sunset fee-for-service reimbursement and make the transition to value-based reimbursement payments.
  • Allow states to enact new health reforms at the grade-school level that incorporate physical fitness and nutrition programs to deter preventable illnesses.
  • Let states determine the age at which a child can remain on his or her parent’s group health plan.
  • Enact legislation that protects consumers from unfair balance billing and surprise billing.
  • Provide federal support to accelerate the interoperability of electronic health records (EHR).
  • Reform FAA rules to give states authority to regulate air ambulances.
  • Acknowledge the existence of and promote the protections surrounding religious-based medical-sharing networks similar to companies like Medi-Share, where premiums are significantly more affordable in exchange for limited network access.

See also: Is the ACA Repeal Taking Shape?  

I appreciate the opportunity to provide my thoughts on moving forward and advancing meaningful healthcare public policy. As an experienced regulator and conservative leader, I understand the challenges of balancing budgets and managing deficits. I urge the House to deliver immediate changes that will stabilize the individual market for policy year 2018 and to design long-term solutions that address competition and affordability to participants in the individual market.

The following is a briefing note from Social Re Consultancy for Mr. John D. Doak, Oklahoma insurance commissioner, on health insurance to the uninsured and lessons from delivering microinsurance in low-income settings in India, Asia and Africa. 

Implications for Insurance Taxation?

Election-year politics are dominating legislative action this year as both parties lay down policy agendas for 2017 and beyond. President Obama and the Republican leaders of Congress are offering competing plans on how to reform the U.S. tax system and how to promote other policies intended to increase economic growth and make American companies more competitive. At the same time, both Democratic and Republican candidates seeking their party’s presidential nomination are advancing tax reform plans.

During his final year in office, President Obama likely will continue to rely on his administration’s regulatory authority and the presidential veto to preserve the 2010 Affordable Care Act (ACA)—as well as other legislative and regulatory actions taken during his years in office.

Obama administration action

On Feb. 9, President Obama submitted an FY 2017 budget to Congress that reaffirmed his support for “business tax reform” that would lower the top U.S. corporate tax rate to 28%, with a 25% rate for domestic manufacturing income.

Significant international tax increase proposals that have been re-proposed include a 19% minimum tax on future foreign income and a one-time mandatory 14% tax on previously untaxed foreign income. The president’s budget, again, reserves revenue from a large number of previously proposed tax increases to support business tax reform—including specific proposals affecting insurance taxation (discussed below)—but his budget identifies only part of the revenue that would be needed to support his proposed corporate rate reductions.

Congressional action

House Speaker Paul Ryan (R-WI) has called for House Republicans to vote in 2016 on comprehensive tax reform legislation and on changes to federal entitlement programs as a way to define and build support for a conservative legislative agenda. Senate Majority Leader Mitch McConnell (R-KY) is also expected to advance a conservative legislative agenda with a focus on demonstrating an ability to govern and with an eye on protecting the Republican Senate majority.

See Also: 19 Specific Taxes Directly Related to Healthcare Reform

House Ways and Means Committee Chairman Kevin Brady (R-TX) recently outlined his goals for producing a blueprint for comprehensive tax reform and plans to “move forward immediately to draft international tax reform legislation.” Chairman Brady has said he hopes the Obama administration and Congress can reach common ground on some policies and build on the momentum from the last year’s “tax extender” legislation, which included a provision making permanent Subpart F exceptions for active financing income.

Chairman Brady said comprehensive tax reform “will not happen until we have a new president,” but he is “hopeful that, next January, we will have a president—Republican or Democrat—who is committed to making pro-growth tax reform a reality for the American people.” The chairman outlined several principles for comprehensive tax reform, including a “competitive tax rate” and a “permanent, modern territorial-type system that helps American companies compete and win overseas.” He also said the Ways and Means Committee will look, “with fresh eyes,” at a range of tax ideas, including “consumption tax, cash flow tax, reformed income tax and any other approach that will be pro-growth.”

On international tax reform, Chairman Brady said “developments in the global environment demand our immediate attention.” He pointed to OECD  “base erosion and profit shifting” (BEPS) proposals that “disproportionately burden American companies” and the European Commission anti-tax avoidance package that would provide EU member countries with an “arsenal of new revenue-grabbing tax measures.” He also discussed the growing number of corporate inversions and foreign acquisitions involving U.S. companies: “We will send a clear signal to American companies and shareholders that help is on the way—that we won’t stand idly by while our tax code drives them overseas or makes them a target for a foreign takeover.”

Senate Finance Chairman Orrin Hatch (R-UT) has said he “doubts very much” that international-only tax reform can be enacted this year. The Finance Committee Republican majority staff has been working on options for corporate integration tax reform proposals that would seek to eliminate the double taxation of corporate earnings. Corporate integration proposals generally have focused on approaches providing that any distributions made by such entities would either be deductible by the entity (dividends paid deduction) or would be excludable by the recipient (dividend exclusion). A December 2014 report prepared by the Senate Finance Committee Republican staff stated that a dividends-paid deduction “would generally be easy to implement and would largely equalize the treatment of debt and equity.” Chairman Hatch recently asked Treasury Secretary Jack Lew to “keep an open mind” to a corporate integration proposal that might help to make U.S. corporations more competitive globally and could reduce inversions.

Although there is bipartisan agreement that the U.S. corporate tax rate should be lowered significantly and that our international tax system should be updated, there is significant disagreement over key business tax issues, including how to offset the cost of a corporate rate reduction.

See Also: How a GOP Congress Could Fix Obamacare

Insurance-related revenue raisers

The Obama administration’s FY 2017 budget re-proposes several revenue-increasing measures specific to insurance companies. The proposed legislative changes generally would apply for tax years beginning after Dec. 31, 2016.

Among the insurance-related measures are provisions that would:

  • Disallow the deduction for non-taxed reinsurance premiums paid to affiliates — This proposal would disallow any deduction to covered insurance companies for the full amount of reinsurance premiums paid to foreign affiliated insurance companies with respect to reinsurance of property and casualty risks if the premium is not subject to U.S. income taxation. The proposal would provide a corresponding exclusion from income for reinsurance recovered, with respect to a reinsurance arrangement for which the premium deduction has been disallowed. The proposal would also provide an exclusion from income for ceding commissions received with respect to a reinsurance arrangement for which the premium deduction has been disallowed. The exclusions are intended to apply only to the extent the corresponding premium deduction is disallowed. The proposal would provide that a foreign corporation that is paid a premium from an affiliate that would otherwise be denied a deduction under this provision may elect to treat those premiums and the associated investment income as income effectively connected with the conduct of a trade or business in the U.S. If that election is made, the disallowance provisions would not apply.
  • Conform net operating loss rules of life insurance companies to those of other corporations — This proposal would modify the carry-back and carry-forward periods for losses from operations of life insurance companies to conform the treatment to that of other taxpayers. Under the proposal, losses from operations of life insurance companies could be carried back up to two taxable years prior to the loss year and carried forward 20 taxable years following the loss year.
  • Modify rules that apply to sales of life insurance contracts, including transfer for value rules — This proposal would create a reporting requirement for the purchase of any interest in an existing life insurance contract with a death benefit equal to, or exceeding, $500,000. The proposal would also modify the transfer for value rule to ensure that exceptions to that rule would not apply to buyers of policies.
  • Modify dividends received deduction for life insurance company separate accounts — This proposal would repeal the present-law proration rules for life insurance companies and apply the same proration regime separately to both the general account and separate accounts of a company. Under the proposal, the policyholders’ share would be calculated based on a ratio of the mean of the reserves to the mean of the total assets of the account. The company’s share would be equal to one less than the policyholders’ share.
  • Expand pro rata interest expense disallowance for company-owned life insurance (“COLI”) — This proposal would curtail an exception to a current law interest disallowance of a pro rata portion of a company’s otherwise-deductible interest expense, based on the un-borrowed cash value of COLI policies. As modified, the exception would apply only to policies covering the lives of 20% owners of the business. The proposal would apply to contracts issued after Dec. 31, 2016, in tax years ending after that date.
  • Repeal special estimated tax payment provision for insurance companies under section 847 — This proposal would repeal IRC Section 847 and would include the entire balance of an existing special loss discount account in income in the first tax year after 2016. Alternatively, the proposal would permit an election to include the balance in income ratably over four years. Existing special estimated tax payments would be applied.

Insurance Developments: Judicial and Administrative

A number of judicial and administrative developments occurred in 2015 concerning insurance companies.

These developments affected insurers in various lines of business:

  • Life insurers: The most significant development for life insurers was not solely a tax development. Life principal-based reserves (PBR) will be effective when 42 states representing 75% of total direct written premiums amend their standard valuation law. At the current rate of adoption, Life PBR is expected to be effective Jan. 1, 2017, for contracts issued on or after that date. Life PBR will implicate a number of tax issues, and, for the first time, the IRS and Treasury included guidance on Life PBR in its annual Priority Guidance Plan. Also during 2015, the Tax Court decided in Webber v. Commissioner, 144 T.C. No. 17 (June 30, 2015) that a policyholder was liable for taxes on income earned on assets supporting a variable life insurance contract based on the policyholder’s control over the assets. The case accorded deference to a number of the IRS’s “investor control” revenue rulings and could result in closer attention to variable life insurance and annuity contracts that are privately placed.
  • Non-life insurers: In 2015, the Tax Court addressed what qualifies as insurance risk for purposes of classifying contracts as insurance contracts. In R.V.I. Guaranty Co., Ltd v. Commissioner, 145 T.C. 9 (September 21, 2015), the court held that residual value insurance (RVI) contracts that protect against an unexpected decline in the market value of leased personal property qualify as insurance contracts for federal income tax purposes. The case’s reasoning relies heavily on the treatment of the contracts by non-tax regulators, and it provides taxpayers further guidance for distinguishing between investment risk and insurance risk.
  • Health insurers: In 2015, a Treasury Inspector General for Tax Administration (TIGTA) report criticized the IRS for the “finality” requirement that prevents the service from assessing health insurers that inadvertently or otherwise were not assessed the correct amount (or any) of the health insurance provider fee, which is apportioned among all covered health insurers. Other health insurance providers still wait for the IRS to act on refund requests of the fee in 2015. The ultimate resolution remains uncertain.
  • Captive insurance companies: During 2015, the IRS issued two Chief Counsel Advice (CCA) that analyze whether specific types of policies issued by captive insurance companies constitute insurance for federal income tax purposes. In CCA 201511021, the IRS determined that contracts indemnifying the policyholder for loss of earnings resulting from foreign currency fluctuations did not satisfy the three-prong test to be considered insurance because foreign currency risk is not an insurance risk. The CCA was issued before the tax court’s decision in R.V.I. Guaranty Co., Ltd., so it did not take the tax court’s approach into account. In CCA 201533011, the IRS concluded that excess loss policies issued by a captive insurance company that covered healthcare risks of members of unrelated HMOs are not insurance contracts because they lacked the requisite element of risk shifting. Based on the facts as presented, the CCA analyzed the arrangement as an interest-bearing deposit, but it then concluded that receipts were included in income and deductions were allowed for future claim payments when made. Also in 2015, the IRS issued IR 2015-19, which added section 831(b) companies to the “Dirty Dozen” list of tax scams, indicating the IRS would target these companies in examination.
  • PFIC exception for income derived in the active conduct of an insurance business: Again during 2015, the IRS proposed regulations that would provide guidance on investment income that is treated as derived in the active conduct of an insurance business and, therefore, not treated as “passive income” under the passive foreign investment company (PFIC) rules. In particular, Prop. Reg. §1.1297-4 would provide that “active conduct” requires that an insurer conduct its activities through its own officers and employees and that investment income be earned on assets held to meet obligations under insurance and annuity contracts. Several comments were submitted on these issues and on the use of a bright line test for whether assets are held to meet obligations under insurance contracts.
  • Cross-border reinsurance: The Court of Appeals for the District of Columbia Circuit ruled in Validus Reinsurance, Ltd v. United States of America, 786 F.3d 1039 (2015) that the Federal Excise Tax (FET) on insurance premiums does not apply to retrocessions between two foreign insurers, regardless of whether the underlying risks are U.S.-based. Accordingly, the IRS issued Rev. Rul. 2016-3, 2016-3 I.R.B. 282, which revokes the ruling setting forth the IRS’s prior position on the application of FET on a cascading basis to either reinsurance or retrocession arrangements between two foreign insurers. The Validus decision and Rev. Rul. 2016-3 mark the end of the controversy with the IRS on this issue, and most companies already have submitted claims for refund of previously-paid excise tax on a cascading basis, or they plan to do so.
  • Inversions: In 2014, the Treasury Department and the IRS issued Notice 2014-52, which describes regulations the Treasury and IRS intend to issue concerning transactions sometimes referred to as “inversions.” The notice included a “cash box” rule, which targeted taxpayers who engage in certain inversion transactions with foreign corporations and their subsidiaries with substantial liquid assets. As a follow up to that notice, the Treasury and IRS issued Notice 2015- 79, providing more information about the intended regulations. In particular, Notice 2015-79 describes regulations that the IRS and the Treasury intend to issue addressing transactions that are structured to avoid the purposes of §7874 (concerning expatriated entities) and addressing “post-inversion tax avoidance transactions.” The latter notice clarifies that property held by a U.S. insurance corporation and a foreign corporation that is engaged in the active conduct of an insurance business will be exempted from the “cash box” rule. As in prior years, the IRS and Treasury jointly issued a Priority Guidance Plan outlining guidance it intends to work on during the 2015-16 year. The plan continues to focus more on life than property and casualty insurance companies. The following insurance-specific projects were listed as priority items. Many carried over from last year’s plan, including:
  • Final regulations under §72 on the exchange of property for an annuity contract. Proposed regulations were published on Oct. 18, 2006;
  • Regulations under §§72 and 7702 defining cash surrender value;
  • Guidance on annuity contracts with a long-term care insurance feature under §§72 and 7702B;
  • Guidance under §§807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles-based methodologies, including stochastic reserves based on conditional tail expectations;
  • Guidance under §833 (expected to address de minimis MLR relief);
  • Guidance on exchanges under §1035 of annuities for long-term care insurance contracts; and
  • Guidance relating to captive insurance companies.

Implications

  • Election year politics and disagreements between President Obama and Congressional Republicans (notably on how to offset any corporate tax reductions) make domestic or international tax reform unlikely in the coming year.
  • President Obama’s FY2017 budget proposes several revenue-increase measures specific to insurance companies. However, it remains to be seen which, if any, of the measures will come into effect.
  • Multinational insurers and reinsurers should closely monitor legislative and regulatory developments pertaining to taxation of overseas profits. Both the PFIC regulation and the promised regulations on inversions could have a significant effect on some companies and their shareholders.
  • Life insurers should consider the effect of Life PBR tax issues on product development, financial modeling and compliance as they prepare for the Jan. 1, 2017, effective date.
  • Non-life insurers with non-traditional lines of business should consider the effect, if any, that the R.V.I. Guaranty Co. case and the two chief counsel advice memoranda on the nature of insurance risk and the presence of risk shifting may have on insurance qualification.
  • Captive insurers should be prepared for additional IRS scrutiny as a result of the Priority Guidance Plan item promising guidance, and the inclusion of §831(b) companies in the IRS “Dirty Dozen” list.
FBI

Apple v. FBI: Inevitable Conflicts on Tech

The battle between the FBI and Apple over the unlocking of a terrorist’s iPhone will likely require Congress to create legislation. That’s because there really aren’t any existing laws that encompass technologies such as these. The battle is between security and privacy, with Silicon Valley fighting for privacy. The debates in Congress will be ugly, uninformed and emotional. Lawmakers won’t know which side to pick and will flip flop between what lobbyists ask and the public’s fear du jour. Because there is no consensus on what is right or wrong, any decision legislators make today will likely be changed tomorrow.

This fight is a prelude of things to come, not only with encryption technologies but everything from artificial intelligence to drones, robotics and synthetic biology. Technology is moving faster than our ability to understand it, and there is no consensus on what is ethical. It isn’t just that the lawmakers are not well-informed, the originators of the technologies themselves don’t understand the full ramifications of what they are creating. They may take strong positions today based on their emotions and financial interests, but, as they learn more, they, too, will change their views.

Imagine if there was a terror attack in Silicon Valley — at the headquarters of Facebook or Apple. Do you think that Tim Cook or Mark Zuckerberg would continue to put privacy ahead of national security?

It takes decades, sometimes centuries, to reach the type of consensus that is needed to enact the far-reaching legislation that Congress will have to consider. Laws are essentially codified ethics, a consensus that is reached by society on what is right and wrong. This happens only after people understand the issues and have seen the pros and cons.

Consider our laws on privacy. These date back to the late 1800s, when newspapers started publishing gossip. They wrote a series of intrusive stories about Boston lawyer Samuel Warren and his family. This led his law partner, future U.S. Supreme Court Justice Louis Brandeis, to write a Harvard Law Review article, “The Right of Privacy,” which argued for the right to be left alone. This essay laid the foundation of American privacy law, which evolved over 200 years. It also took centuries to create today’s copyright laws, intangible property rights and contract law. All of these followed the development of technologies such as the printing press and steam engine.

Today, technology is progressing on an exponential curve; advances that would take decades now happen in years, sometimes months. Consider that the first iPhone was released in June 2007. It was little more than an iPod with an embedded cell phone. This has evolved into a device that captures our deepest personal secrets, keeps track of our lifestyles and habits and is becoming our health coach and mentor. It was inconceivable just five years ago that there could be such debates about unlocking this device.

A greater privacy risk than the lock on the iPhone are the cameras and sensors that are being placed everywhere. There are cameras on our roads, in public areas and malls and in office buildings. One company just announced that it is partnering with AT&T to track people’s travel patterns and behaviors through their mobile phones so that its billboards can display personalized ads. Even billboards will also include cameras to watch the expressions of passersby.

Cameras often record everything that is happening. Soon there will be cameras looking down at us from drones and in privately owned microsatellites. Our TVs, household appliances and self-driving cars will be watching us. The cars will also keep logs of where we have been and make it possible to piece together who we have met and what we have done — just as our smartphones can already do. These technologies have major security risks and are largely unregulated. Each has its nuances and will require different policy considerations.

The next technology that will surprise, shock and scare the public is gene editing.  CRISPR–Cas9 is a system for engineering genomes that was simultaneously developed by teams of scientists at different universities. This technology, which has become inexpensive enough for labs all over the world to use, allows the editing of genomes—the basic building blocks of life. It holds the promise of providing cures for genetic diseases, creating drought-resistant and high-yield plants and producing new sources of fuel. It can also be used to “edit” the genomes of animals and human beings.

China is leading the way in creating commercial applications for CRISPR, having edited goats, sheep, pigs, monkeys and dogs. It has given them larger muscles and more fur and meat and altered their shapes and sizes. Scientists demonstrated that these traits can be passed to future generations, creating a new species. China sees this editing as a way to feed its billion people and provide it a global advantage.

China has also made progress in creating designer babies. In April 2015, scientists in China revealed that they had tried using CRISPR to edit the genomes of human embryos. Although these embryos could not develop to term, viable embryos could one day be engineered to cure disease or provide desirable traits. The risk is that geneticists with good intentions could mistakenly engineer changes in DNA that generate dangerous mutations and cause painful deaths.

In December 2015, an international group of scientists gathered at the National Academy of Sciences to call for a moratorium on making inheritable changes to the human genome until there is a “broad societal consensus about the appropriateness” of any proposed change. But then, this February the British government announced that it has approved experiments by scientists at Francis Crick Institute to treat certain cases of infertility. I have little doubt that these scientists will not cross any ethical lines. But is there anything to stop governments themselves from surreptitiously working to develop a race of superhuman soldiers?

The creators of these technologies usually don’t understand the long-term ramifications of what they are creating, and, when they do, it is often too late, as was the case with CRISPR. One of its inventors, Jennifer Doudna, wrote a touching essay in the December issue of Nature. “I was regularly lying awake at night wondering whether I could justifiably stay out of an ethical storm that was brewing around a technology I had helped to create,” she lamented. She has called for human genome editing to “be on hold pending a broader societal discussion of the scientific and ethical issues surrounding such use.”

A technology that is far from being a threat is artificial intelligence. Yet it is stirring deep fears. AI is, today, nothing more than brute-force computing, with superfast computers crunching massive amounts of data. Yet it is advancing so fast that tech luminaries such as Elon Musk, Bill Gates and Stephen Hawking worry it will evolve beyond human capability and become an existential threat to mankind. Others fear that it will create wholesale unemployment. Scientists are trying to come to a consensus about how AI can be used in a benevolent way, but, as with CRISPR, how can you regulate something that anyone, anywhere, can develop?

And soon, we will have robots that serve us and become our companions. These, too, will watch everything that we do and raise new legal and ethical questions. They will evolve to the point that they seem human. What happens, then, when a robot asks for the right to vote or kills a human in self-defense?

Thomas Jefferson said in 1816, “Laws and institutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths disclosed, and manners and opinions change with the change of circumstances, institutions must advance also, and keep pace with the times.” But how can our policy makers and institutions keep up with the advances when the originators of the technologies themselves can’t?

There is no answer to this question.

marijuana

Medical Marijuana’s Growing Pains

Since California led the way in 1996, 23 states and the District of Columbia have legalized medical or recreational marijuana sale and use. In 2016, several states are considering bills that would legalize medical marijuana, reduce jail time or fines for possession and amend existing marijuana laws. In 2014, Congress even put its support toward medical marijuana and hemp growers in the omnibus bill.

As the medical marijuana (MMJ) industry grows beyond infancy, so does the scrutiny of its business liabilities. It seems every week brings a new growing pain for the industry. Here are three important liability concerns that you and your clients should be considering.

Product Liability

Product liability insurance is typically excluded from general liability policies for MMJ dispensaries and grow operations. This is for a couple of reasons: (1) the illegality of the product on a federal level and (2) lack of FDA approval for marijuana for consumption.

Product liability is an essential coverage for MMJ operations as it protects them in the event of claims because of illness or injury from cannabis products. These claims are on the rise as more individuals are exposed to MMJ, particularly when those individuals experiment with various ways of consuming THC.

A class action filed in Colorado in 2014 (Coombs v. Beyond Broadway) alleges that people became ill after eating THC-infused chocolate samples at an event. The class action is open to all attendees who may have been served at the event, so the demand and settlement could be dramatic.

This claim would be handled under the product liability policy. This coverage is available as a stand-alone product, though some carriers may be willing to package it back in with the general liability and rate it separately.

Product Recall

In the Wild West that is the cannabis industry right now, a trend is emerging: product recall.

Cannabis products are being recalled at an alarming rate. Denver alone has recalled 13 products in 13 weeks, including a vape pen oil containing a dangerous, banned pesticide. In October 2015, a number of products were recalled because of banned pesticide content.

Product recall is expensive, and none of those expenses are covered by product liability insurance. In fact, in nearly all of the product recall cases in Denver, no one was sickened by the pesticide-laden products. Cannabis purchased to make the products was independently tested by the manufacturer and voluntarily recalled.

Independent third-party testing is important for quality control, especially in the marijuana industry. When every media outlet and government organization has their eyes on your clients, they need to be one step ahead, so testing product before shipment or sale should be part of any risk management plan.

Product recall insurance is becoming essential. This coverage is written on a manuscript basis to fit the needs of your client and can cover everything from retrieval and shipping costs to destruction costs and even provide public relations help to rebuild and maintain the insured’s reputation.

Professional Liability

With medical cannabis, the dispensary takes on the responsibility of a highly regulated pharmacy. Insureds may be compliant with all state and local rules and regulations, but mistakes do occur. The most common are:

  • Failing to give the correct product to the patient or an authorized caregiver.
  • Failing to confirm the identity of the patient or caregiver before dispensing.
  • Failing to protect patient privacy.

All of the above and more can be covered with a properly written professional liability or E&O policy. Protecting patient privacy can also fall under cyber liability, which your clients should also be concerned about.

MMJ business owners have the same concerns as any other business: profitability, legality, providing a valuable service to the community. As insurance professionals, not only must we look beyond the nature of the business to see the similarities, but also the industry-specific concerns.

Captives: Congress Shoots, Misses

In late December, Congress put together a last-minute “tax extender” package that, among many other things, made some changes to section 831(b) of the Internal Revenue Code. That section allows “small” captive insurance companies to elect to exempt from income tax all of their insurance income.

These small captives have been widely used in recent years by owners of large, privately held businesses to allegedly add to their existing insurance coverages while enjoying immediate income tax reductions. Further tax benefits could include conversion of ordinary income to capital gains and a potential estate transfer benefit, depending on the ownership of the captive.

Congress has changed those benefits a bit, by eliminating any estate planning benefits, starting in 2017. But Congress failed to address the true levels of abuse that this code section has spawned and, indeed, may have made things worse.

These “enterprise risk” or “micro” captives are primarily used as a form of tax shelter, notwithstanding the pious claims of captive managers that they are meeting legitimate insurance needs. While such needs certainly may exist in some clear cases, the vast majority of entrepreneurs forming these captives care much more about the tax benefits than any increased insurance coverage.

The IRS knows this and has stepped up both audits of individual companies and larger, promoter audits of captive managers in an effort to crack down on captives that are being formed without the intent to form an insurance company. In addition, the IRS is well aware that unscrupulous captive managers create vastly inflated “premiums” payable by the operating company to the captive to maximize the tax benefits of owning such a small captive. These premiums often bear no relation to third-party market costs, nor can they be justified by a reasonable actuarial analysis of the actual risk being insured by the captive.

Another abuse is found in captive managers’ offering the new captive owner what the IRS would call a sham “pooling” arrangement, to comply with certain “risk distribution” requirements of court cases and revenue rulings.

There are many cases pending in the Tax Court that attempt to corral these abuses. Their outcome is, of course, uncertain.

So the Treasury Department went to the Senate Finance Committee in early 2015, hoping to obtain legislation that would gut section 831(b) (and put a lot of captive managers out of business).

Instead, the department got legislation that only stops these captives from being used as estate planning tools.

The legislation also increased the annual allowable premium paid to such captives, from $1.2 million to $2.2 million, indexed for inflation. The reasons for this failure have a lot to do with Sen. Chuck Grassley of Iowa, who has long wanted an increase in premium to benefit certain farm bureau captives in his state. He needed some revenue offset to allow for the increase, and, by closing this “estate planning loophole,” he can claim that tax revenues will increase.

That claim may be doubtful (only about 1% of taxpayers end up being subject to the estate tax), and captive managers now have a new, higher goal of $2.2 million for the “premiums” to be paid to these small captives.

It is also clear that this new legislation will have no effect on the current robust enforcement actions underway by the IRS. The issues of inflated premiums, sham pooling arrangements and lack of substance in the alleged insurance transaction remain in force and subject to serious scrutiny.

It is unlikely that Congress will bother to look at this code section again any time in the near future.

As a result of this new legislation, section 831(b) captives can generally no longer be owned by the entrepreneur’s spouse, children, grandchildren or trusts benefiting them. (Details about how the legislation achieves this change can be found in other sources).

Perhaps as many as half of all existing micro captives were formed with estate planning in mind. These captives will have to change their ownership or dissolve before the end of 2016. Tax professionals should review all captives owned by their clients to ensure that they remain complaint with the changes in the law. Relying on the captive managers may not be sufficient.