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13 Emerging Trends for Insurance in 2016

Where does the time go?  It seems as if we were just ringing in 2015, and now we’re well into 2016. As time goes by, life changes, and the insurance industry—sometimes at a glacial pace—does, indeed, change, as well. Here’s my outlook for 2016 on various insurance topics:

  1. Increased insurance literacy: Through initiatives like The Insurance Consumer Bill of Rights and increased resources, consumers and agents are both able to know their rights when it comes to insurance and can better manage their insurance portfolios.
  2. Interest rates: The federal funds target rate increase that was announced recently will have a yet-to-be determined impact on long-term interest rates. According to Fitch Ratings, further rate increases’ impact on credit fundamentals and the longer end of the yield curve has yet to be determined. Insurance companies are hoping for higher long-term rates as investment strategies are liability-driven. (Read more on the FitchRatings website here). Here is what this means: There will not necessarily be a positive impact for insurance policy-holders (at least in the near future). Insurance companies have, for a long period, been subsidizing guarantees on certain products or trying to minimize the impact of low interest rates on policy performance. In the interim, many insurance companies have changed their asset allocation strategies by mostly diversifying their portfolios beyond their traditional holdings—cash and investment-grade corporate bonds—by investing in illiquid assets to increase returns. The long-term impact on product pricing and features is unknown, and will depend on further increases in both short- and long-term interest rates and whether they continue to rise in predictable fashion or take an unexpected turn for which insurers are ill-prepared.
  3. Increased cost of insurance (COI) on universal life insurance policies: Several companies—including Voya Financial (formerly ING), AXA and Transamerica—are raising mortality costs on in-force universal life insurance policies. Some of the increases are substantial, but, so far, there has been an impact on a relatively small number of policyholders. That may change if we stay in a relatively low-interest-rate environment and more life insurance companies follow suit. Here is what this means: As companies have been subsidizing guaranteed interest rates (and dividend scales) that are higher than what the companies are currently (and have been) earning over the last few years, it is likely that this trend will continue.
  4. Increasing number of unexpected life insurance policy lapses and premium increases: For the most part, life insurance companies do not readily provide the impact of the two prior factors I listed when it regards cash value life insurance policies (whole life, universal life, indexed life, variable life, etc). In fact, this information is often hidden. And this information will soon be harder to get; Transamerica is moving to only provide in-force illustrations based on guarantees, rather than current projections. Here is what this means: It will become more challenging to see how a policy is performing in a current or projected environment. At some point, regulators or legislators will need to step in, but it may be too late. Monitor your policy, and download a free life insurance annual review guide from the Insurance Literacy Institute (here).
  5. Increased complexity: Insurance policies will continue to become more complex and will continue their movement away from being risk protection/leverage products to being complex financial products with a multitude of variables. This complexity is arising with products that combine long-term care insurance and life insurance (or annuities), with multiple riders on all lines of insurance coverage and with harder-to-define risks — even adding an indexed rider to a whole life policy (Guardian Life). Here is what this means: The more variables that are added to the mix, the greater the chance that there will be unexpected results and that these policies will be even more challenging to analyze.
  6. Pricing incentives: Life insurance and health insurance companies are offering discounts for employees who participate in wellness programs and for individuals who commit to tracking their activity through technology such as Fitbit. In auto insurance, there can be an increase in discounts for safe driving, low mileage, etc. Here is what this means: Insurance companies will continue to implement different technologies to provide more flexible pricing; the challenge will be in comparing policies. The best thing an insurance consumer can do is to increase her insurance literacy. Visit the resources section on our site to learn more.
  7. Health insurance and PPACA/Obamacare: The enrollment of individuals who were uninsured before the passage of Obamacare has been substantial and has resulted in significant changes, especially because everyone has the opportunity to get insurance—whether or not they have current health issues. And who, at some point, has not experienced a health issue? Here is what this means: Overall, PPACA is working, though it is clearly experiencing implementation issues, including the well-publicized technology snafus with enrollment through the federal exchange and the striking number of state insurance exchanges. And there will be continued challenges or efforts to overturn it in the House and the Senate. (The 62nd attempt to overturn PPACA was just rejected by President Obama.) The next election cycle may very well determine the permanency of PPACA. The efforts to overturn it are shameful and are a waste of time and money.
  8. Long-term care insurance: Rates for in-force policies have increased and will almost certainly face future increases—older policies are still priced lower than what a current policy would cost. This is because of many factors, including the prolonged low-interest-rate environment, lower-than-expected lapse ratios, higher-than-expected claims ratios and incredibly poor initial product designs (such as unlimited benefits on a product where there was minimal if any claims history). These are the “visible” rate increases. If you have a long-term care insurance policy with a mutual insurance company where the premium is subsidized by dividends, you may not have noticed or been informed of reduced dividends (a hidden rate increase). Here is what this means: Insurance companies, like any other business, need to be profitable to stay in business and to pay claims. In most states, increases in long-term care insurance premiums have to be approved by that state’s insurance commissioner. When faced with a rate increase, policyholders will need to consider if their benefit mix makes sense and fits within their budget. And, when faced with such a rate increase, there is the option to reduce the benefit period, reduce the benefit and oftentimes change the inflation rider or increase the waiting period. More companies are offering hybrid insurance policies, which I strongly recommend staying away from. If carriers cannot price the stand-alone product correctly, what leads us to believe they can price a combined product better?
  9. Sharing economy and services: These two are going to continue to pose challenges in the homeowners insurance and auto insurance marketplaces for the insurance companies and for policy owners. There is a question of when is there actually coverage in place and which policy it is under. There are some model regulations coming out from a few state insurance companies, however, they’re just getting started. Here is what this means: If you are using Uber, Lyft, Airbnb or a similar service on either side of the transaction, be sure to check your insurance policy to see when you are covered and what you are covered for. There are significant gaps in most current policies. Insurance companies have not caught up to the sharing economy, and it will take them some time to do so.
  10. Loyalty tax: Regulators are looking at banning auto and homeowners insurance companies from raising premiums for clients who maintain coverage with them for long periods. Here is what this means: Depending on your current auto and homeowners policies, you may see a reduction in premiums. It is recommended that, in any circumstance, you should review your coverage to ensure that it is competitive and meets your needs.
  11. Insurance fraud: This will continue, which increases premiums for the rest of us. The Coalition Against Insurance Fraud released its 2015 Hall of Shame (here). Insurance departments, multiple agencies and non-profits are investigating and taking action against those who commit elder financial abuse. Here is what this means: The more knowledgeable that consumers, professional agents and advisers become, the more we can protect our families and ourselves.
  12. Uncertain economic and regulatory conditions: Insurance companies are operating in an environment fraught with potential changes, such as in interest rates (discussed above); proposed tax code revisions; international regulators who are moving ahead with further development of Solvency II; and IFRS, NAIC and state insurance departments that are adjusting risk-based capital charges and will react to the first year of ORSA implementation. And then there is the Department of Labor’s evaluation of fiduciary responsibility rules that are expected to take effect this year. Here is what this means: There will be a myriad of potential outcomes, so be sure to continue to monitor your insurance policy portfolio and stay in touch with the Insurance Literacy Institute. Part of the DOL ruling would result in changes to the definition of “conflict of interest” and possibly compensation disclosure.
  13. Death master settlements: Multiple life insurance companies have reached settlements on this issue. Created by the Social Security Administration, the Death Master File database provides insurers with the names of deceased people with Social Security numbers. It is a useful tool for insurers to identify policyholders whose beneficiaries have not filed claims—most frequently because they were unaware the deceased had a policy naming them as a beneficiary. Until recently, most insurers only used the database to identify deceased annuity holders so they could stop making annuity payments, not to identify deceased policyholders so they can pay life insurance benefits. Life insurers that represent more than 73% of the market have agreed to reform their practices and search for deceased policyholders so they can pay benefits to their beneficiaries. A national investigation by state insurance commissioners led to life insurers returning more than $1 billion to beneficiaries nationwide. The National Association of Insurance Commissioners is currently drafting a model law  that would require all life insurers to use the Death Master File database to facilitate payment of benefits to their beneficiaries. To learn more, visit our resources section here. Here is what this means: Insurance companies will not be able to have their cake and eat it too.

What Can You Do?

The Insurance Consumer Bill of Rights directly addresses the issues discussed in this article.

Increase your insurance literacy by supporting the Insurance Literacy Institute and signing the Insurance Consumer Bill of Rights Petition. An updated and expanded version will be released shortly  that is designed to assist insurance policyholders, agents and third party advisers.

Sign the Insurance Consumer Bill of Rights Petition 

What’s on your mind for 2016? Let me know. And, if you have a tip to add to the coming Top 100 Insurance Tips, please share it with me.

‘Data on the Move’ Means Data at Risk

Everywhere we look today, data is on the move. The downside:  When personal information and data are being moved electronically, they’re more vulnerable to identity theft.

At the Identity Theft Resource Center,  a crucial part of our analysis when we track data breaches is to look for emerging trends.  Unfortunately, one trend has become evident: The number of breaches linked to “data on the move” in the healthcare industry is up significantly.  In fact, these types of data breaches – say, when a laptop or flash drive is stolen or back-up tapes are lost in the mail – have risen above other industries quite dramatically.

But there’s hope. Companies and organizations can take steps to reduce these data breaches. They can provide more robust employee training and stricter controls over what devices are allowed to leave the premises. Organizations can also review what data is stored on devices and how the devices are protected. Adding encryption to laptops that contain sensitive data – and that must leave the premises – will also improve the situation without busting the bottom line.

Breach incidents because of data on the move have been trending downward as a percentage of all breach incidents, from 20% in 2008 to 12% in 2012. Although the percentage increased slightly to 13% in 2013, most industry sectors have seen a payoff from preventive measures.

The medical sector is not having a similar experience. More than half of the breaches because of data on the move occurred in the health/medical sector.

DataMove

For instance, in California, Palomar Health recently experienced a data breach when an encrypted laptop and two unencrypted flash drives were taken from a staff member’s car. The devices exposed the personal health information of 5,000 patients. In Michigan in late January, a laptop computer and flash drive were stolen from an employee of the state Long Term Care (LTC) Ombudsman’s Office. Information on the laptop was encrypted, but data on the flash drive was not. The flash drive contained personal information about 2,595 living and deceased individuals, including names and addresses and, for some individuals, dates of birth. Either a Social Security number or a Medicaid identification number was included with 1,539 records.

Data breaches pose a significant risk to consumers because of the correlation between breaches and identity theft. According to Javelin Research, one out of three people whose information was breached fell victim to fraud in the same year. When medical records or personal health information (PHI) are compromised, consumers are not only  facing an increased risk of medical identity theft. The risk for all types of identity theft is increased. (For more information on medical identity theft and its impact on the community, see the Medical Identity Theft and Fraud article on ITL).

The information entrusted to medical providers and insurance companies is often the same information that can be used to steal a person’s identity and commit financial identity theft, government identity theft and even criminal identity theft. In addition to receiving medical goods and services or prescriptions in the victim’s name, a thief could obtain loans or new lines of credit, apply for government benefits or file a false tax return. The perpetrator could even use the victim’s name if caught while committing a crime.

“Whether sensitive data is at rest or in transit, it should have appropriate risk-based controls and policies applied to its governance,” says Ann Patterson, program director with Medical Identity Fraud Association, which unites all the stakeholders and helps to convey the importance of these best practices. “The same judicious enterprise-wide data protection principles that you apply to your data at rest should also be considered for your data in transit and your mobile data. Particularly for mobile, BYOD policies (Bring Your Own Device) are essential.”

According to MIFA, many organizations are feeling the impact of shrinking budgets and may be tempted to reduce costs by limiting financial resources for internal fraud detection and prevention programs.  This may provide immediate help to the bottom line. But in the long term it’s the wrong solution. Costs creep up in other areas when fraud is ignored.  This could result in an organizational culture shift; as the old saying goes, what we allow, we encourage.

Coupled with human resources divisions, the fraud detection and prevention programs often provide employee training and formulate best practices in regard to fraud reduction.

The ITRC realizes the critical importance of information management and data security. We believe strongly in the importance of educating consumers and businesses about  the value of our individual data and the importance of personally identifying information (PII). For this reason, our organization began tracking data breaches in 2005. Tracking breaches has allowed us to look for patterns in regard to how our information is being safeguarded, or compromised, by those we trust with it.

The ITRC defines a data breach as an event in which an individual name plus a Social Security number, driver’s license number, medical record or financial record (credit/debit cards included) is potentially put at risk because of exposure. This exposure can occur either electronically or in paper format. The ITRC will capture breaches that do not, by the nature of the incident, trigger data-breach-notification laws. Generally, these breaches consist of the exposure of user names, emails and passwords without involving sensitive personal identifying information. These breach incidents will be included by name but without the total number of records exposed. (For a more detailed explanation of our methods, visit the ITRC breach report page).

Data breaches and identity theft have been on the rise and have a significant effect on the individual victims as well as on the U.S. economy.  We acknowledge that there is no panacea to rid ourselves of this issue entirely. However, encouraging negligence by not providing employees with the proper tools, and simply not acknowledging the problem, is not the answer, either.

Small and steady gains can be made by implementing training and increasing accountability for the individuals and organizations that we entrust to be good stewards of our PII.  A good start would be to understand and recognize how each type of incident plays a role and identify deficiencies.

Another option for organizations is to get involved with industry and trade organizations that also tackle issues related to data breach best practices daily. Businesses want to keep proprietary information close to the vest, but best practices about breaches should not be a trade secret.  A highly engaged and enlightened health/medical community would be a step in the right direction.

New Data Strategies for Workers’ Comp

Workers’ compensation is widely recognized as one of the most challenging lines of business, suffering years of poor results. Insurance companies are under increasing pressure to achieve profitability by focusing on their operations, such as underwriting and claims.

Insurers can no longer count on cycles, where a soft market follows a hard one. The traditional length of a hard or soft market is evolving in a global economy where capital moves faster than ever and competitors are using increasingly sophisticated growth, segmentation and pricing strategies.

Insurance executives also cite regulatory and legislative pressures, such as healthcare and tax reform, as inhibitors of growth. Furthermore, medical costs continue to rise, making it particularly difficult to price for risk exposure. The long tail of a workers’ compensation claim means that the cost to treat someone continues to increase as time elapses and becomes a compounding problem.

Despite recent improvements in combined ratios, there are still many challenges within workers’ compensation that have to be reconciled. The savviest insurers are evaluating the availability of technologies, advanced data and analytics to more accurately price risk – and ultimately ensure profitability.

The ‘Unknown’ in Workers’ Compensation

Information asymmetry has made it difficult for insurers to accurately determine who is a high-risk customer and who is low-risk. At the point of new business, a workers’ compensation insurer is likely to have the least amount of information about those they are insuring, and it’s easy to understand why. The insured knows exactly who is on the payroll and what types of duties employees have. Some of that information is relayed to an agent, and then finally to the carrier, but, as in any game of telephone, the final message becomes distorted from the original.

This imbalance of information is one reason why fraud is rampant, and why insurers ultimately pay the price. Payroll misclassification – or “premium fraud” – occurs when businesses pay salaries off the books, misrepresent the type of work an employee does or purposely misclassify employees as independent contractors. Some misclassifications are not nefarious. But whatever the cause, they create significant revenue and expense challenges for carriers that rely on self-reporting.

The ‘Silent’ Killer

Without the right insight or analytical tools, insurance companies have a hard time discerning between their policyholders and making consistent and fair decisions on how much premium to charge on each policy. When an insurer begins to use predictive analytics, competitors that are still catching up run the risk of falling victim to adverse selection. When we hear executives say things like, “The competition has crazy pricing,” it raises a red flag. We immediately begin looking for warning signs of adverse selection, such as losing profitable business and an increasing loss ratio.

The problem is that it takes time to recognize that a more sophisticated competitor is stealing your good business by lowering prices while also sending you the worst-performing business. By the time you recognize adverse selection is occurring, you’re falling behind and have to respond quickly.

The Power of Actionable Data

Fortunately, there are technologies available for insurers of all sizes to make more informed, evidence-based decisions. But when it comes to data, there is still some confusion: Is more data always better? And how can carriers turn data into actionable results?

It’s not always about the volume of data that an insurer has; it’s about the business value you can derive from it.

If an insurer is just beginning to store, govern and structure its data, it is likely not receiving actionable insights from historic data assets. Accessing a more holistic data set with multiple variables (from states/geography, premium size, hazard groups, class codes, etc.) through a third party or partner can help to avoid selection bias, while encouraging rigorous testing and cataloging of data variables. Having access to a variety of information is key when it comes to making data-driven decisions.

The conundrum insurers face when delivering actionable intelligence that underwriters can use is that they only know the business they write. They know very little about business they quote and nothing about business they don’t even see. What complicates this picture is that an insurer’s data is skewed by its specific risk appetite and growth strategies. It’s up to the insurer to fill in the blind spots in its own data set to ensure accurate pricing and risk assessment. As we know, what an insurance company doesn’t know can hurt it.

As insurers increasingly turn to advanced data and analytics, the next question that keeps insurers up at night is, “When everything looks good, how do I know what isn’t really good?” One way that Valen Analytics is helping insurers answer that question is by providing companies with a “Risk Score,” a standard measure of risk quality. By tapping into Valen’s contributory database, workers’ compensation underwriters can have better insight into all the policies they write – even historically loss-free policies. In fact, the Risk Score accurately identifies a 30% loss ratio difference between the best- and worst-performing loss-free policies. This is one example of how the power of data can push the industry forward.

Despite its many challenges, the workers’ compensation industry is becoming more analytically driven and improving its profitability. A comprehensive data strategy drives pricing accuracy and business growth while allowing insurers to achieve efficiencies in underwriting decision-making. By keeping up with technological advances, insurers can use data and analytics to grow into new markets and areas of business, while also protecting their profitable market share.

While NCCI’s annual “State of the Line” report labeled workers’ compensation as “balanced” this year, we may soon see the integration of data and analytics push the industry to be recognized as “innovative.”

12 Animals That Sell Insurance

Insurance companies, agencies and vendors really like animals. We like them partly because we insure them. But mostly we like them because, in an industry that struggles to translate its core values to tangible brand attributes, a cute and fuzzy or large, strong animal can help convey the right message and generate attention.

These 12 brands, while completely different in size and essence, found the perfect animal to communicate their offerings and stand out from the herd (or pack or pride or. . . ).

1. Aflac Duck

AFLAC

2. Bolt Horse

bolt

3. Car Insurance Gorilla

gorilla

4. Elephant Auto Insurance Elephant (What Else?)

elephant

5. Geico Camel

geicocamel

6. Geico Gecko

geicogecko

7. Geico Pig

geicopig

8. Giraffe Professional Insurance Agency

Giraffe

Giraffe

9. Hartford Stag

elk

10. ING Lion

ing

11. MetLife Snoopy

snoopy

12. The Zebra – Zebra

zebra

The 13 Oddest Aspects of Reinsurance

Looking behind the curtain of reinsurance, you find a most unusual business. Here are 13 anomalous features:

–Reinsurance is for the most part unregulated, but users — insurance companies — are regulated.

–Insurers must use a system of accounting that makes reinsurance attractive: If a reinsurer gives insurers a discount off a list price (ceding commission), they may show on their books that they paid the list price and may treat the discount as income.

–Reinsurance may be marketed by independent brokers that owe the insurance companies no fiduciary duties. The broker leads insurance companies to believe that it has their best interests at heart, but courts have ruled that the broker does not even have a duty to not inflate its commissions. The broker’s relationship with the reinsurer is much more important than the broker’s relationship with the insurers.

–The reinsurer can insist that all disagreements must be arbitrated, and that the arbitration does not set precedent or provide guidance should a similar issue arise in the future. That way, the reinsurer can argue the same issue over and over and over. The findings of arbitration are not only not recorded, they are often confidential.

–The outcome will not be determined by legal construction and interpretive rules but by the “custom and practice” of the industry — but which “custom and practice” is neither written down nor uniformly agreed upon or adhered to by those in the industry. That is, the contract can specifically say one thing, and the wording can be ignored in any arbitration finding if it is not in line with “custom and practice.” A reinsurer can do all this and at the same time argue that the lopsided arrangement is an “honorable engagement.”

–The reinsurance contract likely has an “entire agreement” clause, meaning that nothing from outside the contract can be used to establish rights or obligations. That is, the four corners of the contract supposedly set the parameters of the agreement. You may ask: Isn’t “custom and practice” contained outside the contract? Yes, it is. So, at the same time that there is the argument that the contract is the entire agreement, there is also the provision that unwritten rules outside the contract determine the interpretation of the contract.

–If there is a disagreement as to what the contract says, the dispute must be arbitrated as not a legal obligation — yet the contract says it applies the laws of the state where the insurer is based.

–Who is responsible for writing this convoluted and lopsided contract? Often, that is the broker — which is not a party to the contract.

–If a broker fails to even issue a memorialization of the product to the insurer, nine months after having “sold” the product, it is the insurance company that is punished, not the broker or the reinsurer.

–Even though some states specifically provide that reinsurance falls within the statutory definition of a regulated product, states do not regulate reinsurance directly. Reinsurance should be regulated federally, because it is clearly interstate commerce and falls within the U.S. Constitution’s commerce clause, but the federal government does not actually regulate reinsurance, apart from income tax issues. So, reinsurers do not have to obtain regulatory approval for rates or for products.

–Talk about a lobbying force. Legislatures have been convinced that taxing it would raise the price of everything for the general populace. That argument could be made for any business, because all taxes are ultimately borne by the general populace, but has not caught on for other industries.

–Reinsurance is amazingly simple. It comes in essentially one of two forms: treaty (for groups) and facultative (for individuals). Treaty comes in essentially two varieties: proportional and non-proportional. But reinsurance becomes esoteric by design. It has cloaked itself in mystery by avoiding the courts as a venue and by taking advantage of the fact that few legislators have ever dealt with the product.

–Although with similar financial products, courts would find that third parties might have rights, third parties have no rights under reinsurance.

I have not figured out why reinsurance is not fully regulated, as is insurance. I have heard the logic that the parties to the contract are equally sophisticated, and therefore no regulation is necessary. The problem with that logic is that the premise is false. Many of the parties do not have equal bargaining power; they are not equally qualified to enter into the transaction; and there are no real arm’s-length negotiations. Many small companies spend a great deal on reinsurance each year.

So why not at least tax reinsurance? I have heard the logic that this would be “double taxation,” because the original (the insurance) transaction was taxed. However, that ignores the realities of reinsurance. Reinsurance is not insurance of insurance. It is insurance on the performance of an insurance company’s core business, which happens to be insurance. Why does insurance covering loss from a collection of insurance products get to escape taxation on premiums when insurance covering loss from a fleet of cars does not? The same hurricane can cause loss to the core business of the car dealer and the insurance company, but coverage for the car dealer carries taxes on premiums while coverage for the insurance company does not.

I have also heard that reinsurance is like any other wholesale business, where sales tax is not applied. This logic ignores the realities of reinsurance. Reinsurance is not a commodity that is purchased in bulk to then subdivide into smaller units for sale by insurance companies. Reinsurance is a retail sale; it is not a wholesale transaction.

I am not necessarily advocating for regulation or taxation of reinsurance, but I am advocating for leveling the playing field and bringing transparency to the process of reinsurance.

I think that could be done with the abolition of any mandatory arbitration in reinsurance contracts by the NAIC. The plaintiff’s bar has a history of efficiently “regulating” where no regulation exists, if given the proper venue. Arbitration has not brought lower costs and timely determinations. Indeed, arbitration has proven to have none of the benefits and all of the problems of litigation.

It really is about time that reinsurance is made to come out from the shadows and to fully participate in the 21st century judicial system, rather than allowing it hold on to the faux vestiges of yesterday’s “gentlemen’s agreements.”