Copper theft presents a significant challenge for loss control.
Unlike other property crimes where “recovery” goes a long way toward mitigating the loss, such as the recovery of a stolen car in an auto theft, the recovery of the stolen copper seldom impacts the size of the claim.
Copper theft is different because the damage done to a building stealing a few hundred dollars' worth of copper can cost insurers tens of thousands of dollars to repair. The typical copper theft claim involves the damage done ripping wires and plumbing out of walls or the coils from a rooftop HVAC system. In vacant buildings, thieves target water lines and sprinkler systems as well as the electrical wiring. Once a vacant property has been hit, thousands of dollars must be spent to bring it back up to code before it can be occupied. It is this “collateral damage” that makes copper theft claims so expensive to an insurance company.
The key to reducing copper theft claims is prompt police response. The faster law enforcement arrives, the less time thieves have to damage the property. Faster police response is what wireless video alarms deliver and why they are a valuable tool for loss control against copper theft.
Copper theft has impacted insurance companies across North America, becoming a mainstream problem covered by television news. The following reports from television news underscore much of what this article is attempting to communicate — a new paradigm to mitigate risk and reduce claims impacting the real world from Virginia to Arizona.
Construction crime is a close cousin to copper theft and has been a black hole for risk management with few affordable solutions. The nature of construction risk is temporary and this means that wired surveillance cameras and alarm systems are simply too expensive and cumbersome to install to make them cost-effective.
The technology challenges are significant: in addition to limited budgets there is often no power, no phone lines, and no easy access to internet. Policy holders do not want to spend large amounts of money for temporary infrastructure that has no value after the job is done. For construction, human guarding is the most obvious approach, but it is beyond the budgets of many job sites. With guarding cost prohibitive, from a loss control perspective there have been very few affordable options for mainstream policy holders to protect their projects. Construction remains a problem child for many insurers who are forced to raise deductibles and implement exclusions to make construction profitable.
The following newscast from Buffalo, New York describes the challenges of securing a construction site and successes found with wireless video alarm systems.
While human guards have become too expensive and unreliable for many sites, technology is improving and loss control has a new tool to secure construction sites. Portable wireless video alarms give loss control professionals an affordable tool to deliver police response to a job site before the damage occurs. These new wireless camera/detectors (called MotionViewers) sense an intruder and send a short video clip of the incident over the cell network to a central monitoring station for immediate review and police dispatch and priority police response.
The immediate review/response with a monitored video alarm has proven more effective than human guards as the sensor/cameras are installed in multiple points across the job site to detect and report any activity. The crucial factor in reducing claims for copper theft is immediate police response, and video verified alarms make all the difference — the monitoring central station operator is a virtual eyewitness to the crime.
Police treat a video verified alarm as a crime-in-progress — they respond faster and they make arrests. Case studies on video verified alarms have arrest rates of over 50%. One construction site in Arizona had 40 arrests over four months on a single site. Arrests make a difference because one arrest prevents an additional 30 crimes — copper theft is typically done by habitual thieves who target construction sites or vacant property.
To be affordable and effective, the camera/sensors must be easy to install, without the cost of trenching cables and running wires. Power is a challenge as many construction sites have only temporary power provided by generators during working hours. Many vacant building have no power at all.
The wireless Videofied alarm systems need no infrastructure to secure a site. They operate for months or even years on batteries, communicating over the cell network to the central station. These portable MotionViewers are more effective than fixed cameras because they can be moved to protect the assets on a job site as the project evolves. Portability is important because construction theft is often an inside job by a subcontractor familiar with the delivery and location of expensive materials or assets — and they know the locations of fixed cameras and how to avoid them. In contrast, magnetic mounts on the wireless MotionViewers enable the job supervisor to move the cameras, placing them on steel studs and tool cribs at the end of the day to protect what is most at risk.
Wireless video verified alarms for outdoor applications mean that loss control professionals have an effective tool to fight copper theft that is affordable enough for implementation by their policy holders. For more information visit www.videofied.com.
Overview Of The Risk
There were more than 26 million new strains of malware released into circulation in 2011. Such a rate would produce nearly 3,000 new strains of malware an hour! Almost two-thirds of U.S. firms report that they have been the victim of cyber-security incidents or information breaches. The Privacy Rights Clearinghouse reported that since 2005, more than 534 million personal records have been compromised. In 2011, 273 breaches were reported, involving 22 million sensitive personal records. The Ponemon Group, whose Cost of Data Breach Study is widely followed every year, indicated a total cost per record of $214 in 2011, an increase of over 55% ($138) compared to the cost in 2005 when the study began.
Other surveys are consistent. NetDiligence, a company that provides network security services on behalf of insurers, reported in their “2012 Cyber Risk and Privacy Liability Forum” the results of their analysis of 153 data or privacy breach claims paid by insurance companies between 2006 and 2011. On average, the study said, payouts on claims made in the first five years total $3.7 million per breach, compared with an average of $2.4 million for claims made from 2005 through 2010.
And attacks simply don't target large companies. According to Symantec's 2010 SMB Protection report, small busineses:
- Sustained an average loss of $188,000 per breach
- Comprised 73% of total cyber-crime targets/victims
- Lost confidential data in 42% of all breaches
- Suffered direct financial losses in 40% of all breaches
Indeed, according to the 2011 Verizon Data Breach Report, in 2010, 57% of all data breaches were at companies with 11 to 100 employees. Interestingly, it was the Report's opinion that 96% of such breaches could have been prevented with appropriate controls. Bottom line: cyber attacks are here to stay — and in many ways, they are getting worse.
A Look At The Financial Institution Sector
Willy Sutton once infamously remarked that he robs bank because “that's where the money is.” According to Professor Udo Helmbrecht, the Executive Director of the European Networking and Information Security Agency, if Willy Sutton was alive today, he would rob banks online.
Criminals today can operate miles, or even oceans, away from the target. “The number and sophistication of malicious incidents have increased dramatically over the past five years and is expected to continue to grow,” according to Gordon Snow, Assistant Director of the Cyber Division of the Federal Bureau of Investigation (testifying before the House Financial Services Committee, Subcommittee on Financials Institutions and Consumer Credit). “As businesses and financial institutions continue to adopt Internet-based commerce systems, the opportunity for cybercrime increases at the retail and consumer level.” Indeed, according to Snow, the FBI is investigating 400 reported account takeover cases from bank accounts of US businesses. These cases total $255 million in fraudulent transfers and has resulted in $85 million in actual losses.
According to the FBI, there are eight cyber threats that expose both the finances and reputation of financial institutions: account takeovers, third-party payment process breaches, securities and market trading company breaches, ATM skimming breaches, mobile banking breaches, insider access, supply chain infiltration, and telecommunications network disruption.
It was telecommunications network disruption that dominated the news in 2012.
Otherwise known as a distributed denial of service attack, US banks were attacked repeatedly throughout the year by sophisticated cyber “criminals” whose attacks were eventually sourced to the nation of Iran in what would truly be considered a Cyber War attack against this country's infrastructure.
Among the institutions hit were PNC Bank, Wells Fargo, HSBC, and Citibank, among many others. Big or small, it made no difference. At the end of the day, as many as 30 US banking firms are expected to be targeted in this wave of cyber attacks, according to the security firm RSA. And it is likely that we are not at the end of the day. On January 9, 2013, the computer hacking group that has claimed responsibility for cyber attacks on PNC Bank vowed to continue trying to shut down American banking websites for at least the next six months.
That is not to say that financial situations only had to worry about distributed denial of service attacks launched by hostile nation states in 2012.
On December 13, 2012 the Financial Services Information Sharing and Analysis Center, which shares information throughout the financial sector about terrorist threats, warned the US financial services industry that a Russian cyber-gangster is preparing to rob American banks and their customers of millions of dollars. According to the computer security firm, McAfee, the cyber criminal, who calls himself the “Thief-in-Law,” already has infected hundreds of computers of unwitting American customers in preparation to steal that bank account data.
Of course not all threats look like they come from the latest 007 flick. On October 12, 2012, the Associated Press reported TD Bank had begun notifying approximately 260,000 customers from Maine to Florida that the company may been affected by a data breach. Company spokeswoman Rebecca Acevedo confirmed to the Associated Press that unencrypted data backup tapes were “misplaced in transport” in March 2012. She said the tapes contained personal information, including account information and security numbers. It is unclear why the bank waited until October to notify customers. Over 46 states now have mandatory notification laws that dictate prompt notification to bank customers of missing or stolen “Personally Identifiable Information.” Failure to make timely notification can, and often does, prompt customer lawsuits and regulatory investigations.
The bottom line: you cannot be a financial institution operating in the 21st Century and not have a cyber risk management plan which includes the purchase of cyber insurance.
The Cyber Insurance Market
With these facts, it is not surprising that the cyber insurance market has grown tremendously from its initial beginning in 2000. Starting with what was the brainchild of AIG and Lloyds of London, the market has grown to over 40 insurance providers. A widely accepted statistic is that the market now produces over $1 billion in premium to insurance carriers on a worldwide basis.
Despite the increasing claim activity, informal discussions with the market continue to indicate that cyber risk is a profitable business. Perhaps, it is for this reason, cyber premium rates are flat to down 5% according to industry reports in the market where rates in property-casualty are generally increasing.
Carriers also see this as an area where there are many non-buyers, and statistics seem to back them up. According to the “Chubb 2012 Public Company Risk Survey: Cyber,” 65% of public companies surveyed do not purchase cyber insurance, yet 63% of decision-makers are concerned about this cyber risk. A risk area with a high level of concern but little purchase of insurance is an insurance broker's dream. In a recent Zurich survey of 152 organizations, only 19% of those surveyed have bought cyber insurance despite the fact that 76% of companies surveyed expressed concern about their information security and privacy.
It is unclear why there aren't more buyers but most of the industry believes it's a lack of education. For example, previous surveys indicated that over 33% of companies incorrectly believe that cyber risk is covered under their general corporate liability policy.
It is then perhaps not surprising that the Betterley 2012 market report stated “we think this market has nowhere to go but up” Although, they quickly qualified, “as long as carriers can still write at a profit.”
In April of 2013 the ISO modified the Commercial Property Forms. It was one of the biggest changes in forms that we have seen in years with the majority of forms taking on some type of change.
Effective April 2013, many of the Commercial General Liability forms also have a new edition date. Some of the changes are minor but carry new edition dates of existing form numbers, and there are some forms that are first being introduced. It is a multistate revision and some of the specific state forms have also taken a change or introduced new forms. Some of the ISO changes have already been adopted in insurance company forms while other changes represent clarification of the “intent” of the form.
There are new multistate endorsements that are being introduced:
- Primary And noncontributory — Other Insurance Condition Endorsement
- Additional Insured — Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Agreement
- Total Pollution Exclusion For Designated Products Or Work Endorsement
- Liquor Liability — Bring Your Own Alcohol Establishments Endorsement
- Amendment of Personal and Advertising Injury Definition Endorsement
- Designated Location(s) Aggregate Limit Endorsement
Specifically we will highlight those changes that have any significant impact and new endorsements to the form series. It goes without saying that any form that narrows coverage requires that we notify our insureds to avoid any gap in coverage as they renew on the new CGL edition date. All of these changes will be discussed in more detail in the Insurance Community class on March 19th.
Liquor Liability Form Revisions
One of the areas that has taken on a significant change is in the area of Liquor Liability. There are several forms that have taken the new edition date including:
|Liquor Liability Coverage Form||CG 00 33 04 13|
|Liquor Liability Coverage Form||CG 00 34 04 13|
|Amendment Of Liquor Liability Exclusion||CG 21 50 04 13|
|Amendment Of Liquor Liability Exclusion — Exception For Scheduled Premises Or Activities||CG 21 51 04 13|
|Liquor Liability — Bring Your Own Alcohol Establishments||
CG 24 06 04 13
|Amendment Of Liquor Liability Exclusion||CG 29 52 04 13|
|Amendment Of Liquor Liability Exclusion — Exception For Scheduled Premises Or Activities||CG 29 53 04 13|
As with most liability changes there is case law that gives rise to the need for clarification and form revision. Some of the specific court cases relating to this change are:
- PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania;
- McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009);
- SIMMONS V. HOMATAS (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois., to name a few.
In the case of PENN-AMERICA INS.CO. v. PECADILLOS, INC. (27A.3d259 (2011) Superior Court of Pennsylvania, two customers entered the bar after visiting several other drinking establishment where they drank in excess. They continued to drink at Pecadillos, became further intoxicated, and were asked to leave even though they were in no condition to drive. The patrons left, caused an accident, killed two individuals and injured two others. The insured argued that the allegations in the underlying action against them fell outside the related CGL policy's liquor liability exclusion. The court ruled that a “duty to defend” was triggered when an insured was alleged to have continued to serve intoxicated patrons and then ejected them in a dangerously inebriated condition.
In the case of McGuire v. Curry and Park Jefferson Speedway, Inc., a South Dakota Corporation (766 N. W. 2d 501 (2009), a racetrack employer allowed an unsupervised, underage employee access to alcoholic beverages. The employee was a runner hired to deliver alcohol and other supplies to the racetrack's concession stands and bars. One day after the employee's shift ended, he drove his vehicle off the racetrack's premises while intoxicated and injured a passenger on a motorcycle. The plaintiff's suit filed against the racetrack alleged negligent hiring, retention and supervision of an underage employee. The court concluded that the racetrack did have a duty to supervise the employee and to disallow access to alcoholic beverages.
In the last case, SIMMONS V. HOMATAS (et al On Stage Productions, Inc.,) (925 n. e. 2D 1089 (2010; 236 ill. 2D 459) Supreme Court of Illinois, the Illinois court had to rule on whether a business that does not serve alcoholic beverages but allows patrons to bring in alcohol is considered in the business of selling alcoholic beverages. In this case the club, operated by Stage Productions, is a nude strip club that does not serve alcohol but allows its patrons to bring their own alcohol and sells them set ups — providing glasses, mixers, ice, etc. Homatas and his companion brought in a fifth of rum and vodka and became intoxicated. They left the club and retrieved their car from valet parking. The valet parker opened the driver's door and told Homatas to leave the premises. Fifteen minutes later, Homatas collided with another vehicle, resulting in the death of four individuals.
The case had to deal with whether the business can be liable for injuries that arise, not as a result of serving alcohol, but as a result of actions in connection with allowing patrons to consume alcohol that they brought on the premises. The court concluded that the plaintiff's common law claims were not preempted by the state's Dram Shop laws. The court went on to state that the business was not in the business of selling liquor even though they provided the set ups for the liquor that was brought in by the patrons.
Due to these cases and others, the ISO has revised the Liquor Liability exclusion in the various GL coverage forms to clearly state that the Liquor Liability exclusion applies even if the claims against any insured allege the negligence or other wrongdoing in:
- The supervision, hiring, employment, training or monitoring of others; or,
- Providing or failing to provide transportation with respect to any person that may be under the influence of alcohol;
if the “occurrence” which caused the “bodily injury” or “property damage” involved that which is described in Paragraph (1), (2) or (3) of the exclusion.
There is further clarity that a Bring Your Own Alcohol Establishment (BYO) is not considered in the business of selling, serving or furnishing alcoholic beverages. There is a new endorsement available in the series that specifically deals with the BYO exposure titled: Liquor Liability Bring Your Own Alcohol Establishment.
Pollution Form Revisions
There are a couple of forms relating to Pollution that have been modified with the 4/13 change including:
|Pollution Liability Coverage Form Designated Sites||Cg 00 39 04 13|
|Pollution Liability Limited Coverage Form Designated Sites||Cg 00 40 04 13|
|Total Pollution Exclusion For Designated Products Or Work||Cg 21 99 04 13|
|Pesticide Or Herbicide Applicator — Limited Pollution Coverage||Cg 28 12 04 13|
In the Pollution Liability Coverage Forms CG 00 39 and CG 00 40 the “Aircraft, Auto, Rolling Stock or Watercraft” exclusion is revised to clarify coverage as relates claims for negligence in the “supervision, hiring, employment, training or monitoring of others” when the claim involves injury or damage arising out of the use of an automobile. This exclusion has been reviewed in prior form series including in 2000 and 2003. There is a new exclusionary endorsement introduced titled: Total Pollution Exclusion for Designated Products or Work CG 21 99. This new endorsement is similar to the CG 21 98 except that it limits the applicability of the exclusion to the specific product or work described in the schedule on the endorsement. Caution when reviewing the endorsement — it is broadening if the CG 21 99 replaces the CG 21 98. However, addition of the endorsement to a policy that does not contain the CG 21 98 would result in a reduction in coverage.
Additional Insured Endorsements
There are approximately 24 Additional Insured Endorsements that have taken the new edition date. These changes are due, in part, to the various state laws that have “anti-indemnification” laws that prohibit provisions in construction contracts which require one party to indemnify another against liability for the other party's own negligence or fault. Also, there are some states that prohibit providing insurance to an additional insured for the party's own negligence.
One of the clarifications in the new Additional Insured Endorsements is to add new language that will provide insurance to an additional insured “only to the extent provided by law.” Further clarification is that the coverage provided under the Additional Insured Endorsement cannot be broader coverage than that provided to the named insured. There is a new Additional Insured endorsement introduced in this form series titled: Additional Insured-Owners, Lessees or Contractors — Automatic Status for Other Parties When Required in Written Construction Contract Agreement (CG 20 38). This endorsement provides additional insured status to parties to whom the named insured has become obligated due to written contract or agreement to name an additional insured under their policy.
Primary and Non-Contributory — Other Insurance Endorsement CG 20 01 04 13 — New Form
A new form has been introduced to clarify that coverage is made available to an additional insured on a “primary and non-contributory” basis. This change is particularly important for the construction client because construction contracts oftentimes require that the additional insured is provided coverage on a “primary and noncontributory” basis. The provisions require that:
- The additional insured is a named insured on other insurance available to them; and
- A written contract or agreement has been entered into by the insured stating that the insured's policy will be primary and wound not seek contribution from any other insurance available to the additional insured.
There are several other forms that have taken a change in edition date that we will be discussing in our upcoming New Commercial General Liability Form class taught on March 19th. The class is being taught by Marjorie Segale, AFIS, CISC, CIC, RPLU, CRIS, ACSR, CISR. Marjorie is the Vice President and Director of Education for the Insurance Community Center and President of Segale Consulting Services, LLC.
This is a listing of the forms that have changed. If it form is marked in “red” it is a new form to the series.
|Commercial General Liability Coverage Form (Occurrence)||CG 00 01 04 13|
|Commercial General Liability Coverage Form (Claims Made)||CG 00 02 04 13|
|Owners And Contractors Protective Liability Coverage Form Coverage For Operations Of Designated Contracto||CG 00 09 04 13|
|Liquor Liability Coverage Form (Occurrence)||CG 00 33 04 13|
|Liquor Liability Coverage Form (Claims Made)||CG 00 34 04 13|
|Railroad Protective Liability Coverage Form||CG 00 35 04 13|
|Products/Completed Operations Liability Coverage Form (Occurrence)||CG 00 37 04 13|
|Products/Completed Operations Liability Coverage Form (Claims Made)||CG 00 38 04 13|
|Pollution Liability Coverage Form Designated Sites||CG 00 39 04 13|
|Pollution Liability Limited Coverage Form Designated Sites||CG 00 40 04 13|
|Underground Storage Tank Policy Designated Tanks||CG 00 42 04 13|
|Electronic Data Liability Coverage Form||CG 00 65 04 13|
|Product Withdrawal Coverage Form||CG 00 66 04 13|
|Limited Product Withdrawal Expense Endorsement||CG 04 36 04 13|
|Electronic Data Liability||CG 04 37 04 13|
|Primary And Non-Contributory — Other Insurance Endorsement||CG 20 01 04 13|
|Additional Insured Concessionaires Trading Under Your Name||CG 20 03 04 13|
|Additional Insured Controlling Interest||CG 20 05 04 13|
|Additional Insured Engineers Architects Or Surveyors||CG 20 07 04 13|
|Additional Insured User Of Golfmobiles||CG 20 08 04 13|
|Additional Insured Owners, Lessees Or Contractors Scheduled Person Or Organization||CG 20 10 04 13|
|Additional Insured Managers Or Lessors Of Premises||CG 20 11 04 13|
|Additional Insured State Or Governmental Agency Or Subdivision Or Political Subdivision — Permits Or Authorizations||CG 20 12 04 13|
|Additional Insured State Or Governmental Agency Or Subdivision Or Political Subdivision — Permits Or Authorizations Relating To Premises||CG 20 13 04 13|
|Additional Insured Vendors||CG 20 15 04 13|
|Additional Insured Mortgagee, Assignee Or Receiver||CG 20 18 04 13|
|Additional Insured Executors, Administrators, Trustees Or Beneficiaries||CG 20 23 04 13|
|Additional Insured Owners Or Other Interests From Whom Labor Has Been Leased||CG 20 24 04 13|
|Additional Insured Designated Person Or Organization||CG 20 26 04 13|
|Additional Insured Co-Owner Of Insured Premises||CG 20 27 04 13|
|Additional Insured Lessor Of Leased Equipment||CG 20 28 04 13|
|Additional Insured Grantor Of Franchise||CG 20 29 04 13|
|Oil Or Gas Operations Non-Operating, Working Interests||CG 20 30 04 13|
|Additional Insured Engineers, Architects Or Surveyors||CG 20 31 04 13|
|Additional Insured Engineers, Architects Or Surveyors Not Engaged By The Named Insured||CG 20 32 04 13|
|Additional Insured Owners, Lessees Or Contractors — Automatic Status When Required In Construction Agreement With You||CG 20 33 04 13|
|Additional Insured Lessor Of Leased Equipment Automatic Status When Required In Lease Agreement With You||CG 20 34 04 13|
|Additional Insured — Grantor Of Licenses — Automatic Status When Required By Licensor||CG 20 35 04 13|
|Additional Insured — Grantor Of Licenses||CG 20 36 04 13|
|Additional Insured — Owners, Lessees Or Contractors — Completed Operations||CG 20 37 04 13|
|Additional Insured — Owners, Lessees Or Contractors — Automatic Status For Other Parties When Required In Written Construction Agreement||CG 20 38 04 13|
|Exclusion — Designated Professional Services||CG 21 16 04 13|
|Amendment Of Liquor Liability Exclusion||CG 21 50 04 13|
|Amendment Of Liquor Liability Exclusion — Exception For Scheduled Premises Or Activities||CG 21 51 04 13|
|Exclusion — Financial Services||CG 21 52 04 13|
|Exclusion — Funeral Services||CG 21 56 04 13|
|Exclusion — Counseling Services||CG 21 57 04 13|
|Exclusion — Professional Veterinarian Services||CG 21 58 04 13|
|Exclusion — Diagnostic Testing Laboratories||CG 21 59 04 13|
|Total Pollution Exclusion For Designated Products Or Work||CG 21 99 04 13|
|Exclusion — Inspection, Appraisal And Survey Companies||CG 22 24 04 13|
|Exclusion — Professional Services — Blood Banks||CG 22 32 04 13|
|Exclusion — Testing Or Consulting Errors And Omissions||CG 22 33 04 13|
|Exclusion — Construction Management Errors And Omissions||CG 22 34 04 13|
|Exclusion — Products And Professional Services (Druggists)||CG 22 36 04 13|
|Exclusion — Products And Professional Services (Optical And Hearing Aid Establishments)||CG 22 37 04 13|
|Exclusion — Camps Or Campgrounds||CG 22 39 04 13|
|Exclusion — Engineers, Architects Or Surveyors Professional Liability||CG 22 43 04 13|
|Exclusion — Services Furnished By Health Care Providers||CG 22 44 04 13|
|Exclusion — Specified Therapeutic Or Cosmetic Services||CG 22 45 04 13|
|Exclusion — Insurance And Related Operations||CG 22 48 04 13|
|Exclusion — Failure To Supply||CG 22 50 04 13|
|Pesticide Or Herbicide Applicator — Limited Pollution Coverage||CG 22 64 04 13|
|Druggists||CG 22 69 04 13|
|Real Estate Property Managed||CG 22 70 04 13|
|Colleges Or Schools (Limited Form)||CG 22 71 04 13|
|Colleges Or Schools||CG 22 72 04 13|
|Professional Liability Exclusion — Computer Software||CG 22 75 04 13|
|Professional Liability Exclusion — Health Or Exercise Clubs Or Commercially Operated Health Or Exercise Facilities||G 22 76 04 13|
|Professional Liability Exclusion — Computer Data Processing||22 77 04 13|
|Exclusion — Contractors — Professional Liability||22 79 04 13|
|Limited Exclusion — Contractors — Professional Liability||22 80 04 13|
|Exclusion — Adult Day Care Centers||22 87 04 13|
|Professional Liability Exclusion — Electronic Data Processing Services And Computer Consulting Or Programming Services||22 88 04 13|
|Professional Liability Exclusion — Spas Or Personal Enhancement Facilities||CG22 90 04 13|
|Exclusion — Telecommunication Equipment Or Service Providers Errors And Omissions||CG22 91 04 13|
|Lawn Care Services — Limited Pollution Coverage||CG22 93 04 13|
|Limited Exclusion — Personal And Advertising Injury — Lawyers||CG22 96 04 13|
|Exclusion — Internet Service Providers And Internet Access Providers Errors And Omissions||CG22 98 04 13|
|Professional Liability Exclusion — Web Site Designers||CG22 99 04 13|
|Exclusion — Real Estate Agents Or Brokers Errors Or Omissions||CG23 01 04 13|
|Liquor Liability — Bring Your Own Alcohol Establishments||CG24 06 04 13|
|Amendment Of Personal And Advertising Injury Definition||CG24 13 04 13|
|Waiver Of Governmental Immunity||CG24 14 04 13|
|Amendment Of Coverage Territory — Worldwide Coverage||CG24 22 04 13|
|Amendment of Coverage Territory — Additional Scheduled Countries||CG24 23 04 13|
|Amendment Of Coverage Territory — Worldwide Coverage With Specified Exceptions||CG24 24 04 13|
|Amendment Of Insured Contract Definition||CG24 26 04 13|
|Limited Contractual Liability — Railroads||CG242 7 04 13|
|Designated Location(S) Aggregate Limit||CG25 14 04 13|
|Pesticide Or Herbicide Applicator — Limited Pollution Coverage||CG28 12 04 13|
|AMENDMENT OF LIQUOR LIABILITY EXCLUSION||CG29 52 04 13|
|AMENDMENT OF LIQUOR LIABILITY EXCLUSION — EXCEPTION FOR SCHEDULED PREMISES OR ACTIVITIES||CG29 53 04 13|
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A recent press release states, “The California Secretary of State announced today that a ballot initiative to require health insurance companies to publicly justify and get approval for rate increases before they take effect has qualified for the 2014 ballot.” The release goes on to state, “the initiative would require health insurance companies to refund consumers for excessive rates charged as of November 7, 2012 even though voters will not vote on the initiative until a later ballot.”
The President of Consumer Watchdog stated, “Californians can no longer afford the outrageous double-digit rate hikes health insurance companies have imposed year after year, and often multiple times a year. This initiative gives voters the chance to take control of health insurance prices at the ballot by forcing health insurance companies to publicly open their books and justify rates, under penalty of perjury. Health insurance companies are on notice that any rate that is excessive as of November 7th 2012 will be subject to refunds when voters pass this ballot measure.” This effort was supported by State Senator Dianne Feinstein and California Insurance Commissioner David Jones.
Is there more to the story? Is there something else we should be considering? Is it really this obvious that this is solving a major concern or problem?
As with most sensational statements, there is far more to consider as it relates to the affordability of health insurance. As a professional actuary for more than 41 years, I am afraid there is far more to this story than has been described by the proponents of this initiative. The remainder of this article will address some of the most obvious issues.
Do Carriers Intentionally Price Gouge Their Customers?
Although there always seems to be exceptions to the norm, carriers set rates based upon their historical costs and a reasonable projection of what might happen in the future. These rates are developed by professional actuaries who are subject to Guidelines for Professional Conduct that govern their analysis and review methodologies.
Rates are not made subjectively, but rather based upon extensive analysis of what costs have been. Actuaries spend endless hours reviewing the claims experience, analyzing utilization and cost levels, developing estimates of inflationary trends, analyzing operating costs and carefully projecting what future rates will need to be in order to cover costs and produce needed margins. When prior rates are inadequate, premium rates are increased on particular plans to avoid losses.
This process is very systematic and based upon detailed actuarial analyses. This process is not arbitrary or capricious, but can be challenging for some product lines. I know of no competent carrier that intentionally tries to gouge its customers, but rather the opposite. Carriers work hard to find ways to provide the greatest value to their customers and keep rates as low as possible.
Why Do Premium Rates Go Up So Much?
There are many reasons why rates increase but the most prevalent reason is the high cost of health care. Most of the premium goes to pay health care bills. Under health care reform at least 80% – 85% of the premium goes to pay for health claims. The carrier has little control over these costs other than their efforts related to negotiating discounts and in the impact of their care management activities. The carrier is subject to the prices charged by health care providers. Hospitals charge what they want to charge and carriers try to keep these down by negotiating and maintaining discounts from billed charges.
Since the government sponsored programs pay deeply discounted prices for Medicaid and Medicare members, sometimes below actual cost of care, the carriers are subject to a significant cost shift, paying prices much higher than their governmental counterparts. When providers increase their prices, carrier costs automatically increase. Other than the limited impact of regulation on prices for Medicaid and Medicaid patients, there is no oversight of what providers charge for their services. The fear by providers of the pending impact of health care reform and how it will expand the Medicaid population has resulted in some dramatic increases in provider charge levels to carriers.
In addition to the increases in provider costs, premium rates increase for other factors which include:
- Aging: as members age, their costs increase as much as 1.5% – 2.0% per year
- Selection bias at time of lapse: there is a strong tendency for a bias in lapsed or terminated members. The healthier members tend to lapse more quickly than others since they are more easily able to find alternate coverage. This tends to increase average costs about 1% – 1.5% per year, especially on individual and small group coverage.
- Impact of underwriting: As individuals are reviewed by carriers for medical conditions at time of enrollment, more healthy individuals are enrolled. As time passes, the impact of this underwriting selection wears off and as a result the average costs increase by as much as 2% – 3% per year.
- Deductible leveraging: As costs have increased over the years, individuals have preferred higher deductible programs to keep their costs down. Effective trend rates are higher on higher deductible programs based upon a concept known as deductible leveraging, even though the underlying trend is identical to that for a lower deductible program. For example the effective trend for a $3,000 could be a third larger than for a lower deductible. For example, for an underlying trend of 10%, the leveraged trend for a $3,000 deductible is 13.2% or 3.2% greater than what is expected.
- Utilization trend: In addition to changes in what providers charge, the actual rate by which patients consume services is higher each year, by as much as 1% – 1.5% per year. Some services increase more rapidly.
- Unit costs vs. CPI: National CPI statistics for health care are based upon a common market basket of services and do not reflect a reasonable norm from which to expect health care services to follow. Recent CPI statistics show a general economic trend of no more than 3%, with their medical statistics showing 5% – 6%. Carrier trends have been even higher for many reasons including the above factors.
The Unique California Situation
In most states the insurance commissioner has the authority to regulate rates carriers use for some of their products. Historically in California, the commissioner’s authority was somewhat limited. They required filing of some rates, but did not have the authority to stop a carrier from using a proposed rate or rate increase. They were able to exert some pressure, many times strong pressure, to stop a carrier from large rate increases, but if a carrier wanted to proceed they usually had the right to do so.
In recent years, the department resorted to some public pressure, some negative PR, and essentially threats to the carriers. The proposed initiative gives them the “authority” to do something meaningful, not just veiled threats. So as far as that is concerned, it is good to give more real enablement to do something meaningful to hold all carriers accountable for their actions. I do not believe there is any real concern about carrier behavior, at least among the major players.
The Real Issue
It’s always better to deal with the real cause of the problem, not just undesirable symptoms. If headaches are caused by a brain tumor, it is better to fix or remove the tumor, not just take a stronger pain killer. If the Insurance Rate Public Justification and Accountability Act is to fix the healthcare cost problem, then it is taking action on a symptom of the problem, not the real cause.
As discussed above, there are multiple reasons why health insurance premiums increase. Regulating the carriers alone doesn’t solve any of the underlying problems. It restricts the behavior of one of the middlemen. It doesn’t get to the core problem. It definitely will have an impact, but if not kept in check, will create perhaps even greater problems, potentially driving some carriers out of the market and perhaps transferring more of the problem to additional government bureaucracy.
Although the author is not a big fan of increased government regulation, some regulation or legislation focused on the prices providers are able to charge for services might be more beneficial. At least the major driving force of premium rate increases would be more stable and controlled which would keep premiums more in line.
Although fraught with additional challenges, my favorite solution to the provider charge driver is a shift from today’s system which has different prices for different payers to a system where all payers pay the same price (i.e., called the all-payer system). No matter what type of coverage a person has, the carrier/administrator would be charged the same price. This means that there would be no bias against government payers vs. private sector payers. This would increase the cost for the government for Medicaid, but would substantially reduce what the private sector pays.
Our firm’s analysis shows that setting the prices at Medicare payment levels for all patients would actually be a close proxy for a reasonable price. Private sector prices would drop in most markets by 15% – 17%. Medicaid prices would be increased to a reasonable Medicare payment level. Providers would have no reason not to take any patient since each patient brings the same revenue.
This would also level the playing ground for managed care plans and carriers since network differences would be eliminated. The plans could compete on more important items such as care management effectiveness, clinical efficacy, comparative effectiveness, and quality of the provider network.
Under this approach, Medicare would be the agency essentially regulating the reasonableness of prices. Significant administrative costs would be eliminated from both the carriers and the providers.
There would be a cost to the various states for raising the price they have to pay for Medicaid beneficiaries since they often have to pay 50% of the cost of these patients. Some of this could be offset by some increased federal payments from the savings generated in the system.
California’s proposed initiative is interesting but probably not as big of a deal as it could be. Here’s hoping for some “real” legislation that could save more of us more “real” dollars and eliminate some of the administrative costs of the current system.