Tag Archives: insurance coverage

Built For Reform: Third Party Administrators And The Affordable Care Act

The Affordable Care Act (ACA) is considered the most significant, albeit poorly written, law that Congress has passed in the last 50 years. As regulators devise the details needed for the law to be fully implemented, unprecedented new administrative and compliance burdens are looming for employers. Independent Third Party Administrators (TPAs) have decades of experience guiding employers through the pitfalls of government rules and requirements. This expertise makes independent Third Party Administrators invaluable to employers trying to mitigate the impact of health care reform.

A Brief History Of The Third Party Administrator Industry
Most employee benefit plans are highly technical and difficult to administer. Those complexities gave birth to the Third Party Administrator industry.

While there are reports of a Third Party Administrator operating as early as 1933, the modern Third Party Administrator concept is rooted in servicing mostly pension plans codified in the 1946 Federal Taft-Hartley Act. Such plans are typically comprised of several employers whose employees belong to a single union.

By the late 1950s, there were also a few Third Party Administrators specializing in servicing medical plans sponsored by single employers. The industry boomed after the enactment of the Employee Retirement Income Security Act of 1974, as employers began exploring the option of self-funding when traditional insurance coverage failed to meet their cost expectations. Today, the administration of self-funded medical plans is the primary line of business for many independent Third Party Administrators.

Employers that self-fund assume the financial risk of paying claims for expenses incurred under the plan. Medical, dental, vision, and short-term disability plans, as well as Health Reimbursement Arrangements (HRAs), can all be part of a self-funded program.

Most employers sponsoring self-funded medical plans purchase stop loss coverage to limit their risk. An insurance carrier becomes liable for the claims that exceed certain pre-determined dollar limits.

The Value Of A Third Party Administrator-Administered Self-Funded Program
Employers can choose to administer their self-funded plans in-house. However, few have the experience to do it well. Considering the heavy penalties for regulatory non-compliance, self-administration is generally ill-advised.

Some insurance carriers offer Administrative Services Only (ASO) contracts to employers that wish to self-fund but rely on the carrier to do the paperwork. Unfortunately, most insurance carriers have benefit administration systems that are too inflexible to accommodate the unique plan designs that are the hallmark of self-funding. In addition, they are more attuned to the legal requirements applicable to fully insured products, which differ dramatically from those for self-funded plans.

Insurance carriers may assume financial risk under an Administrative Services Only contract by providing the stop loss coverage. Conversely, Third Party Administrators are not risk-taking entities so they are clearly in a position to act in the best interest of the plan and its members.

The independent Third Party Administrator industry was built on change. Never having settled for the “one-size-fits-all” approach of the fully insured model, independent Third Party Administrators maintain sophisticated information technologies that adapt easily to new demands, as well as professional staff accustomed to responding to regulations that continually reshape employee benefits in profound ways.

Independent Third Party Administrators usually provide a broad range of à la carte services to self-funded employers: plan design, claims processing, placement of stop loss coverage, case management, access to networks and disease management, wellness, and utilization review vendors, eligibility management and enrollment, subrogation, coordination of benefits, plan document and summary plan description preparation, billing, customer service, compliance assistance, ancillary benefits and add-ons such as Section 125 plans, consulting, and COBRA and HIPPA administration. Independent Third Party Administrators are best at customizing their services and plans to suit a client’s specific needs including benefit philosophies, demographics, risk tolerance, and compliance requirements.

A fully insured arrangement cannot compete with a thoughtfully designed, Third Party Administrator-administered self-funded program. Employers that self-fund enjoy increased financial control, lower operating costs, flexibility with plan design, a choice of networks, detailed reporting of plan usage and claims data, and effective cost management.

The Challenges Of The Affordable Care Act
When small employers (those with fewer than 50 full-time equivalent employees) offer health benefits, the coverage is usually fully insured. However, self-funding has gained momentum among small employers.

In 2014, large employers (those with 50 or more full-time equivalent employees) will be subject to the Affordable Care Act’s “pay or play” requirements. A large employer must offer its full-time employees (working at least 30 hours per week or 130 hours total in any given month) and their children minimum essential coverage that is affordable and provides minimum value. Otherwise, the employer will be subject to a penalty if any of its full-time employees obtains health coverage through a Health Insurance Exchange (now called a Health Insurance Marketplace) and is certified as eligible for a premium tax credit.

The premiums for fully insured coverage are expected to rise significantly due to the Affordable Care Act imposing an annual fee on most insurers, modified community rating in the individual and small group markets, and expensive mandates for essential health benefits. Self-funded plans are exempt from these requirements. In addition, while Affordable Care Act requirements will likely inflate insured premiums, stop loss premiums remain competitive (even for small employers).

Self-Funding As A Strategy For Overcoming The Affordable Care Act’s Challenges
Depending on size, employers must make important decisions about managing the costs associated with health care reform. They can provide coverage or not provide coverage (and possibly pay a penalty), reduce hours, eliminate jobs, or find a way to offer a cost-effective and compliant plan.

Independent Third Party Administrators are the experts at self-funding. A Third Party Administrator can custom design a high quality, Affordable Care Act-compliant, self-funded program that a small or large employer can offer at a controlled cost. For employers looking for flexible solutions to manage costs while continuing to recruit and retain talented employees, a Third Party Administrator-administered self-funded program with medical stop loss coverage is a viable solution.

What The Insurance Industry Needs To Know About Epoxy Water Pipe Liner

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Recently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. This method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many epoxy failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

  • The potential for epoxy liner failures may be high in galvanized steel potable water systems.
  • There is no reliable way to inspect the adhesion of epoxy inside a pipe.
  • If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
  • Epoxy liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a “new” system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner “solution” as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy “solution.”

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don't know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation … this can become a huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The epoxy liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then “cured in place” either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the epoxy lining system are associated with the planning and quality of the preparation as well as training of the applicator personnel.

 

The Anatomy of an Epoxy Failure: The following photographs demonstrate the progression of an epoxy failure where the surface has been improperly prepared.

Single Crack Allows Water To Enter

Multiple Cracks Form Due To Underlying Corrosion

Cross Section of Coating Breach, Pitting Continues

When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at it's weakest — pitted areas and threads.

Pipe threads are especially vulnerable: The photo below shows corrosion in steel pipe near pipe threads. Sandblasting with epoxy would weaken the threaded area further. A crack in the epoxy at this location would allow the corrosion to continue unknown to the residents. In many cases the existing pipe is better off left alone until a full re-pipe can take place.

Corrosion In Steel Pipe Near Pipe Threads

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service2 3 4. While epoxy is tested safe to drinking quality standards by independent studies1 and national water quality standards6, any such “certification” is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression7 of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers3, The American Water Works Association9, the American Society of Testing and Materials10, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.3 Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.10

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.7 The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn't re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.5

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.6 The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

1 Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

2 Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

3 PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

4 INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

5 Canadian law suit brought against the epoxy applicators.

6 Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

7 Layman's Guide to Epoxy Paint / Coating Failures.

8 NSF/ANSI Standard 61 Drinking Water System Components.

9 AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

10 ASTM F2831 – 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

Disclaimer
Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.

Leap Year: Season 2, Episode 2 – One Of Those Nights

From the looks of things, C3D has started to attract a lot of attention in Silicon Valley. Some of this is positive buzz from the press like the semi-successful appearance Jack made last week on What’s Trending. But the specific attention to the C3D office — that is smashing it up and stealing their latest prototypes — is much less welcome. Not only did Jack promise a product launch in three months, three times faster than they planned, now Bryn will need to start from scratch to get their new product ready in record time.

Maybe their benefactor Glenn Cheeky can help? Kind of, but while he did put them in touch with detective Smiley, he also instructed them not to file a police report and suffer the related bad publicity. Glenn’s advice makes sense. Bad press can quickly rub the shine off an exciting new company for analysts, investors and consumers. But operating without funds can do just the same — and probably quicker.

The C3D team is in a unique situation with the intense media and gossip network of Silicon Valley influencing their judgment. But what if this was just a normal business? How would they get back on their feet after a break-in?

Well, if C3D had a business owner policy (BOP), they would have been able to get compensated for their damaged equipment to start out, even if it’s leased. This policy typically also pays to remove debris left behind from the break-in and for damaged personal items. It will even pay to restore electronic data destroyed on electronic files (luckily Bryn learned from last year and started to back their files up off site) and for business interruption claims for lost income due to the break-in. Since C3D is a startup working to get a new product on the market, business interruption might not apply, but for many businesses this coverage can be a lifesaver and keep a temporary setback like a break-in or a fire from becoming something that truly threatens the future of their businesses.

So, what’s the next step for C3D? Finding the people who broke into their office could let them exact some revenge, but will it help them get their product to market on time?

The Insurance Rate Public Justification & Accountability Act – Does It Get To The Real Problem?

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.

Proposed Solution
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.

Bottom Line
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.

Shouldn’t Your Insurance Coverage Become More Than An Expense?

Most businesses buy their insurance coverage and while it may seem expensive they are content knowing that unforeseen circumstances driven by an unforeseeable event won’t financially devastate their company. What if there was a way to shift this traditional model?

I think there are a great many of us who have had the thought that if my premiums aren’t used to pay losses for my business why shouldn’t I get some of that money back? After all, why should the insurance company make a windfall profit because I do a great job of risk management and preventing losses before they happen?

The purpose of this article is to tell you that there is a way to recoup part of your premiums, while still getting competitive premiums. Insurance is a financial transaction as well as a way to purchase protection for your business. Most of us are familiar with the basics of paying premiums, checking to be sure we have adequate limits of insurance and can tolerate the cost of a claim under our selected deductible. At the same time, we aren’t nearly as familiar with the way our premiums are used by the policy issuing Insurance Carrier.

Insurance Carriers use a pooling system to provide protection to policy holders and at the same time maintain adequate financial reserves sufficient to pay claims individually or in the event of a catastrophe. By pooling premiums Insurance Carriers need to write a mix of accounts, both low hazard as well as higher hazard. In addition, the pool needs a balance of profitable and unprofitable accounts, which creates a subsidy for the unprofitable accounts, but enough premiums in the aggregate to pay all claims.

The ultimate goal of the Insurance Carrier is to break even or maybe make a small profit when considering a traditional balance sheet review of their business revenues versus expenses. Unlike many other businesses, the Insurance carrier has a second and more rewarding way to generate profits from the insurance transaction. This additional source of profits is carried on their balance sheets as both assets and restricted assets in the liability column.

A simple example of how this works is easily seen in life insurance. The Insurance Carrier can issue a policy with a 1 million dollar benefit and pay that amount the next day in worst case situations. Obviously, the carrier didn’t collect the full premium nor will they on that policy. The assets held on the balance sheet as restricted assets are used to pay this loss. The same dynamics work with the same characteristics in business insurance. The principal lines of business coverage are workers’ compensation, auto liability, general liability and health insurance.

The existence of restricted assets on the insurance carrier’s balance sheet is also the source of investment income. These assets in commercial insurance are primarily reserve dollars set aside after the occurrence of a claim that are not yet paid. In addition, the carriers set aside reserves allocated for claims, but not yet allocated to a specific claim. Over a period of years these restricted assets can grow to be several times the annual premium written by the Insurance Carrier.

Restricted Assets are invested in secure non-equity investments such as bonds until needed to make claims payments. In many instances, the insurance carrier can generate investment income in the range of 5-50% of annual premium income. This allows insurance carriers to cover unexpected losses and have capital available for growth of their policy count with new business.

Business owners need to know that there are programs and insurance coverage methods that will allow them to take advantage of these income streams for their own benefit. Insurance carriers, while accustomed to taking risk when writing insurance policies, are very comfortable giving up the income potential in return for policyholders taking a portion of that risk. Working for only fee income allows insurance carriers to increase income while limiting risk. At the same time, moving to a program with an alternative structure is a good option for a business. It allows a business to reduce insurance cost through recapture of premiums as dividends. It is a “win-win” situation for everybody and allows a business to build an asset while continuing to protect their business against catastrophic losses.

A careful feasibility study can be completed that will quantify the risk/reward equation for a business owner. Completion of the feasibility study will allow a business to make an informed decision as to whether taking a defined risk is adequately rewarded with reduced cost and dividends, over time.

 

In addition to building assets on your balance sheet with an alternative approach to insuring risk, you can also gain better oversight of your insurance costs and claims management. Every company of average size should consider having a feasibility study completed. If you are interested in having such a study completed for your company, feel free to contact me.