Tag Archives: insurance premiums

6 Lessons From Katrina, 10 Years On

In December 2005, just three months after Katrina savaged the Gulf Coast, we edited On Risk and Disaster, a book on the key lessons that the storm so painfully taught. The book was very different from most of the post-mortems that focused on the country’s lack of preparedness for the storm’s onslaught. It focused sharply on how to reduce the risk of future disasters—and how to understand how to help those who suffer most from them.

One of the most important findings highlighted by the book’s 19 expert contributors was that the storm affected lower-income residents far more than others. Reducing the exposure to potential damage before disasters occur, especially in the most hazard-prone areas, is one of the most important steps we can take. To achieve this objective in low-income areas, residents often need help to invest in measures to reduce their losses. Failing to learn these lessons will surely lead to a repeat of the storm’s awful consequences.

Now, 10 years after Katrina struck, six lessons from the book loom even larger.

1. Disasters classified as low-probability, high-consequence events have been increasing in likelihood and severity.

From 1958 to 1972, the number of annual presidential disaster declarations ranged between eight and 20. From 1997 through 2010, they ranged from 50 to 80. The National Oceanic and Atmospheric Administration reported that the number of severe weather events—those that cause $1 billion in damage or more—has increased dramatically, from just two per year in the 1980s to more than 10 per year since 2010. That trend is likely to continue.

2. Most individuals do not purchase insurance until after suffering a severe loss from a disaster—and then often cancel their policies several years later.

Before the 1994 Northridge earthquake in California, relatively few residents had earthquake insurance. After the disaster, more than two-thirds of the homeowners in the area voluntarily purchased coverage. In the years afterward, however, most residents dropped their insurance. Only 10% of those in seismically active areas of California now have earthquake insurance, even though most people know that the likelihood of a severe quake in California today is even higher than it was 20 years ago. Moreover, most homeowners don’t keep their flood insurance policies. An analysis of the National Flood Insurance Program in the U.S. revealed that homeowners typically purchased flood insurance for two to four years but, on average, they owned their homes for about seven years. Of 841,000 new policies bought in 2001, only 73% were still in force one year later, and, after eight years, the number dropped to just 20%. The flood risk, of course, hadn’t changed; dropping the policies exposed homeowners to big losses if another storm hit.

3. Individuals aren’t very good at assessing their risk.

A study on flood risk perception of more than 1,000 homeowners who all lived in flood-prone areas in New York City examined the degree to which people living in these areas assessed their likelihood of being flooded. Even allowing a 25% error margin around the experts’ estimates, most people underestimated the risk of potential damage; a large majority of the residents in this flood-prone area (63%) underestimated the average damage a flood would cause to their house. It is likely that “junk science,” including claims that climate change isn’t real, leads many citizens to problems in assessing the risks they face.

4. We need more public-private partnerships to reduce the costs of future disasters.

Many low-income families cannot afford risk-based disaster insurance and often struggle to recover from catastrophes like Katrina. One way to reduce future damages from disasters would be to assist those in hazard-prone areas with some type of means-tested voucher if they invest in loss-reduction measures, such as elevating their home or flood-proofing its foundation. The voucher would cover both a portion of their insurance premium as well as the annual payments for home-improvement loans to reduce their risk. A program such as this one would reduce future losses, lower the cost of risk-based insurance and diminish the need for the public sector to provide financial disaster relief to low-income families.

5. Even if we build stronger public-private partnerships, individuals expect government help if they suffer severe damage.

Just before this spring’s torrential Texas rains, there was a huge battle in the Texas state legislature about whether local governments ought to be allowed to engage in advance planning to mitigate the risks from big disasters. Many of the forces trying to stop that effort were among the first to demand help when floodwaters devastated the central part of the state. Even the strongest believers in small government expect help to come quickly in times of trouble. We are a generous country, and we surely don’t want that to change. But jumping in after disasters strike is far more expensive than taking steps in advance to reduce risks. Everyone agrees that the cost curve for disaster relief is going up too fast and that we need to aggressively bend it back down.

6. Hurricanes tend to grab our attention—but there are other big risks that are getting far less attention.

Hurricanes are surely important, but winter storms, floods and earthquakes are hugely damaging, too. Too often, we obsess over the last catastrophe and don’t see clearly the other big risks that threaten us. Moreover, when big disasters happen, it really doesn’t matter what caused the damage. Coast Guard Adm. Thad Allen, who led the recovery effort after Katrina, called the storm “a weapon of mass destruction without criminal intent.” The lesson is that we need to be prepared to help communities bounce back when disasters occur, whatever their cause; to help them reduce the risk of future disasters; and to be alert to those who suffer more than others.

The unrest that rocked Baltimore following Freddie Gray’s death reminds us that Adm. Allen’s lesson reaches broadly. The riots severely damaged some of the city’s poorest neighborhoods and undermined the local economy, with an impact just as serious as if the area had been flooded by a hurricane. Many of the same factors that bring in the government after natural disasters occurred here as well: a disproportionate impact on low-income residents, most of whom played no part in causing the damage; the inability to forecast when a random act, whether a storm surge or a police action, could push a community into a downward spiral; and the inability of residents to take steps before disasters happen to reduce the damage they suffer.

Conclusion

Big risks command a governmental response. Responses after disasters, whatever their cause, cost more than reducing risks in advance. Often, the poor suffer the most. These issues loom even larger in the post-Katrina years.

Natural disasters have become more frequent and more costly. We need to develop a much better strategy for making communities more resilient, especially by investing—in advance—in strategies to reduce losses. We need to pay much more attention to who bears the biggest losses when disasters strike, whatever their cause. We need to think about how to weave integrated partnerships involving both government and the private and nonprofit sectors. And we need to understand that natural disasters aren’t the only ones our communities face.

Sensible strategies will require a team effort, involving insurance companies, real estate agents, developers, banks and financial institutions, residents in hazard-prone areas as well as governments at the local, state and federal levels. Insurance premiums that reflect actual risks coupled with strong economic incentives to reduce those risks in advance, can surely help. So, too, can stronger building codes and land use regulations that reduce the exposure to natural disasters.

If we’ve learned anything in the decade since Katrina, it’s that we need to work much harder to understand the risks we face, on all fronts. We need to think about how to reduce those risks and to make sure that the least privileged among us don’t suffer the most. Thinking through these issues after the fact only ensures that we struggle more, pay more and sow the seeds for even more costly efforts in the future.

This article was first published on GovEx and was written with Donald Kettl and Ronald J. Daniels. Kettl is professor of public policy at the University of Maryland and a nonresident senior fellow at the Brookings Institution and the Volcker Alliance. Daniels is the president of Johns Hopkins University.

A Quiet ACA Waiver — and Needed Change

Massachusetts has been on the forefront of American history since the days of Paul Revere and the Boston Tea Party. It is also the state that inspired the Affordable Care Act, a.k.a. Obamacare, by its groundbreaking universal coverage law implemented under former Gov. Mitt Romney. What has received very little, if any, national media coverage is that the heavily Democratic-controlled state of Massachusetts quietly filed for and was granted a three-year waiver on how premiums are calculated under the ACA for small employers.

The waiver request was so quiet that the Boston Globe reported that Gov. Deval Patrick, a friend and supporter of the president, signed the legislation on the Friday afternoon before the July 4th weekend last year “in private when the statehouse was empty and the majority of voters were on vacation.”

One of the major negative consequences of Obamacare for small employers in Massachusetts and throughout the country is that the ACA destroys the entire concept of “experience rating.” Experience rating has been the cornerstone of how workers’ compensation insurance premiums are calculated since time immemorial. In simple terms, employers’ workers’ comp premiums are based on the type of industry in which they operate, the number and type of employees they have and their historical safety record. Employers with great safety records pay less for insurance, and employers with poor safety records pay more. This approach is not only fair but gives employers a strong financial incentive to provide a safe workplace.

After enactment of the Massachusetts universal coverage law, (which I am told was only 70 pages long, compared with the ACA's 2,000-plus pages and growing) employers’ health insurance premiums were 15% above the national average and the most expensive in the nation. Now, under the ACA, Massachusetts health insurance premiums are projected to go up 50% for the majority of small employers.

The basic issue is that the Massachusetts universal coverage law used nine rating factors to calculate premiums for small employers. These include discounts for using healthcare insurance purchasing cooperatives and for providing a safe workplace. Those nine factors are now preempted under the ACA and have been replaced by only four: age, family size, location and smoking habits.

The Chamber of Commerce and other small-business groups protested the changes vehemently. Gov. Patrick said he privately asked for a waiver and was told “no” by the president and the Department of Health and Human Services. Obviously, it would be a political embarrassment to the president if the place where his healthcare reform began, and one of the “bluest” states in the nation, publicly requested a waiver. However, the state legislature overwhelmingly voted to require the governor to do so.

Massachusetts was, in fact, granted a three-year waiver on the ACA's requirements on rating factors. The request for a permanent waiver was denied last September by Secretary Kathleen Sebelius at HHS.

Of course, “progressive” healthcare reform advocates opposed the waiver, stating that it would be “unfair” to other employers. How is it unfair that employers who promote wellness and a safe workplace are rewarded for their efforts with reduced premiums?

A study by the Pioneer Institute predicts that Massachusetts employers will now have to cut back on employment and the number of insured. Tell me, how is that “progressive”?

The Massachusetts Department of Insurance has reported that a study by the state’s health insurers predict that 60% of small employers will see a 50% or greater rate increase after the waiver expires in 2016, on top of the normal yearly increases.

The president, during his State of the Union address, challenged anyone to identify changes needed to the ACA. Maybe it’s time to dump the ACA premium rating factors in the Boston harbor like the British tea and restore full-blown experience rating for small employers in Massachusetts and in the rest of the nation.

What Happens When Technology and Workers’ Comp Law Collide?

Those of us who have been workers’ comp professionals for a while like to think that there are no new issues. We’ve seen it all, done it all, and have a closet full of T-shirts to prove it. Yet technology, like the proverbial new wine in an old wineskin, can break out of the boundaries created by aged statutes and old case law.

There have been some recent examples of corporate civil liability for employees who are in motor vehicle accidents while using their cell phones for business. This also raises a slightly different and thornier question: What about employees who get into accidents while off work but while making business calls on personal cell phones. Should they, too, be entitled to workers’ compensation benefits?

This issue was addressed in Virginia a few years ago in the case of Donna Turpin v. Wythe County Community Hospital.  (http://www.washingtontimes.com/news/2011/oct/9/workers-comp-case-upheld-in-cellphone-related-cras/?page=all)

Here, the claimant was a nurse who was off work, but on call, when she received a work-related phone call. While trying to answer the phone, she lost control of her vehicle and crashed, resulting in moderate injuries.

The fact that nurse Turpin was on call makes the injury arguably more compensable, and the Virginia Court of Appeals agreed. It awarded benefits even though she wasn’t technically at work.

But I have been waiting to see courts address the issue where a business professional is driving his or her car on a Saturday or Sunday, running personal errands and not on call. Then, when he receives a work-related cell phone call, he becomes distracted and is in a motor vehicle accident. Should this be compensable even though the employee is not at work and is doing personal activities?

As you may surmise, the majority of jurisdictions within the U.S. would probably find this injury to be compensable, as there is a benefit to the employer from having the employee take a business call on personal time. Under the “mutual benefit doctrine,” if the employee is conducting legitimate work then the claim is compensable even if the employee is on his way to get donuts for his family.

However, if companies have a policy that prohibits the use of cell phones while driving, how do we resolve the inherent conflict between an injury arising out of work duties and an injury that occurred as the result of a violation of company policy?

Many states (but not a majority) have provisions within their workers’ compensation statute that allow for a reduction of benefits if the claimant is injured as a result of a failure to use safety devices or a failure to follow safety rules.

If you are in a state that has such provisions, this is an added reason why the company policy manual should be updated to prohibit the use of cell phones while driving. That way, even if the claim is compensable, there would still be a reduction of benefits paid.

The response to such policies is typically negative: “Why should the worker be punished when he was injured while trying to do his job?” Valid question. Here is a valid answer: incentive.

I often tell employers that safety rules and policies are not adopted to punish employees but to try to reduce injuries. Everything we do in life has risk. But any risk manager will tell you that the trick is to maximize work efficiency while minimizing (rarely eliminating) the risk. Employees should be penalized for violating safety policies, because without the concern for punishment (like having one’s comp benefits reduced or even eliminated), there is no incentive to follow the policies designed to minimize the risks faced by workers.

I drafted the hypothetical situation because: 1) It could easily happen, and 2) It demonstrates how technology blurs the line between our personal activities and our work activities.

Safety policies should be adopted to minimize risk—like a ban on driving and using cell phones at the same time. Such a policy should not only reduce the risk of injury to your employees but should also reduce the risk of increased insurance premiums.

Now, if only I could figure out a way to craft a policy that eliminated the calories in donuts, I would really be on to something.

Private Exchanges May Be the Free Market Solution to Cost Control and Healthcare Consumerism

While the Patient Protection and Affordable Care Act (PPACA) is sometimes shortened to the “Affordable Care Act” or ACA, the act has few features that will make insurance more affordable.  Government studies and industry experts have indicated that strict coverage mandates, limited premium classifications, community rating, added benefits, single risk pools, and price compression will raise premiums more rapidly than if the ACA had never been passed.

The development of exchanges, both government and private exchanges, are part of an evolution that will change the way insurance is sold and bought.  It is a new way of connecting products with customers.   Government exchanges are likely to be used mainly by those qualifying for a federal subsidy.  The standards and restrictions on government exchanges are likely to attract poor risks and high cost claimants.  The government exchanges will use government paid “navigators” rather than independent licensed agents.  The government exchanges and navigators are not expected to offer supplemental products, life insurance or other products and services.

Private exchanges may be the free market solution to real cost control and lowering the number of uninsureds.  With 40-50 million uninsureds, the traditional agent distribution system for insurance is not working.   About 60% of the uninsured are under age 35.  Studies conducted in Georgia by the Center for Health Transformation Uninsured Working Group showed that 35% of the uninsured could afford insurance but did not know it.  Another 40% needed lower cost options that were not available to them either because insurers emphasized high premium products, or because existing state laws or legislative mandates increased premiums and favored insurers over consumers.

Many uninsureds work for a small businesses that do not offer insurance. They may be self-employed, part-time, or doing contract work.  In most cases, the need is for individual insurance, not group plans.  Selling single policies can be time consuming with little financial rewards for an agent.  Many potential individual sales are halted at the kitchen table when in the process of completing an application issues arise that could cause a declination.   Information derived by an insurer during the underwriting process is typically fed into an industry association called the Medical Information Bureau.  That information is shared across companies and a declined health application could have ramifications for future applications of life insurance, disability coverage and other forms of insurance. 

Private exchanges are developing that will offer individual and group products that emphasize wellness and treatment compliance for those under medical care.  PPACA requires insurers to “community rate” their products.  That is, individuals or small groups will not get direct credit for healthy activities.  New entities are forming that will likely attract healthy individuals and the less healthy members interested in getting better.  Developing private health cooperatives, captive mutual companies, and new insurers may be unencumbered by an existing unhealthy membership or a current business model that limits attracting customers willing to be engaged in healthy behaviors. 

Healthcare consumerism is more likely to emerge through private exchanges than government exchanges.  Private exchanges will provide a transition from employer-based insurance to individual-centered or consumer-centered insurance.  In theory, both large and small employers will be able to purchase health insurance through the private exchanges, and their employees can choose an individual health plan from those offered by participating insurers.

Time will tell.  We are in the beginning stages of a major market revolution.  We already know that government exchanges as originally promised for small groups have been delayed one year until 2015.  As private exchanges come on line, I believe each will be a little different and offer varying levels of products and services.  For awhile it will be a “wild west” show.  Ultimately, the success and failure of each exchange’s product and distribution model will lead to consolidation and better products, services, convenience, help, and information for the consumer.  In the end, more product competition and price transparency will lead to more citizens being insured and lower insurance costs will prevail.  This is the way free markets create successful products and services that consumers want to buy.

Why Obamacare Is Unraveling

President Obama’s announcement during a Nov. 14 press conference that he would like to see insurance carriers extend non-complying health coverage after Jan. 1 may be the event that unravels the Affordable Care Act (ACA).  Carriers and health plans have worked hard for several years, have spent millions of dollars complying with ACA, have fought with insurance department regulators getting policies approved and, in many cases, have notified consumers of the need to terminate non-compliant policies. Now, carriers and health plans have a new wrinkle thrown their way.  What is going to happen next?

Some of the key principles of ACA are:

  • Clear definition of Essential Health Benefits (i.e., EHB)
  • Clear definition of metallic or metal level plans based upon the actuarial value of the benefit plan
  • Restrictions on premium format and methods to derive premium rates
  • Rigorous rate review and approval process coordinated by a combination of state insurance departments and federal oversight
  • Mandates for participation in some type of health coverage
  • Large number of taxes and fees to help fund ACA
  • Assumption that there would be a reasonable risk pool so carriers could appropriately price and predict future costs of care

Minimum loss ratio requirements to ensure that a reasonable portion of the premium rate goes toward the payment of claims

Carriers have worked hard to comply with the new regulations, which for many have involved significant shifts in the methods used to conduct business.  The rate development process for a typical carrier follows this process:

  • Review of prior claims experience and profitability
  • Determination of what rate increase will be required to maintain a profitable product offering
  • Development of proposed rate for various rate cohorts with competitive comparisons
  • Potential benefit redesign to meet regulatory changes or competitive pressures in the marketplace
  • Obtaining independent actuarial certification regarding proposed rates as a reasonableness test (e.g., Section 1163 required in California)
  • Filing of rates with regulators for approval and follow-up with regulators until rates are formally approved
  • Communication of rates to those insured, and implementation of the new rates

This process can require four to six months to complete.  It is actuarially complex and requires careful analysis of many factors and variables. 

As ACA emerged, carriers had to adjust benefits covered in prior products where they failed to meet the minimum EHB required.  In some cases, products were terminated because they did not meet either the EHB or the minimum actuarial value of 60%.  Carriers worked hard to develop replacement products, filed these with regulators and started to present these to their customers. 

It was obvious that some customers would be concerned about the impact of rate changes associated with ACA-approved benefit programs.  Rates would increase for a variety of reasons:

  • Health care inflation continues
  • Mandated benefits required broader coverage than previously purchased
  • Elimination of gender rating generally increased rates for insured males
  • Minimum Actuarial Values (i.e., > 60% AV) raised benefits for some insureds
  • Assumed average risk score for the individual market was higher than in the past because medical underwriting is no longer appropriate, and, in some cases, carriers raised the average assumed health status built into the rates to reflect the enrollment of additional Medicaid- or Medicaid-like lives.
  • Age rating was affected, requiring higher rates at younger ages to offset some of the reductions at the older ages (i.e., 3:1 limits on age rating curve).

The concerns expressed by the public on higher rates, the concerns expressed about policy cancellations, the delays caused by website challenges, the continued frustrations about ACA all combined into a situation where a large portion of public were frustrated with ACA.  The president’s announcement was a response to many of these concerns and frustrations.

However, there are several complications facing the carrier community as a result of this suggestion or proposal to the insurance departments and affected carriers.

  • Rates for terminated programs were not updated for 2014.  Rates can’t be extended without adjustment because rates were established for a previous time period, and there has been inflation.  Updating would require a minimum of 4 – 6 months.  The software implemented by the federal government and used at the local insurance department level is built around the new ACA requirements and would likely reject restored versions of terminated policies.
  • The risk pool for all of the ACA-approved rates will be changed significantly if individuals are able to continue their prior programs.  Selection bias issues would be significant.
  • The individual mandate for credible health coverage would be compromised if individuals continued their prior, non-compliant coverage.  The anticipated tax base would be jeopardized with the continued offering of non-compliant coverage if penalties were forgiven.
  • The disruption to the insurance industry involved in the exchanges would be significant and potentially would permanently damage the risk pool.
  • More importantly, the public’s perception of the benefit of ACA to them will be affected as changes were required, then they weren’t, then they will be, etc.

Although there are many features of ACA that potentially provide value to the public, the flawed rollout, the delays in implementation and now radical changes to the structure of the ACA program very likely start to unravel the viability of the program.  Only time will tell.