Tag Archives: premium

penalty

When a Penalty Is Not a Penalty

The Affordable Care Act requires most Americans to buy qualifying health insurance coverage. Fail to comply with this mandate, and there’s a financial penalty waiting for you come tax time. But when is a penalty not a penalty? When is a mandate not a mandate? Hey, kids, let’s do some math.

The penalty for going uninsured in 2016 is $695 per adult and $347.50 per child, up to a maximum of $2,085 or 2.5% of household income, whichever is greater.

To determine the cost of coverage, we’ll use the second-lowest Silver plan available in a state. That’s the benchmark used to calculate ACA subsidies, and in 2015 Silver plans were roughly 68% of policies sold through an exchange. Even more important, I found a table showing the cost of the second-lowest cost Silver plan for 40-year-olds by state, but I couldn’t find a similar table for other levels.

The least our 40-year-old could spend on the second-lowest Silver plan this year is $2,196, in New Mexico; the highest premium is $8,628, in Alaska. The median is $3,336. Divide the penalty by the premium, and you get 32% of the cheapest premium and 21% of the median premium. Put another way, paying the penalty saves our 40-year-old  consumer $1,500 in New Mexico and more than $2,600 in the mythical state of median.

I did find a table showing the national average premium a 21-year-old would pay for a Bronze plan: $2,411.  In this situation, the $695 penalty amounts to just 29% of the policy’s cost, a savings of more than $1,700.

The purpose of this post is not to encourage people to go uninsured. I think that’s financially stupid given the cost of needing health insurance coverage and not having it. And, personally, I support the individual mandate. I also understand the political obstacles to establishing a real penalty for remaining uninsured.

However, I also believe the individual market in this country is in trouble. (More on this is a later post). Adverse selection is a contributing cause to this danger. The individual mandate is supposed to mitigate against adverse selection. The enforcement mechanism for that mandate, however, is a penalty that, for many people, is no penalty at all.

That’s not just my opinion. That’s the math.

A version of this article was originally posted on LinkedIn.

obamacare

Next PR Problem for Obamacare

There is a big PR problem brewing, one receiving very little attention in the media or in industry publications. It’s one I think will resonate among those who typically support the politicians who supported the Affordable Care Act.

The issue stems from the delay in the 1094/1095 reporting under section 6055 and 6056 of the IRS code specifically created under the Affordable Care Act. In English: This is the reporting requirement for carriers and employers that lets the government know if an offer of coverage was made to a particular employee, if it met certain requirements and if it was “affordable” according to one of several calculations set forth by the bill. If an “applicable large employer” does not report or does not meet the minimum requirements for coverage and affordability, there are serious fines at play.

The deadline for the first reports, barring any further delays, is March 31.  (The initial deadline was pushed back because of the burden on employers.)

Why is this important? Well, Obamacare established subsidies to help reduce out-of-pocket costs. The subsidy amount is based on household income in relation to the federal poverty level. Your job also must not offer insurance that meets the requirements about the base level of coverage and affordability. Without employer reporting, however, the government has, thus far, relied on individuals’ assessments of coverage and affordability.

Even if the employer plan meets the affordability test, most people would still call their plans through their employer “unaffordable.” The confusion is compounded by something the industry refers to as the “family glitch.” Let’s say I am offered coverage at my job, and my employer pays 80% of the premium for me. But my employer pays nothing toward the cost of carrying my dependents, an all-too-common scenario. This coverage would likely meet the affordability test for my coverage alone, on the lowest-cost plan my employer offers. If my employer pays nothing toward my family, however, it could easily cost me $1,000 or more per month out of my pay to cover my family. That’s clearly not affordable to most Americans, but, because my coverage met the test, the entire household becomes ineligible for a subsidy.

You could have hundreds of thousands of people who honestly believed their coverage was not affordable, didn’t think their employers plan met the coverage requirements or outright lied because there appeared to be no one checking. These people received what could amount to significant subsidies they weren’t entitled to.

Technically, they received an advanced tax credit. If it is determined you were not eligible for that tax credit, you now have a liability, and it is widely believed the IRS will have the right to garnish wages, freeze assets and place liens on property.

How much are we talking here? Well, I have seen subsides as big as $1,500 per month. The average is around $2,890 per year, per person (according to the Kaiser Family Foundation). So, if a family of four owes the entire year back at the average subsidy, we are talking more than $10,000 a year plus (most likely) penalties and interest from the IRS.

What is the average working person going to do if he gets a demand for $1,000 from the IRS? $10,000?  More? And if the IRS exerts the same force it does on normal tax debts, things such as frozen bank accounts, liens and garnished wages could follow pretty quickly.

All in all, this reporting we are now preparing for employers will likely have significant financial impact on many American workers who should not have received the subsidy to begin with. In all likelihood, many did not fully understand that.

The timing of all this will largely depend on how quickly the government aggregates the data it is collecting from numerous sources.

But get ready for what I believe will be a vocal, angry and desperate group of people with compelling stories facing a very difficult financial situation.

Insurers Must Finalize Digital Strategies

I’m a big believer in the power of good, evidence-based research; I’ve mentioned this often in my blog posts. So, I am pleased to start this new series discussing our recent Distribution and Agency Management Survey.

It’s the most extensive distribution survey in the insurance industry ever conducted by Accenture Research.  We canvassed top executives at 414 carriers in 20 countries in Europe, North America, Asia Pacific and Latin America. They ranged from marketing chiefs to CIOs, heads of distribution and sales, brokerage executives and chief digital officers—they were all involved in insurance distribution. Many of them, 44%, work in Europe. Nearly all the carriers we surveyed generate premium income of more than $1 billion a year. Forty-five percent were multiline insurers, 28% were property and casualty insurers, and 27% were life insurers.

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This is, indeed, a very powerful survey.

It gives a clear picture of how quickly insurers are deploying digital strategies in the sale and distribution of their products and services. Moreover, it highlights the actions carriers need to take to harness the full potential of digital technologies to transform their distribution model and avoid being left behind by competitors.

Digital technology is no longer an adjunct to the businesses of the world’s major insurers. It now dominates the agendas of most of the biggest carriers around the globe. And its influence is fast getting stronger.

We’ve entered an era of huge digital disruption. Carriers must move quickly to formalize their digital strategies and shape their future distribution models—one of the main findings of the Distribution and Agency Management Survey.

Reimagining insurance distribution - Distribution and Agent Management Survey Accenture POV

More than 80% of the insurance executives we surveyed intend to fully digitize their sales processes in the next few years. This is a huge shift from just two years ago, when only a minority of carriers had such plans. In Europe, 27% of insurers have already implemented end-to-end digital sales processes, and a further 30% plan to follow suit in the next three years. This is in line with trends from the rest of the world.

New highly personalized digital channels will enable insurers to build intimate customer relationships that can be leveraged by physical channels to sell further products and services. They’ll also offer new business opportunities. Nearly 60% of all the insurers we surveyed are prioritizing a shift to more customer-centric distribution models, while 48% have, or plan to have, a customer-centric hub that allows them to use customer data to improve the service experience. Raising the quality of the customer’s digital experience is a major priority among insurers in Europe and the rest of the world.

Carriers across the globe are preparing a host of new digital services and products. Competition will be fierce. In the midst of growing change and uncertainty, it’s vital insurers cultivate business agility and act decisively in selecting and implementing their digital strategies.

In my next blog post, I’ll examine, in more detail, the digital disruption that’s taking place in the distribution channels of major insurers around the world.

For more information about Accenture’s Distribution and Agency Management Survey, click here.

An Open Letter to Federal Regulators

I welcome and applaud the federal government’s interest in the regulation of our nation’s insurance industries and markets. In response to the Federal Insurance Office’s request for comments on the “gaps” in state regulation, I appreciate this opportunity to present my views. Indeed, your request, Director McRaith, for comments upon such “gaps” seems to reveal what a keen, yet heretofore unpublicized, good sense of humor you must have.

To very briefly introduce myself, I am an economist, a CFA and a life insurance agent of more than 20 years who has worked with scores of life insurers. My views have been published by the Journal of Insurance Regulation, the American Council on Consumer Interests and various other industry trade publications. My positions are based on my extensive experiences with our nation’s profoundly problematic state-based insurance regulatory system, problems that those who have not been intimately involved with in the marketplace might find inconceivable.

State insurance regulators have never required the proper disclosure of cash value life insurance policies. Markets do not work properly without adequately informed consumers. While life insurance is, conceptually, a simple product, without the proper conceptual understanding of and the necessary relevant information, consumers cannot effectively search for good value. “The Life Insurance Buyer’s Guide,” published by regulators and mandatorily distributed with policies by insurers and their agents, is not just a little deficient—it is misleading, seriously incomplete and defective. And, it, in all of its various state editions, has been that way for almost 40 years.

Professor Joseph Belth has written about this national problem for more than 40 years. In 1979, the Federal Trade Commission issued a scathing report on the life insurance industry’s cash value products. Cash value policies are composed of insurance and savings components, and consumers need appropriate information about both. This specifically requires appropriate disclosure of these policies’ annual compounding rates on consumers’ savings element as well as annual costs regarding their insurance element. Both Professor Belth and I have separately developed very similar disclosure approaches. (More information about my approach and its comparative conceptual and marketplace tested-advantages is available on my website or upon request.)

The exceptional nature of this regulatory failure can be grasped by specifically contrasting the states’ regulatory track record on cash value policy disclosures with those of other financial regulators’ actions. Investment product disclosures have been mandated since the 1930s. Truth in Lending was enacted in 1969. And yet, while a consumer’s potential risks in making a poor life insurance purchase can arguably be shown to be greater than those in purchasing a poor investment or obtaining an unattractive loan, Truth in Insurance or Truth in Life Insurance legislation has never been promulgated by any state.

A second insightful perspective, and one with much more tangible consequences on its harmful impacts on consumers, can be grasped by reviewing a few basic facts about the current life insurance marketplace.

Three Facts

Fact No. 1: The life insurance marketplace is awash with misinformation; this should hardly be surprising. Life insurers actually run misleading advertisements and conduct training in deceptive sales practices. Evidence of such has been repeatedly submitted to state regulators. Moreover, given the industry’s commission-driven sales practices (commissions that can make those of mortgage brokers, now notorious for their own misrepresentations, look tiny), sales misconduct is pervasive. The harmful consequences of such agent misrepresentations are manifested every day, both directly and indirectly, in unwise purchases or other costly life insurance mistakes by American families. These misrepresentations go unrecognized because of consumers’ inadequate financial grasp of a product’s true conceptual framework, and these go unpunished because, as a past president of the national largest agent organization has written in widely quoted published articles, state laws prohibiting deceptive life insurance sales practices have virtually never been enforced.

Fact No. 2: Cash value life insurance policies that are sold to be lifelong products have extraordinary high lapse rates. Data shows that over an eight-year period, approximately 40% of all the cash value policies of many life insurers are discontinued. It is true there are many possible causes for consumers to discontinue coverage, but age-old evidence of consumer dissatisfaction has been a virtual five-alarm that state regulators have ignored for more than 40 years. Such lapses are especially financially painful to consumers, as the typically sold cash value policy has huge front-end sales loads (sales loads regarding which agents are trained to make misrepresentations).

It is very important that all readers fully understand that, contrary to pervasive misconceptions and misrepresentations, cash value policies do not avoid the increasing costs of annual mortality charges as a policyholder ages. The fundamental advantages of cash value life insurance products come from the product’s tax privileges. Tax privileges, however, are essentially a free, non-proprietary input. In a competitive marketplace, firms cannot charge consumers or extract value for a free, non-proprietary input. No one pays thousands of dollars in sales costs to set up an IRA. Cost disclosure will enable consumers to evaluate cash value policies by the policies’ price competitiveness and, as such, will drive the excessive sales loads out of cash value policies.

The heart of the battle over disclosure is that disclosure threatens to—and, in fact, will—undermine the industry’s traditional sales compensation practices. For example, over the past five years, Northwestern Mutual, the nation’s largest insurer, with $1.2 trillion of individual coverage in force, paid $4.5 billion in agent life insurance commissions and other agent compensation, while its mortality costs for its death claims were only $3.5 billion. (Northwestern paid more than $12 billion to policyholders surrendering their coverage during the same five years.)

Agents, naturally, do not like the idea of reduced compensation, but their arguments are not compelling. Insurers believe little life insurance would be sold without such agent compensation; that is, that the large and undisclosed agent compensation cash value policies typically provide is, 1) necessary to compensate agents for their sales efforts and yet, 2) could not be obtained from an informed consumer.

My position is that good disclosure on life insurance will drive the excessive and unjustified sales loads out of cash value policies, making them price competitive with pure-term policies, thereby enabling consumers to truly benefit from the product’s tax privileges. Also, product cost disclosure is an essential component of any fair business transaction (and, as all readers properly educated about life insurance know, a cash value policy’s premium and annual cost are different.)

Fact No. 3: It is undeniable that the sales approaches used today are not effective. Unbiased experts have, for decades, demonstrated that Americans have insufficient life insurance. In August 2010, the Wall Street Journal’s Leslie Scism reported that levels of coverage have plummeted to all-time lows. Contrast that with data showing consumers’ ever-increasing voluntary purchases of additional coverage via their employers’ group life insurance plans. Marketing research shows that fear making a mistake is the primary reason consumers avoid or postpone purchases and financial decisions. Inadequate disclosure on life insurance policies not only prevents consumers from being appropriately informed; it is also a main factor in their avoidance of the very product they so often need.

I predict publicity of appropriate disclosure will lead to: unprecedented sales growth, policyholder persistency, different levels of coverage, positive impacts on all other measurements of satisfaction regarding consumers’ future life insurance purchases and life insurance agents becoming trusted and esteemed professionals. Admittedly, appropriate disclosure could lead to litigation over agents’ and insurers’ prior misrepresentations.

As I think you may now understand, inadequate life insurance policy disclosure is a regulatory “gap” that is virtually the size and age of an intergalactic asteroid.

Other Gaps

As it is currently marketed, long-term care insurance (LTCI) constitutes another serious problem. While, theoretically, LTCI can make sense, the devil is in the details. Essentially, LTCI is a contingent deferred annuity, yet one where insurers retain an option to increase the premiums for entire “classes of insureds” and where consumers must confront post-purchase price risks without the information necessary to assess alternatives. Furthermore, consumers cannot transfer their coverage to a new insurer without forfeiting the value they’ve previously paid. Defective LTCI policies have let consumers be shot like fish in a barrel; in fact, the policies’ inherent unfairness makes loan sharks envious. Appropriate disclosure on LTCI would bring consumers drastically superior value and understanding.

Regulation of life insurance agent licensing is incredibly deficient. Agents should truly be financial doctors. However, states’ agent licensing requirements fail to make sure consumers are served by financially knowledgeable professionals; licensing exams are a joke. While there are many competent agents, it is quite possible that the overwhelming majority of agents—many of whom are new and inexperienced, as more than four out of five recruits fail in the commission-based environment within the first few years—do not possess the basic knowledge necessary to accurately assess a consumer’s needs or to properly evaluate different companies’ policies.

There is virtually no state regulation of fee-only advisers who charge for providing advice about life insurance industry products. Such individuals can cause harm to consumers in multiple ways: improperly assessing needs and evaluating policies and recommending policy terminations or other actions (beneficiary or ownership changes, inappropriate policy loans, etc.) that lead to policies being mismanaged. To my knowledge, the only state that actually requires licensing for fee-only advisers is New Hampshire. A cursory review of public records, however, reveals shocking omissions in New Hampshire’s enforcement of such rules. One of the state’s former insurance commissioners, who for years has operated a prominent website providing and charging for advice on life insurance, has never been licensed.

Agent continuing education (CE) requirements are problematic. Outdated courses are still deemed acceptable, similar courses can be submitted virtually indefinitely to fulfill bi-annual CE requirements, and many courses are so devoid of meaningful information that they are vacuous. While the potential merits of CE are undeniable, only serious testing and recordings provide the means of monitoring the true effectiveness of instruction and learning.

Another area for improved regulation concerns the insurer-agent relationship. This is not to suggest draconian involvement by the government, rather to recognize the legitimate public interests in properly structuring such relationships—just as is done in relationships between pilots and airlines, construction workers and contractors, nurses and hospitals. The contracts between insurers and agents show unequal bargaining power. Insurers have not only exercised their power unfairly but have—possibly illegally—prohibited certain agent conduct, while requiring other, on matters clearly outside the boundaries of the contract. Attorneys specializing in franchise law have stated that the typical agent’s contract is the most one-sided arrangement they have ever seen.

Over the past 20 years, I have written many articles and submitted extensive documentation of sales and managerial fraud in the life insurance marketplace, yet no one with any marketplace authority or power has ever taken any effective action. Nonetheless, my commitment to reform the life insurance industry and marketplace remains. In fact, while federal regulatory action and any other private assistance would be greatly appreciated, all that is needed for the transformation of the age-old, dysfunctional life insurance industry is the dissemination—the genuine and effective mass market dissemination—of the type of life insurance policy disclosure information that is available on my web site, BreadwinnersInsurance.com. [The full version of this letter is available on the site.]

Innovation Trends in 2016

For the past few years, the innovation rate in the global insurance industry has run at peak levels, in good part because of digitization, which continues to be a pervasive influence—if not as disruptive as early projections.

Initial expectations of a departure from traditional distribution channels turned out not to be the case. Clients preferred direct, personal contact when buying insurance products. While online channels have not generated major changes—for example, in the vehicle insurance sector in Italy (5% of premiums today are generated online, compared with 1% in 2012) —telematics has had a substantial impact. It represents 15% of all insurance policies today in Italy. (These policies did not exist in 2002.)

Digital transformation is, of course, leaving its mark in four macro areas.

First, consumer expectationsA Bain survey suggests that more than three out of four consumers expect to use a digital channel for insurance interactions.

Second, product flexibility: The traditional Japanese player, Tokio Marine, for example, started offering temporary insurance policies via mobile phone, e.g., travel insurance limited to the dates of travel and personal accident coverage for people playing sports.

Third, ecosystems: They are created when the insurance value proposition depends on collaboration with partners from other sectors. For example, when Mojio sells a dongle (at, say, a supermarket) that requires connection to an open-source platform to be installed in a car, third-party suppliers are able to extract driving data from that platform and create services based on it. Onsurance, for one, offers tailor-made insurance coverage based on the data collected.

Fourth, services: Insurers today are moving away from the traditional approach of covering risks to a more comprehensive insurance plan, which includes additional services.

Connected insurance: a telematics “observatory” to promote excellence 

The fact that the Italian insurance market represents the best of international automotive telematics practices gave rise to the idea of creating an “observatory” to help generate and promote innovation in the insurance sector. Bain, AniaAiba and more than 25 other insurance groups are among its current participants.

The observatory has three main objectives: to represent the cutting edge of global innovation; to offer a strategic vision for major innovation initiatives while reinforcing the Italian excellence paradigm; and to stimulate research and debate concerning emerging insurance issues such as privacy and cyber risk.

The Observatory on Telematics Connected Insurance & Innovation, will focus not only on vehicle insurance (where Italy has the highest penetration and the most advanced approach worldwide), but on additional important insurance markets related to home, health and industrial risk, which, I am convinced, represent the next innovation wave.

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Italy is currently the best practice leader in connected insurance. Italian expertise in vehicle telematics is finding applications in other insurance areas, particularly in home insurance—where Italy is the pioneer—and in the health sector, where we recently launched our first products.

InsurTech on the rise

Another sector that has seen an increased number of investments in 2016 is InsurTech. Until last year, attention focused on many types of financial service start-ups. Today there is significant growth in investments in insurance start-ups: almost $2.5 billion invested in the first nine months of 2015, compared with $0.7 billion in 2014 [according to CB Insight]. Many new firms are entering the sector, bringing innovation to various areas of the insurance value chain. The challenge for traditional insurers will be to identify firms worth investing in, and also to create the means for working with those new players.

The challenge is integration

Ultimately, the main challenge for insurers will be to find ways to integrate the start-ups into their value chains. The integration of user experience and data sources will be key to delivering an efficient value proposition: It is untenable to have dozens of specialized partners with different apps in addition to the insurer’s main policy. It will be necessary to manage the expansion and fragmentation of the new insurance value chain.

To come up with an answer to this problem, start-ups are generating innovative collaborative paradigms. One example is DigitalTech International, which offers companies a white-label platform that integrates various company apps and those of third-party suppliers into a single mobile front end, even as it offers a system for consolidating diverse client ecosystems (domotics, wearables, connected cars) into a single  data repository.

Integrating and managing complex emerging ecosystems will be one of the greatest challenges in dealing with the Internet of Things (IoT) for the insurance industry.

(A version of this article first appeared on Insurance Review.)