Tag Archives: rand

Wellness Vendors Keep Dreaming

Alice laughed: “There’s no use trying,” she said. “One can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Six impossible things before breakfast?  The wellness industry would just be getting warmed up by believing six impossible things before breakfast. Wellness vendors believe enough impossible things all day long to support an entire restaurant chain:

Consider the article in the current issue of BenefitsPro — forwarded to me by many members of the Welligentsia — titled: “Can the Wellness Industry Live Up to Its Promises?”  BenefitsPro interviewed US Corporate Wellness, Fitbit, Staywell and HERO. Each is a perennial candidate for the Deplorables Awards — except US Corporate Wellness, which already secured its place in the Deplorables Hall of Fame (see, Why Nobody Believes the Numbers) several years ago with these three paeans to the gods of impossibility.

In case you can’t read the key statistic — the first bullet point — it says: “Wellness program participants are 230% less likely to utilize EIB (extended illness benefit) than non-participants.” Here is some news for the Einsteins at US Corporate Wellness: You can’t be 230% less likely to do anything than anybody. For instance, even you, despite your best efforts in these three examples, can’t be 230% less likely to have a triple-digit IQ than the rest of us. Here’s a rule of math for you: a number can only be reduced by 100%. Rules of math tend to be strictly enforced, even in wellness. So the good news is, even in the worst-case scenario, you’re only 100% less likely to have a triple-digit IQ than the rest of us.

See also: 6 Pitfalls to Avoid With Core Systems  

And yet, if it were possible to be 230% dumber than the rest of us, you might be. For instance, US Corporate Wellness also brought us this estimate of the massive annual savings that can be obtained just by, Seinfeld-style, doing nothing:

Assume I spent about $3,500/year in healthcare 12 years ago, which is probably accurate. My modifiable risk factors were zero then and are still zero — no increase. So my healthcare spending should have fallen by $350/year for 12 years, or $4,200 since then. But that would be impossible, because I could only reduce my spending by $3,500. Do you see how that works now?

To his credit, US Corporate Wellness’s CEO, Brad Cooper, is quoted in this article as saying: “Unfortunately some in the industry have exaggerated the savings numbers.” You think?

I’m pretty sure this next one is impossible, too. I say “pretty sure” because I’ve never been able to quite decipher it, English being right up there with math as two subjects that apparently frustrated many a wellness vendor’s fifth grade teacher:

400% of what? Is US Corporate Wellness saying that, as compared with employees with a chronic disease like hypertension, employees who take their blood pressure pills are 400% more productive? Meaning that, if they controlled their blood pressure, waiters could serve 400% more tables, doctors could see 400% more patients, pilots could fly planes 400% faster? Teachers could teach 400% more kids? Customer service recordings could tell us our calls are 400% more important to them?

Or maybe wellness vendors could make 400% more impossible claims. That would explain this BenefitsPro article.

Fitbit

We have been completely unable to get Fitbit to speak, but BenefitsPro couldn’t get the company to shut up. Here is Fitbit’s Amy McDonough: “Measurement of a wellness program is an important part of the planning process.” Indeed it is! It’s vitally important to plan on how to fabricate impossible outcomes to measure, when in reality your product may even lead to weight gain. Here is one thing we know is impossible: You can’t achieve a 58% reduction in healthcare expenses through behavior change — especially if (as in the 133 patients the company tracked in one study) behavior didn’t actually change.

You can read about that gem, and others, in our recent Fitbit series here:

Health Enhancement Research Organization (HERO) and Staywell

I’ll consider these two outfits together because people seem to bounce back and forth between them. Jessica Grossmeier is one such person. Jessica became the Neil Armstrong of impossible wellness outcomes way back in 2013. While at Staywell, she and her co-conspirators told British Petroleum they had saved about $17,000 per risk factor reduced. So, yes, according to Staywell, anyone who temporarily lost a little weight saved BP $17,000 — enough to clean up about 1,000 gallons of oil spilled from Deepwater Horizon.

See British Petroleum’s Wellness Program Is Spewing Invalidity for the details.

Leave aside both the obvious impossibility of this claim, and also the mathematical impossibility of this claim given that employers only actually spend about $6,000/person on healthcare. Jessica’s breakthrough was to also ignore the fact that this $17,000/risk factor savings figure exceeds by 100 times what her very own article claims in savings. Not by 100%. By 100 times.

Fast-forward to her new role at HERO. In this article, she says:

The conversation has thus shifted from a focus on ROI alone to a broader value proposition that includes both the tangible and intangible benefits of improved worker health and well-being.

Her memory may have failed her here, too, because HERO — in addition to admitting that wellness loses money (which explains its “shift” from the “focus on ROI alone”) — also listed the “broader value proposition” elements of their pry-poke-and-prod wellness programs. The problem is the elements of the broader value proposition of screening the stuffing out of employees aren’t “benefits.” They’re costs, and lots of them:

When she says: “The conversation has shifted from a focus on ROI alone,” she means: “We all got caught making up ROIs, so we need to make up a new metric.” RAND’s Soeren Mattke predicted this new spin three years ago, observing that every time the wellness industry makes claims and they get debunked, the industry simply makes a new set of claims, and then they get debunked, and then the whole process repeats with new claims, whack-a-mole fashion, ad infinitum. Here is his specific quote:

“The industry went in with promises of 3 to 1 and 6 to 1 based on health care savings alone – then research came out that said that’s not true. Then they said: “OK, we are cost neutral.” Now, research says maybe not even cost neutral. So now they say: “But it’s really about productivity, which we can’t really measure, but it’s an enormous return.”

Interactive Health

While other vendors, such as Wellsteps, harm plenty of employees, Interactive Health holds the distinction of being the only wellness vendor to actually harm me. I went to a screening of theirs. To increase my productivity, they stretched out my calves. Indeed, I could feel my productivity soaring — until one of them went into spasm. I doubt anyone has missed this story, but in case anyone has

Interactive Health also holds the distinction of being the first vendor (actually their consultant) to try to bribe me to stop pointing out how impossible their outcomes were. They were upset because I profiled them n the Wall Street Journal. The article is behind a paywall, so you probably can’t see it. Here’s the spoiler: The company allegedly saved a whopping $53,000 for every risk factor reduced. In your face, Staywell!

See also: What Is the Major Barrier to Change?  

Here is the BenefitsPro article’s quote from Interactive Health’s Jared Smith:

“There are many wellness vendors out there that claim to show ROI,” he says. “However, many of their models and methodologies are complex, based upon assumptions that do not provide sufficient quantitative evidence to substantiate their claims.”

You think?

Finally, here is a news flash for Interactive Health: Sitting is not the new smoking.  If anything is the “new smoking,” it’s opioid addiction, which has reached epidemic proportions in the workforce while being totally, utterly, completely, negligently, mind-blowingly, Sergeant Shultz-ily ignored by Interactive Health and the rest of the wellness industry.

There is nothing funny about opioid addiction and the wellness industry’s failure to address it, a topic for a future blog post. The only impossibility is that it is impossible to believe that an entire industry charged with what Jessica Grossmeier calls “worker health and well-being” could have allowed this to happen. Alas, happen it did.

And, as I write this post, breakfast hasn’t even been served yet.

New Wellness Scam: Value on Investment

What do you do if your entire industry has a negative ROI? If your industry and its lack of ROI have been skewered in the media? If even RAND, which is the most neutral, grownup organization in all of healthcare, now says your industry, wellness, produces no savings and no reduction in utilization of healthcare services? If your leadership group accidentally proved their own industry loses money for its customers? If, on this very site, Insurance Thought Leadership, your patron saint, Harvard professor Katherine Baicker, professes to have no interest in wellness any more, now that her work has been eviscerated?

What do you do if there is a proof that saving through wellness is impossible, and another proof that, even if savings were possible, there haven’t been any? If these proofs are backed with a $1 million reward for anyone who can disprove them?

Here’s what you do: You change the rules so ROI doesn’t matter any more.

The new mantra is “value on investment,” or VOI. The Willis Health and Productivity Survey published this week claims that 64% of employers do wellness for VOI – specifically, “employee morale” and “worksite productivity.” (The survey also mentions “workplace safety.” I guess the workplace is safer if no one is working because they are all out getting checkups.)

But the darnedest thing is, all the data shows that the best way to really get value on your investment is to cancel your “pry, poke, prod and punish” wellness program.

Employee Morale

Have you ever seen employees demand more blood tests? More Health Risk Assessments (HRAs)? More weigh-ins? Quite the opposite. This shouldn’t be a newsflash, but employees hate wellness programs, except for the part where they get to collect employers’ money. As a CEO myself (of Quizzify), I pride myself on our corporate culture. The last thing I would do is force my employees into a wellness program. It would destroy the camaraderie we’ve established.

Obviously, if employees liked wellness, you wouldn’t need large and growing incentives/penalties to get people to participate. Employees dislike wellness programs so much that collectively they’ve forfeited billions of dollars just to avoid these programs.

Anecdotes often speak more loudly than data, and employee morale anecdotes are easy to come by. Simply look at the “comments” on quite literally any article in the lay media involving wellness programs. It’s usually about 10-to-1 against wellness, with the “1” being someone who says: “Why should I pay for someone who’s fat?” or something similar. Or the positive comment comes from a wellness vendor or consultant. You know an industry is bogus when the only people who defend it are people who profit on it.

The weight-shaming involved in wellness programs is, of course, a huge fallacy. Among other things, except at both extremes, there is only a slight correlation between weight and health expense in the under-65 population — the problems associated with weight show up later, typically after people leave the workforce. Assuming major differences among employees would lead to underwriting every individual-marathoners who might get injured, women who might get pregnant, etc. Take the fallacy out, and there is nothing that the American public-left, right and center – is more unified on than detesting wellness.

Workplace Productivity

You’re already pulling people off the line to do the “pry, poke and prod” programs and send them for checkups that are more likely to harm employees than benefit them. So productivity takes a hit to begin with. Add to that the weight-shaming and ineffectiveness of corporate weight-loss programs.

Most importantly, it turns out – according to the Integrated Benefits Institute, a wellness industry association – that the major contributor to low productivity is depression:

chart

Maybe this is just me, but if I were running a company where workers were depressed, I probably wouldn’t try to address depression by implementing a program that workers were going to hate, which is sort of a “the beatings will continue until morale improves” approach to management. I’m just sayin’…

The other noteworthy observation? Anxiety has a big impact on productivity. Wellness programs pride themselves on how many diseases they find. This practice is called hyperdiagnosis. The goal is to scare as many employees as possible into thinking they’re sick. The C. Everett Koop-award-winning Nebraska state wellness program, for example, bragged about how it found that 40% of employees were at risk. However, the program didn’t do anything about the finding, and a year later only 161 employees in the entire state had reduced a risk factor. The vendor, Health Fitness Corporation, also bragged about all the cancer cases it found and all the lives it saved, until admitting the whole thing was made up.

Once again, it’s not clear how a wellness program would reduce anxiety and increase productivity. Or maybe I’m wrong. Maybe there’s nothing like being told you are at risk of dying to really focus you on clearing your inbox before you croak.

Conclusion

Pretending there is a VOI looks to be even sillier than pretending there is an ROI, because wellness neither increases morale nor improves productivity.

All of this brings us back to what we’ve been saying for years-especially on this site, which was willing to post our stuff long before it was popular to do so: Do wellness for your employees and not to them.

The latter doesn’t work no matter what initials you use. But if you want to improve morale and productivity, up your game for perks, subsidize healthier options for food and maybe even directly subsidize a portion of gym memberships. And maybe teach your employees how to spend their healthcare dollars more wisely. (Disclosure: That is the business we are in.)

What do you do if your entire industry has a negative ROI? If your industry and its lack of ROI have been skewered in the media? If even RAND, which is the most neutral, grownup organization in all of healthcare, now says your industry, wellness, produces no savings and no reduction in utilization of healthcare services? If your leadership group accidentally proved their own industry loses money for its customers? If, on this very site, Insurance Thought Leadership, your patron saint, Harvard professor Katherine Baicker, professes to have no interest in wellness any more, now that her work has been eviscerated?

What do you do if there is a proof that saving through wellness is impossible, and another proof that, even if savings were possible, there haven’t been any? If these proofs are backed with a $1 million reward for anyone who can disprove them?

Here’s what you do: You change the rules so ROI doesn’t matter any more.

The new mantra is “value on investment,” or VOI. The Willis Health and Productivity Survey published this week claims that 64% of employers do wellness for VOI – specifically, “employee morale” and “worksite productivity.” (The survey also mentions “workplace safety.” I guess the workplace is safer if no one is working because they are all out getting checkups.)

But the darnedest thing is, all the data shows that the best way to really get value on your investment is to cancel your “pry, poke, prod and punish” wellness program.

Employee Morale

Have you ever seen employees demand more blood tests? More Health Risk Assessments (HRAs)? More weigh-ins? Quite the opposite. This shouldn’t be a newsflash, but employees hate wellness programs, except for the part where they get to collect employers’ money. As a CEO myself (of Quizzify), I pride myself on our corporate culture. The last thing I would do is force my employees into a wellness program. It would destroy the camaraderie we’ve established.

Obviously, if employees liked wellness, you wouldn’t need large and growing incentives/penalties to get people to participate. Employees dislike wellness programs so much that collectively they’ve forfeited billions of dollars just to avoid these programs.

Anecdotes often speak more loudly than data, and employee morale anecdotes are easy to come by. Simply look at the “comments” on quite literally any article in the lay media involving wellness programs. It’s usually about 10-to-1 against wellness, with the “1” being someone who says: “Why should I pay for someone who’s fat?” or something similar. Or the positive comment comes from a wellness vendor or consultant. You know an industry is bogus when the only people who defend it are people who profit on it.

The weight-shaming involved in wellness programs is, of course, a huge fallacy. Among other things, except at both extremes, there is only a slight correlation between weight and health expense in the under-65 population — the problems associated with weight show up later, typically after people leave the workforce. Assuming major differences among employees would lead to underwriting every individual-marathoners who might get injured, women who might get pregnant, etc. Take the fallacy out, and there is nothing that the American public-left, right and center – is more unified on than detesting wellness.

Workplace Productivity

You’re already pulling people off the line to do the “pry, poke and prod” programs and send them for checkups that are more likely to harm employees than benefit them. So productivity takes a hit to begin with. Add to that the weight-shaming and ineffectiveness of corporate weight-loss programs.

Most importantly, it turns out – according to the Integrated Benefits Institute, a wellness industry association – that the major contributor to low productivity is depression:

chart

Maybe this is just me, but if I were running a company where workers were depressed, I probably wouldn’t try to address depression by implementing a program that workers were going to hate, which is sort of a “the beatings will continue until morale improves” approach to management. I’m just sayin’…

The other noteworthy observation? Anxiety has a big impact on productivity. Wellness programs pride themselves on how many diseases they find. This practice is called hyperdiagnosis. The goal is to scare as many employees as possible into thinking they’re sick. The C. Everett Koop-award-winning Nebraska state wellness program, for example, bragged about how it found that 40% of employees were at risk. However, the program didn’t do anything about the finding, and a year later only 161 employees in the entire state had reduced a risk factor. The vendor, Health Fitness Corporation, also bragged about all the cancer cases it found and all the lives it saved, until admitting the whole thing was made up.

Once again, it’s not clear how a wellness program would reduce anxiety and increase productivity. Or maybe I’m wrong. Maybe there’s nothing like being told you are at risk of dying to really focus you on clearing your inbox before you croak.

Conclusion

Pretending there is a VOI looks to be even sillier than pretending there is an ROI, because wellness neither increases morale nor improves productivity.

All of this brings us back to what we’ve been saying for years-especially on this site, which was willing to post our stuff long before it was popular to do so: Do wellness for your employees and not to them.

The latter doesn’t work no matter what initials you use. But if you want to improve morale and productivity, up your game for perks, subsidize healthier options for food and maybe even directly subsidize a portion of gym memberships. And maybe teach your employees how to spend their healthcare dollars more wisely. (Disclosure: That is the business we are in.)

Wellness War Is Over; Wellness Lost

What if we told you that “pry, poke, prod and punish” wellness programs are bad for morale, damage corporate reputations and cost more money than they save?

You’d say: “Al, you, Tom Emerick and more recently Vik Khanna have been telling us that for years.” You might add: “And while your opinions are usually well-reasoned and based on good data, we’d have to hear the true believers’ side of the story.”

But what if we told you: “That is the true believers’ side of the story”?

Yep, the wellness industry’s leading luminaries – 39 of them, representing 27 vendors and one consulting firm (Mercer) — have all gotten together under the aegis of both their trade associations – Health Enhancement Research Organization (HERO) and Population Health Alliance (PHA) — and reached that “consensus.”

We don’t know if they simply didn’t read their own report before reaching this consensus, or whether they just all decided to tell the truth. Frankly, we’re fine either way. (This is also the second time in five months that a major wellness true believer admitted wellness doesn’t save money. The first time was a meta-analysis in the American Journal of Health Promotion that concluded that “randomized clinical trials show a negative ROI.” After we started quoting the analysis, the editor wrote a 2,000-word essay walking it back.)

Because our claim that we are laying out “the true believers’ side of the story” would otherwise require a certain suspension of disbelief, we are going to rely more heavily than usual on screenshots. We also recommend reading the report itself, or at a minimum our analyses of it. (Our analyses are going to be a 10-part cycle. Make sure to “follow” the website They Said What? to not miss a single episode.)

Page 10 of the report lists 12 elements of cost. The first element itself contains about 12 elements, making this a list of 23 elements of cost. (Add consulting fees, which were overlooked even though three Mercer consultants sat on the committee and even though page 14 calls for use of “consulting expertise,” and you get 24.)

You’ll see damage to employee morale and corporate reputations listed as “tangential costs.” But, as two people who run a company, we would call damage to those intangibles much more than tangential. Our company runs on morale. Pulling people away from their workstations to poke them with needles, weigh them, measure their waists and test to see if they are lying about their smoking habits couldn’t possibly be good for morale.

We are equally curious about the blithe dismissal of legal challenges as a tangential cost. No firm wants its name dragged across the wire services because it is being sued for its wellness program (just ask CVS and Honeywell). Getting dragged into the courts (and, hence, the media) for running a wellness program isn’t a tangential cost — and it’s an unforced error.

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On Page 15, as the report discusses how to measure the return on investment, the authors select only one of those 24 costs – vendor fees – as the basis for comparison. Omitting the other 23 costs, plus incentives, makes it easier to show an ROI. The fees are listed as “$1.50 per employee per month,” or $18 a year, even though the rule of thumb is that wellness programs cost many hundreds of dollars per employee per year.

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Further in, on page 23, the authors list the related savings: $0.99 per “potentially preventable hospitalization,” abbreviated as PPH. (The fact that we have to do the math on our own by comparing figures across pages suggests this admission of losses was a gaffe rather than deliberate honesty.)

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The savings figures are based on reductions in event rates that (1) are about twice what typically gets achieved; and (2) somehow overlook the natural decline of 3% to 5% a year in cardiac events even without a wellness program.

Even without adjusting for those two mistakes, savings fall $0.51 PMPM short of vendors fees alone.

And losing $0.51 per employee per month is the best-case scenario. The “savings” includes benefits from disease management (which is not covered by the $1.50 PMPM in vendors fees), and omits the offsetting costs of all the extra doctor visits that come from overdiagnosis and overtreatment.

So, here are the two conclusions:

  • According to proponents’ own consensus, wellness loses money.
  • Even worse, their savings are wildly overstated (yes, according to government data), and their costs, by their own admission on page 10, are wildly understated.

Don’t take our word for either of these. Write to us, and we will send you an ROI spreadsheet that you can use to do your own calculations.

One way or the other, what RAND’s Soeren Mattke called the wellness wars are over. Wellness has surrendered.

How Will the Wellness Industry Respond?

HERO and its assembled luminaries will probably ignore this gaffe, to prevent a news cycle that their customers might notice. However, if the problem gets covered broadly, they will respond. This was their modus operandi the last time they got “outed.” We had shown them in 2011 that one of their key slides, for which they even gave themselves an award, was made up. We presented our proof many times and even put it in both our books…but it wasn’t until Health Affairs shined a bright light on it that they acknowledged wrongdoing. They said that the slide “was unfortunately mislabeled” by an as-yet-unidentified culprit, but that no one noticed for four years. (Rather than relabeling the slide in a “more fortunate” way, they took the slide off the site.)

To clarify that their position is indefensible, we have offered a reward of $1 milliion for them to simply convince a panel of Harvard mathematicians that they have any idea what they are talking about beyond the fact of the gaffe itself.  Their refusal to claim this reward speaks volumes.

Implications for Brokers

The implications for brokers are profound. First, stop placing wellness programs — or at a minimum get a “release” from your clients saying that they’ve read this article but want to proceed anyway. The disclosure by the wellness industry’s own trade association that wellness loses money increases your liability because you “knew or should have known” that losses were to be expected. Second, you can probably offer your client the chance to abrogate vendor contracts, especially if the vendor was one of the 27 that reached this “consensus.” That might reduce your revenue in the short term but will cement your relationship. And you want your clients to find out about wellness’ problems from you, not from the media.

But whatever else you do, follow future installments here on Insurance Thought Leadership as we plow through this report and deconstruct more of not just their crowd-sourced math but also of their crowd-sourced alternative to reality, in which prying into employees’ personal lives, poking them with needles in blatant disregard for government guidelines, prodding them to get worthless checkups and punishing them when they don’t is all somehow going to save employers millions of dollars.

Disease Management: Savings at Pepsi

The second-most read article from Health Affairs in 2014 was a fantastic piece by the employee benefits professionals from Pepsi and researchers from the RAND Corp.

The Pepsi team and the RAND researchers evaluated PepsiCo’s wellness program over a seven-year period and found the following:

  • The disease management component of the overall wellness program lowered healthcare costs by $136 per member per month (PMPM) and decreased hospital admissions by 29%
  • Lifestyle management/wellness showed a return on investment (ROI) of .48 to 1 (in other words, it LOST money)
  • Disease management’s ROI was 3.78 to 1
  • Combined ROI for wellness and disease management was 1.46 to 1
  • Findings were consistent with RAND’s workplace wellness programs study, which found that lifestyle management did not lower healthcare costs
  • Lifestyle management program’s cost was $144 per participant per year

The article concludes that “blanket statements like ‘wellness saves money’ are not warranted.”

As employers evaluate their healthcare strategies, it is important to keep these findings in mind.

TRIA Non-Renewal: Effect on P&C?

Losses stemming from the destruction of the World Trade Center and other buildings by terrorists on Sept. 11, 2001, totaled about $31.6 billion, including commercial liability and group life insurance claims — not adjusted for inflation — or $42.1 billion in 2012 dollars. About two-thirds of these losses were paid for by reinsurers, companies that provide insurance for insurers.

Concerned about the limited availability of terrorism coverage in high-risk areas and its impact on the economy, Congress passed the Terrorism Risk Insurance Act (TRIA). The act provides a temporary program that, in the event of major terrorist attack, allows the insurance industry and federal government to share losses according to a specific formula. TRIA was signed into law on Nov. 26, 2002, and renewed for two years in December 2005. Passage of TRIA enabled a market for terrorism insurance to begin to develop because the federal backstop effectively limits insurers’ losses, greatly simplifying the underwriting process. TRIA was extended for seven years to 2014 in December 2007. The new law is known as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007.

This week, Congress failed to reauthorize TRIA before members adjourned for the holiday recess. Now, with the expiration of the law on Dec. 31, some businesses may be left without insurance coverage in the event of a terrorist attack on the U.S. Both houses of Congress have been discussing legislation that would set out the federal government’s involvement in funding potential terrorism losses, but bills proposed by the two houses earlier this year differed, and no extension was passed.

A report from the Wharton Risk Management and Decision Processes Center found that, under the current TRIA program, some insurers have already reached a level of exposure to losses from a terrorist attack that could jeopardize their ability to pay claims, based on a critical measure of solvency: the ratio of an insurer’s TRIA deductible amount in relation to its surplus. The report, “TRIA After 2014: Examining Risk Sharing Under Current and Alternative Designs,” found that as the deductible percentage rises, as it does under the Senate bill and proposals put forward in the House, more insurers have a deductible-to-surplus ratio that is above an acceptable level. The report also sets out in detail the amount the American taxpayer and federal government would have to pay under differing scenarios.

A RAND Corp. study published in April 2014 found that in a terrorist attack with losses of as much as $50 billion, the federal government would spend more dealing with the losses than if it had continued to support a national terrorism risk insurance program, because it would likely pay out more in disaster assistance.

A report by the President’s Working Group on Financial Markets made public in April 2014 generally supports the insurance industry’s view that the expiration of TRIA would make terrorism coverage more expensive and difficult to obtain.

The insurance broker Marsh released its annual study of the market, “2014 Terrorism Risk Insurance Report,” in April. Among its many findings is that uncertainty surrounding the potential expiration of TRIA significantly affected the property/casualty insurance market. Some employers with large concentrations of workers and companies with property exposures in major U.S. cities found that terrorism insurance capacity was limited and prices higher, and some could not obtain coverage at all. If the law is allowed to expire or is significantly changed, the market is likely to become more volatile with higher prices and limited coverage, the study concludes.

Before Sept. 11, 2001, insurers provided terrorism coverage to their commercial insurance customers essentially free of charge because the chance of property damage from terrorist acts was considered remote. After Sept. 11, insurers began to reassess the risk. For a while, terrorism coverage was scarce. Reinsurers were unwilling to reinsure policies in urban areas perceived to be vulnerable to attack. Primary insurers filed requests with their state insurance departments for permission to exclude terrorism coverage from their commercial policies.

From an insurance viewpoint, terrorism risk is very different from the kind of risks typically insured. To be readily insurable, risks have to have certain characteristics.

The risk must be measurable. Insurers must be able to determine the possible or probable number of events (frequency) likely to result in claims and the maximum size or cost (severity) of these events. For example, insurers know from experience about how many car crashes to expect per 100,000 miles driven for any geographic area and what these crashes are likely to cost. As a result, they can charge a premium equal to the risk they are assuming in issuing an auto insurance policy.

A large number of people or businesses must be exposed to the risk of loss, but only a few must actually experience one, so that the premiums of those that do not file claims can fund the losses of those who do.

Losses must be random as regards time, location and magnitude.

Insofar as acts of terrorism are intentional, terrorism risk doesn’t have these characteristics. In addition, no one knows what the worst-case scenario might be. There have been few terrorist attacks, so there is little data on which to base estimates of future losses, either in terms of frequency or severity. Terrorism losses are also likely to be concentrated geographically, since terrorism is usually targeted to produce a significant economic or psychological impact. This leads to a situation known in the insurance industry as adverse selection, where only the people most at risk purchase coverage, the same people who are likely to file claims. Moreover, terrorism losses are never random. They are carefully planned and often coordinated.

To underwrite terrorism insurance — to decide whether to offer coverage and what price to charge — insurers must be able to quantify the risk: the likelihood of an event and the amount of damage it would cause. Increasingly, they are using sophisticated modeling tools to assess this risk. According to the modeling firm AIR Worldwide, the way terrorism risk is measured is not much different from assessments of natural disaster risk, except that the data used for terrorism are more subject to uncertainty. It is easier to project the risk of damage in a particular location from an earthquake of a given intensity or a Category 5 hurricane than a terrorist attack because insurers have had so much more experience with natural disasters than with terrorist attacks, and therefore the data to incorporate into models are readily available.

One problem insurers face is the accumulation of risk. They need to know not only the likelihood and extent of damage to a particular building but also the company’s accumulated risk from insuring multiple buildings within a given geographical area, including the implications of fire following a terrorist attack. In addition, in the U.S., workers’ compensation insurers face concentrations of risk from injuries to workers caused by terrorism attacks. Workers’ compensation policies provide coverage for loss of income and medical and rehabilitation treatment from “first dollar,” that is, without deductibles.

Extending the Terrorism Risk Insurance Act (TRIA):

There is general agreement that TRIA has helped insurance companies provide terrorism coverage because the federal government’s involvement offers a measure of certainty as to the maximum size of losses insurers would have to pay and allows them to plan for the future. However, when the act came up for renewal in 2005 and in 2007, there were some who believed that market forces should be allowed to deal with the problem. Both the U.S. Government Accountability Office and the President’s Working Group on Financial Markets published reports on terrorism insurance in September 2006. The two reports essentially supported the insurance industry in its evaluation of nuclear, biological, chemical and radiological (NBCR) risk — that it is uninsurable — but the President’s Working Group said that the existence of TRIA had inhibited the development of a more robust market for terrorism insurance, a point on which the industry disagrees. TRIA is the reason that coverage is available, insurers say. The structure of the program has encouraged the development of reinsurance for the layers of risk that insurers must bear themselves — deductible amounts and coinsurance — which in turn allows primary insurers to provide coverage. Without TRIA, there would be no private market for terrorism insurance.

Studies by various organizations have supported a temporary continuation of the program in some form, including the University of Pennsylvania’s Wharton School, the RAND Corp. and the Organization of Economic Cooperation and Development (OECD), an organization of 30 member countries, many of which have addressed the risk of terrorism through a public/private partnership. The OECD said in an analysis that financial markets have shown very little appetite for terrorism risk because of the enormousness and unpredictability of the exposure. RAND argued not only that TRIA should be extended but also that Congress should act to increase the business community’s purchase of terrorism insurance and lower its price. RAND also advocated mandatory coverage for some “vital systems,” establishing an oversight board and increasing efforts to mitigate the risks.

For the full report from which this is excerpted, click here.