While this is somewhat off-topic, it is nonetheless quite important…
(NYTimes, free registration required) AIG revealed that it paid most of the $126 million penalty assessed by the Feds for wrongdoing out of a bonus pool for AIG Financial Products executives. The decision affected some 50-60 executives, most of whom usually received the majority of their compensation from the annual bonus. Many found their checks were missing a few zeros, and a few received no bonus at all.
This does AIG credit. The penalty was assessed by federal investigators for AIG’s sale of financial instruments whose only purpose was to smooth out earnings for public companies, thereby hiding the true nature of their results. By focusing his anger, and retribution on the individuals responsible for the malfeasance, Hank Greenberg (79), , AIG’s long-serving and highly successful CEO is sending an unmistakable message.
However, remember that the same execs who are paying the fine likely received bonuses in the past based on their financial successes, which undoubtedly included the sale of the financial instruments that led to the investigation. Here’s hoping that the execs affected were the only ones involved, and the wrongdoing did not go any further.
Kudos to AIG and Mr. Greenberg for this move.

RIMS will release it’s annual review of the P&C market in March, and early indications are the soft market persisted throughout 2004, with two notable exceptions.
Across the board, prices declined in all lines of coverage except Employment Practices Liability and Workers’ Comp.
This has been good news for buyers and sellers alike; prices have come down, albeit modestly and without the cutthroat activity of the late nineties. This bodes well for insurers, as their overall returns on equity still are well below the S&P 500 and surplus levels are not excessive.
Interestingly, WC rates have not dropped, or if they have, not consistently or by very much in any jurisdiction. This despite improving loss ratios in many states and at many insurers.
This last note is encouraging. Medical costs in WC are still increasing at 12% annually, most insurers have not figured out how to address medical costs, and they are wisely (giving them the benefit of the doubt) choosing to not cut premiums. Here’s hoping this sanity is not temporary.

Pres. Bush’s plans regarding health care are receiving quite a bit of attention as of late. Perhaps the most comprehensive overview is in the 1/31 edition of the LA Times.
The “net” is a fundamental shift from an employer-based health care payment system to an individually-based system.
The rationale behind the move appears to be based in the so-called ownership society concept. To quote the article:
“Supporters of the new approach, who see it as part of Bush’s “ownership society,” say workers and their families would become more careful users of healthcare if they had to pay the bills. Also, they say, the lower premiums on high-deductible plans would make coverage affordable for the uninsured and for small businesses.”
Not enough time to write up a full report; for those interested, the Times article is well worth the read.

the recent publicity about the Bush administration’s plans to change the way the federal government pays for Medicad got me wondering what the states think of the program.
We know that Florida is struggling with a $1 billion increase in Medicaid costs this year.
Another big state has problems that make FL’s situation look positively sunny be comparison. (free subscription required) Medicaid in NY is now consuming 44% of the state budget. That’s $44 billion, and has resulted in calls for significant cuts in the program, accompanied by increased taxes on health care providers including hospitals.
The New York Times reports:
“The cuts, if they go through, will cause a ripple effect. Since the state’s contribution to Medicaid generates matching contributions from the federal government and New York localities, a $1 billion cut in state financing could mean a decrease of at least $3 billion in overall Medicaid spending across the state, according to health care analysts. Hospital trade groups predicted that cuts on that scale would stun the health care industry, a major sector in the state’s economy, and perhaps lead to cuts in service or even hospital closings.”
NY is somewhat unique in that it requires local governments to partially fund their portion of Medicaid. This complicates Gov. Pataki’s (R) mission, as he has also promised to cap Medicaid funding increases for local government at the general rate of inflation.
Couple that promise with the Bush Administration’s pending changes and the political power of health care employee unions and you have the makings of a very unpleasant budget battle.
We’ll look at other states in future posts – here’s hoping there’s some good news amongst the bad.

NY Atty Gen Eliot Spitzer has evidently rejected Marsh’s offer of $600 million to end his case against the broker for bid-rigging and other sins. Instead, he is seeking $750 million and a public apology from the company as the cost of settling the case.
Given that Mr. Spitzer’s former colleague is now head of Marsh, don’t be surprised to see this get worked out in gentlemanly fashion.

Medicare will increase payments to physicians by 2.6% in 2006.
While this will likely not lead to a line out the door at the Bentley dealerships, it will impact other health care payers whose reimbursement is tied to Medicare – including most states that use Medicare as a basis for their Workers’ Comp fee schedules.
Note that 2.6% is well under the general rate of inflation. Again, providers will undoubtedly seek to recover the lost income from other payers…

Lost in the character assassination, sophomoric use of labels, political name-calling and sound-bites that passed for an election campaign was any realistic debate about the cost of insuring the uninsured. Bush’s effort was deemed to be too modest, while Kerry accused of bankrupting the system to cover the uninsured.
Now that the dust has settled, it’s likely that there will be little progress in this critical area – health care is not a key issue for most voters (who, after all, have health insurance either from private payers or thru Medicare).
With the politicians absent from the field, now is a good time to return to the issue.
The first question is cost – simply put, how much would it cost?
Fortunately “Health Affairs” published an interesting assessment in late 2003 by two of their editors…
“Using data from surveys of individuals, providers, and government programs, Jack Hadley and John Holahan estimate that uninsured Americans received $35 billion worth of uncompensated health care in 2001. Governments picked up $30.6 billion of the cost, while physicians’ and hospitals’ forgone time, profits, and philanthropy were responsible for between $7.5-$9.8 billion’s worth of care for uninsured Americans.
In a second article, Hadley and Holahan project that it would cost between $33.9 billion and $68.7 billion to cover the uninsured. The lower cost would be under a government program, which would likely pay providers less, while the higher cost assumes the uninsured are enrolled in private-sector insurance plans that pay providers more.”
There you have it. By way of comparison, consider we are spending significantly more than that in Iraq.

ACE Insurance’s recent announcement that it is increasing asbestos reserves by almost $300 million may be a case of too little, but perhaps not too late.
Rating agencies have been closely monitoring reserving practices, paying particular attention to the actual amounts set aside as compared to actuarial estimates of future liability. For the layman, this means the companies that determine the financial viability of insurers want to make sure they have set aside enough money to pay for future claims.
This is important stuff – insurance is predicated on the policyholder’s confidence in the insurer’s ability to pay claims. Any concern on the part of present or potential policyholders about this ability is going to hurt the insurance company’s ability to attract new customers.
While one would think the close monitoring of insurance company financials will provide ample warning of impending problems, history shows that when troubles hit insurers, they can collapse seemingly overnight.
In this case, AM Best, one of the leading rating agencies, believes ACE has not set aside enough cash to pay for future asbestos liabilities. Best goes on to say:
“A.M. Best expects that additional charges will need to be taken in the next several years. However, given ACE’s current capital levels and its substantial earnings projections, potential charges taken in subsequent years should be readily absorbed.”
Best did not reduce ACE’s rating. Fitch Ratings (my personal favorite) did cut its rating of an ACE’s subsidiary’s ratings from a B+ to a B- on concerns over future claims and the impact of the charge on overall financials.
Fitch has been very cognizant of the asbestos reserving issue, noting in their latest review of the industry a potential shortfall of $43-$60 billion in reserves for asbestos-related claims at the end of 2003.
While this may seem arcane, esoteric, and generally pretty uninteresting, asbestos reserving practices and results thereof are a key to the viability of many an insurer.
Those who buy insurance should take notice.

The Society for Human Resource Management released a report on the top trends that will affect US businesses in 2005. It comes as no surprise that health care costs led the way, with 57% of respondents naming this issue as the top management concern.
Compare this with a survey conducted last year on opinions of P&C insurance execs, who did not include health care costs in their top eight issues of the year.
Why? Is P&C insurance not affected by health care? No, actually one of the largest cost drivers of medmal, liability, workers comp, private and fleet auto, etc (P&C insurance lines) is health care.
Do P&C carriers have health care costs under control? No, a recent survey indicates medical inflation in one key P&C line is 12% annually, a rate that is significantly higher than overall medical trend.
So why the disconnect?
My guess, and it is only a guess, is a cultural inability to grasp the importance of medical trend. Most P&C insurance execs grew up in the business, viewing claims and the health care part of claims as financial numbers, and thus do not understand health care beyond its’ financial implications. It is viewed as a constant, a black hole, a great unknowable. I’ve heard one exec state “claims are claims, trend is trend”.
With this attitude, no wonder the trend rate is 12%.