Jun
15

The (second to) Last Word on the AIG bailout

We taxpayers agreed to pony up $182.5 billion to bail out AIG after the credit derivative debacle (well, mostly we taxpayers). There were two criticisms of the deal; first that the government should allow the market to determine winners and losers, and second that we’d lose our money. First, the second criticism.
As of yesterday, the Federal Reserve got all its money back plus more. AIG (now doing business as Chartis) announced it has repaid all the Fed money it borrowed (it did not need $21 of the $182.5 billion) and dramatically reduced the amount it owes the US Treasury.
To date, AIG has paid back about $152 billion.
While most of these dollars came from the sale of assets – insurance companies, leasing companies, and other subsidiaries of AIG, this would not have happened if not for significant improvements in the company’s ongoing operations.
That is a credit to the Chartis employees who suffered – and I do mean suffered – through the brutal conditions after AIG’s credit derivative investment group damn near killed the whole company, and a good chunk of the world economy along with it. Whether it was navigating the crowds of protestors outside company buildings, avoiding neighbors at cocktail parties and cookouts, testifying before regulators and Congress, or talking to customers, brokers and prospects, the late summer and fall of 2008 were just awful.
Chartis still has significant issues (excess work comp book is a big one), but CEO Benmosche has the company back on the right track. And thanks to those who stayed and fixed Chartis, the Fed has actually made a profit on that bailout – a profit of at least $3 billion and probably twice that.
In regard to the first complaint about the bailout, there’s a legitimate argument to be made that governments should not bail out companies that fail. In the case of AIG, I believe that’s not the case, for two reasons.
First, inadequate regulations undoubtedly played a part in the credit derivative issue. Thus, government was somewhat responsible for the disaster, and we – the people – are the government. We “allowed” AIG to made those now-obviously-incredibly-stupid investments (isn’t hindsight great?), so, because the problems inherent in a failure of AIG were so monumental, we have to share the responsibility for fixing the problem.
Second, AIG had its fingers in so many aspects of global finance that a failure would have been more than a disaster – it would have cratered the world economy and devastated many individuals, companies, and families. As I noted back in 2009, “AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines’ airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well.”
Thanks to WorkCompCentral for the head’s up.


May
11

NCCI’s second day – state v fed regulation

Current Florida Insurance Commissioner and NAIC Chair Kevin McCarty led off his talk with a description of drug repackaging as a “license to steal.”. I absolutely agree. He expressed optimism when noting the legislative effort will continue next year; on that I am less sanguine.
Most of his talk was about the “incremental encroachment of the federal government into the regulation of insurance.” Noting that insurance has been regulated under McCarran Ferguson for decades, McCarty opined that the current state-based regulation has worked pretty well, if somewhat inefficiently.
McCarty took exception to the new Federal Insurance Office (FIO) created by the Dodd Frank bill. While FIO is explicitly not a regulatory agency, McCarty noted their various functions seem pretty similar to those performed by regulatory agencies. While much of the speech was a pretty dense, acronym-intensive discussion of financial stress tests, bank regulation, McCarty detailed FIO’s various research and reporting functions.
Continuing his advocacy for the state-based regulatory system, McCarty noted that there are very different market needs in different states, which require different regulations, while stating that it is necessary to reduce the frictional costs (his characterization) inherent in the state-by-state regulatory environment .
While McCarty et al may decry the interference of federal authorities in the insurance process, payers may be less negative after considering the additional costs inherent in state-specific regulation. According to a report in Insurance Journal earlier this week,
“Tyler Leverty, a professor of finance in the Tippie College of Business, says that the expenses associated with meeting regulations in every state in which an insurance company does business drive up compliance costs by 26 percent when compared to companies that are regulated by only one state.
“These high regulatory compliance costs reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance,” says Leverty.”
Finally, McCarty was asked for his views on the interstate sale of health insurance products, and seemed somewhat uncomfortable with the topic (not surprising as this is one of the main ideas promoted by GOP opponents of health reform)- noting that he wanted some regulatory authority over any out-of-state policy sellers to protect purchasers; McCarty stated a couple times that he did not want to oversell the benefit of interstate insurance sales, but concluded by allowing that they would probably most help with short term policies for college kids etc. There was a caveat; he thought “everything” should be tried, but he was not enthusiastic in that suggestion…


May
10

Hartwig’s take; the economy and P&C insurance

We’re drinking from the firehose that is Bob Hartwig’s annual discussion of economic factors affecting the property and casualty industry.
His presentation was – as usual – high energy and entertaining. Example – noting that a Greek default would have little impact on the rest of the world, Hartwig said while “we may see an olive shortage”, a default of an economic entity the size of Alabama will just not matter that much.
It was also very positive.
The quick takeaway is we are close to if not at the bottom of the profitability trough, with profits likely increasing over the next four to six months. Barring natural disasters, of course.
Hartwig sees economic activity ramping up, albeit modestly and unevenly; he also opined there won’t be a double-dip recession. The economy is expanding at about 2.5%, driven by consumer sentiment (responsible for 70% of the economy) despite a very slow recovery in construction. What construction activity is going on is mostly building manufacturing plants and power generation facilities.
The P&C sector’s premium growth will be stronger than AM Best’s projections of 3.8%, but there won’t be a traditional hard market, as there remains a lot of capacity and frequency is favorable. The 28 consecutive months of growth in private sector employment, totaling 4.4 million private sector jobs since January 2010, is also favorable for work comp. However, the depth of the recession was so severe that we’ve still got a ways to go…
The public sector continues to suffer job losses, with a half-million employees shed since January 2010. This adds about a half-point to the unemployment rate, which will likely be below eight percent by the end of this year/beginning of 2013. Fortunately, the impact has been offset from a surprising source; US manufacturing growth has been pretty impressive, with a gain of a half-million jobs since January 2010.
However, there’s a lot of variation in economic performance among and between states, with North Dakota enjoying a three percentage unemployment rate compared to Nevada at 11.3%.
Hartwig talked at length about future opportunities for insurers, mentioning health care, energy and alternative energy, petrochemicals etc all as promising markets.
For some reason he presented a couple slides showing P&C industry performance during Presidential terms; the net is return on equity was highest during the Carter administration. Entertaining if not terribly enlightening…
The presentation will be here when it becomes available.


Apr
20

RIMS wrap up

Okay, now to a few last words.
As one more interested in workers comp than other topics, I found the agenda to be pretty thin. With a couple exceptions (CMS and reform), the topics weren’t timely, the subjects pretty basic, and the number of sessions devoted to comp few in number. The session re the impact of health reform on comp was led by Liberty’s Sam Geraci; his presentation provided an excellent brief on the mechanics and functions of health reform and paid particular attention to the potential issues with access to medical providers inherent in providing coverage to 32 million more Americans.
I would have liked to see several issues addressed: market trends (hard, soft, or what); what’s happening with comp reform in key states; actuarial views of cost drivers (can you spell o-p-i-o-i-d-s?); state of the excess/reinsurance market; frequency v severity, what’s happening and why; will the option to opt-out spread beyond Texas and perhaps Oklahoma and why. Perhaps next year…
With attendance up, a seemingly-endless list of exhibitors, dozens of social events (several at great venues), and the location in downtown Philly, there was plenty to do. While I may be biased, the MedRisk event at the WaterWorks was spectacular. 400+ people, terrific band, tasty food, fireworks, great views of Boathouse Row, an after-party replete with scotch tasting and excellent cigars, and – to cap it all off, I got to ride back to the hotel with Mark Farrell and…(wait for it)…David Young, President of Coventry Workers Comp. And lived to blog the tale.
So far…


Apr
18

RIMS, day two

Quick takes
Weather
If exhibitor presence is an indicator of where the world is headed, the insurance world is very concerned about catastrophes.
Several of those huge cat cleanup vehicles were on the exhibit floor at this year’s RIMS conference, along with a couple dozen other companies marketing various cat-related services. Cleanups, weather tracking, hurricane-proof domes, salvage sales, pretty much anything from warning about impending disasters to selling what’s left after the event was on display.
Given the latest news on the impact of storms and natural disasters on the P&C industry’s financials, the decision by these service firms to exhibit at RIMS looks prescient. Chad Hemenway reported yesterday the industry’s 2011 rate of return was a paltry 3.5%, largely due to weather-related claims which increased almost $20 billion from the previous year.
Medical management
There were fewer managed care/medical management firms exhibiting than I expected, perhaps because RIMS attracts a lot of attendees outside their target market. The dearth of sessions on medical management, or, for the most part, the thin workers comp agenda likely played a part as well.
Execs from the non-exhibitors all were there to take advantage of the “target rich environment”; many of their current customers and future prospects were in attendance, and the opportunity to meet makes RIMS a must-do.
New news
Spoke with TriStar CEO Tom Veale yesterday about their acquisition of TPA REM. The combined company greatly extends TriStar’s reach, enabling it to compete for national business (previously TriStar’s reach was limited to the western part of the country). The new company, which is now in the top five among WC TPAs, has revenues of about $100 – $110 million, 400 clients, and almost 900 employees. So far, customers seem fine with the deal, as they should be. The growth of TriStar adds another national TPA to the list, raising the competitive bar and offering employers more choices.
There’s a lot more to this I’ll be covering later.
InsurCard is gaining traction. The company’s debit card solution allows claims payers to fill a debit card with indemnity payments for claimants. They also have ties to about a quarter million health care providers that allows InsurCard’s customers to pay their medical bills with a faxed debit card – HIPPA compliant, no fee to the payer, and secure. Makes a lot of sense – outsource payments and reduce admin expense.
More to come later today.


Apr
17

RIMS Day One – continued…

Attendance must be up – significantly. Can’t get a hotel room anywhere in town, restaurants are booked solid, lobby bar – and most others around the convention center – are SRO (standing room only), and there’s pretty good traffic in the exhibit hall to boot.
The Safety National event at the Ritz was jammed; this has become a must-do for many. Word from SN is they’ve expanded their share in the work comp excess market – they own about a third of the market and are looking to consolidate their position. Part of their growth is likely due to Chartis’ decision to exit the excess work comp market; sources indicate that move was driven in large part by the impact of opioids on duration and medical expense.
Spoke with the folks from Cypress Care at length yesterday about their soon-to-be-released drug trends report. They are taking a pretty interesting approach this year; Jim Andrews decided to split out newer claims from those more than three years old. There are quite a few differences between the groups; here’s two:
o Based on the differences in drug mix and utilization, the price per day per claimant for opioids is double in mature claims when compared to emerging claims ($9.79 compared to $4.28)
o The good news is that the number of claimants utilizing Opioids in emerging claims actually decreased almost 2% from the prior year.
More to come on their report later; Express Scripts is releasing their’s today and I’ll be reporting on that as well.
The first annual meeting of the Friends of Sandy Blunt was well-attended; thanks to Bob Wilson for setting things up, and John Swan of CompPartners for footing the bill.
Finally, I heard bill review firm Medata has had a couple of significant wins recently; tried to pry details out of Cy King but he wouldn’t come clean. Will see what I can learn from other sources today.
Still looking for the new new thing; will have more time on the exhibit floor this pm and will report back later today.


Apr
16

Report from RIMS – day one

This year’s RIMS conference is in Philly once again, and by the looks of the exhibit floor there’s a lot going on. Here’s a few of the news bytes circulating around the floor.
– TPA TriStar is acquiring REM, continuing the ongoing consolidation in the property/casualty claims administrator market. I’ll be by the TriStar booth later today to get more details.
– Despite the rumors to the contrary, Coventry is NOT acquiring managed care services company Genex.
PBM PMSI will release their annual drug trends report shortly; early indications are drug costs were up just over three percent, driven by price increases. And all of the price increase was due to an 8.9% increase in pricing for branded drugs in 2011; generic pricing was essentially flat.
UR/peer review firm CID Management has won a major contract with SCIF, the California state fund. Reports indicate they will begin providing UR services for about half of SCIF’s volume in a couple months.


Feb
27

What is your hand worth?

Three numbskulls in South Carolina decided one hand was worth $671,000, the amount they collected from various insurance policies after sawing off one of their six hands.
Yep, one idiot agreed to have his hand cut off so he and his fellows could split the take from three AD&D policies; no word on how they picked which one would give it up for his buddies, nor if he got more of the take as compensation.
Evidently the FBI found out about the three stooges some time after the amputation and subsequent remuneration, Christina Bramlet of PropertyCasualty360 reported (in a pun-filled piece) on the event.
The surgical instrument of choice was – brace yourself – a pole saw. One of those long poles with a combination saw and lopper at the end for trimming branches in trees. No word if it was powered or manual…
pruner-trees-adjustable-pole-saw-200X200.jpg
So, walk me through this.
You’re sitting around with your buddies, likely a few beers into the evening, and you confess your deep sense of shame over your life-long-hand-to-mouth existence. Someone says he heard of someone else who collected big bucks from an accident where he lost his arm.

The lightbulb goes off.
..among this triumvirate, a rare event to be sure.
Then, the debate starts – no, it’s not “if”; it’s “who”.
How do you pick the unlucky co-conspirator? draw straws? rock-paper-scissors? flip coins? odds and evens, with odd man out losing his left?
Do you follow thru then, or give the unlucky guy a couple days with his soon-to-be-departed appendage, a sort of farewell tour. Maybe play a little baseball, tickle the ivories, tie a couple knots, drive a manual transmission car a few miles, button a few shirts, go a couple rounds with the ol’ pinball machine?
Or just grab the nearest sharp object and start whacking away?
And who has to do the surgery? Do both of the lucky ones agree they’ll do it together, to spread the guilt around, or maybe just see what it feels like to cripple a good friend?
Too bad there’s not a category for on-purpose maiming in the annual Darwin Awards...


Aug
24

Work comp claim reserves – not good, but not too bad either

Yesterday’s PropertyCasualty360 reported on FitchRatings’ latest views on the status of reserves in the Property and Casualty (P&C) insurance industry. For those new to this world, ‘reserves’ are the funds set aside to pay the future costs for claims.
Reserves can be “adequate”, which means the dollars set aside look to be enough to cover future liabilities; “deficient”, which means there aren’t enough funds; or “redundant”, which means they are more than adequate. In Fitch’s view, “U.S. property and casualty loss reserves remain within an adequate range as of year-end 2010, and the potential for large deficiencies emerging in the near-term is limited”.
That’s good news, but before you start smiling, know that another analyst views reserves as “deficient”.
So, who cares?
Well, you should.
If reserves are adequate, insurers won’t need to charge new policyholders more to make up for losses already incurred. If they are deficient, rates are going up. And if they are redundant, than new customers may well get a discount, as there is ‘extra’ money lying around to help cover their claims.
It’s not quite that simple, but you get the picture.
What is notable is where the two analysts agree: both believe workers comp is under-reserved. Keefe Bruyette Woods says the deficit is $2.3 billion and Fitch did not provide a figure in their release.
With work comp reserves at the end of 2010 totaling about $115 billion, that’s a deficiency of about 2%.

What does this mean for you?
Another sign that the market may be firming. Or at least not softening any more.


May
10

NCCI – Insurance in the Obama ‘Era’

Bob Hartwig of the Insurance Information Institute talked about his optimistic views of the economy, a somewhat different perspective than he shared with the audience at last year’s NCCI Issues Symposium.
Hartwig does not expect a ‘double-dip’ recession, and believes we’ll see a significant expansion in employment – and therefore work comp payrolls and demand for commercial insurance – later this year and into 20110.
Projections shared with the audience included significant growth in commercial insurance, albeit growth that will be spotty and vary significantly across the country. At this point it appears the states from Texas north are going to see the most growth the soonest, it would be great if these states actually had residents.
Hartwig sees unemployment dropping to near 9% by the end of this year. That’s a 0.7 point improvement over April numbers, a significant move. I’d note that compared to other economists he’s pretty optimistic as others see employment staying well above the nine percent figure.
Hartwig (and panel members) veered off into politics, decrying the Stimulus Bill as ineffective in creating jobs, citing no visible impact on workers comp policyholder types or volume. A credible and well-respected source, Macreconomic Advisers, noted recently: “we still estimate that the peak effect of the stimulus on employment will reach about 2.5 million by the end of this year before then fading gradually.” Other economic experts have similar or somewhat lower projections, but for Hartwig et al to infer the Stimulus Bill was ineffective was inaccurate.
Panelists discussed the potential for a Federal Office of Insurance Information, noting its function is to collect information and has no regulatory authority per se. The current financial reform bill includes funding for the Office while limiting its role and functions.
The panelists opined the health reform bill may help contain comp medical costs, as it will increase health insurance coverage and thereby reduce the need for work comp payers to fund ‘non-comp’ care. John Leonard of MEMIC noted that there is a ‘lot of good’ in the reform bill, but it’s too early to tell exactly how much, and how, reform will affect comp. John Hill stated that if the proposal helps to weed out inefficiencies in the health care system, that will be a positive, as will the impact of increased coverage on the overall health status of the population.
There was one more session last Thursday that I’ll write about later this week.