NAIC Provides Forum for Ivory Tower Attack on Self-Insurance

The National Association of Insurance Commissioners (NAIC) has never been known as an organization where the self-insurance/alternative risk transfer industry is treated fairly, but its penchant for bias became even more visible this past week. Worse yet, this bias is now being fomented by an “ivory tower” expert.

Professor Timothy Stoltzfus Jost is the designated “consumer representative” on the NAIC’s ERISA (B) Subgroup , which is tasked with developing various policy recommendations related to how states should adapt their insurance regulations to better coordinate with PPACA implementation. The esteemed professor is not shy in sharing his opinion that smaller self-insured group health plans, facilitated by stop-loss insurance, should be made extinct.

During the Workgroup’s last conference call, Professor Jost presented a formal statement entitled The Affordable Care Act and Stop-Loss Insurance. This scholarly work was quite the hit piece on self-insurance disguised with big words, extensive footnoting and misleading legal references.

His central thesis is that smaller employers should not be allowed to self-insure because they do so primarily to escape state regulation, and going forward to sidestep new PPACA regulation. He also pushes the dubious argument that self-insured plans contribute to adverse selection (see my earlier blog post on this subject).

Virtually all of Professor Jost’s points can and will be rebutted privately and publicly as this NAIC policy development process moves forward, but first let’s take some time to consider the source.

He is currently a law professor at the Washington and Lee University of Law, with multiple other academic appointments dating back to 1979. Along the way, he has written several books and academic papers on the subject of health care with titles such as The Threats Facing our Public Health Care Programs and a Rights-Based Response; and Health Care at Risk: a Critique of the Consumer-Driven Movement.

And by the way, he is a graduate of the University of California at Santa Cruz. In case you are not familiar with this school, it makes U.C. Berkley look like a bastion of conservatism.

So what about private sector experience over his 35 year career? You guessed it, zero. How about past experience as a regulator who at least could interact with the private sector? No again. What we have here is the classic liberal elite academic who looks at the world through prisms of theory and ideology.

Professor Jost holds himself out to be a patient’s rights advocate and clearly views the NAIC as a forum to present his “ivory tower” perspective. OK fine, there’s certainly room for a diversity of qualified opinions as part of the policy development process.

The problem is that while Professor Jost may well have valid perspectives to contribute on true consumer (patient) protection issues, he’s out of his league in commenting on how health care delivery should be financed.

Moreover, if he was truly concerned about the ability of individuals to receive quality, affordable health care, Professor Jost should actually be a proponent of self-insured health plans (regardless of size) because these plans generally do a better job on both counts as compared to the fully-insured marketplace.

It appears the professor is in need of some timely continuing education.

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RRG Legislation Snagged by Dodd-Frank Creation

After some initial good progress in moving federal legislation to modernize the Liability Risk Retention Act (LRRA), a new rhetorical roadblock has been raised.

The Risk Retention Modernization Act (H.R. 2126) includes a dispute resolution provision whereby RRGs who believe they are being illegally regulated in non-domiciliary states can access the equivalent of a federal arbitration process as an alternative to initiating costly legal action.

An earlier version of the legislation provided that this dispute resolution mechanism would be administered within the Treasury Department due to technical jurisdiction requirements, but left discretion Treasury to fit this function in as part their exiting organizational chart.

Fast forward to the recent passage of the Dodd-Frank financial reform legislation, which among other things created a new Federal Insurance Office (FIO) to be housed within the Treasury Department. As a result of this development, the current version of the legislation specifically designates FIO as the entity responsible to arbitrate RRG disputes with state regulators.

Supporters of the legislation have always known that there would be some push back in Congress from members concerned that such a dispute resolution would infringe on the authority of state insurance regulators. Of course, the opposite is actually true and this position has gained traction in recent months.

But just as the policy argument has largely been settled, at least one member of Congress key to the legislation’s eventual message has raised a new concern. In a meeting earlier this week to discuss the legislation, Rep. Judy Biggert (R-IL), chairwoman of the House Subcommittee of Capital Markets within the House Financial Services Committee, voiced strong concerns about this new responsibility assigned to the FIO.

Her objection was not really specific to RRG regulation, but rather reflects a broader view held by many Republicans that the FIO is being given too much authority. In hindsight, this objection was not particularly surprising.

While PPACA has garnered the lion share of public attention for those critical of government expanding its regulatory reach, the distaste for Dodd-Frank is significant among most Republican members of Congress. As a result, any manifestation of this law, such as the FIO, can spark a reflexive push back as demonstrated by Rep. Biggert’s comments.

It is important to note that this new wrinkle does not mean that H.R. 2126 cannot pass. The lobbying process on Capitol Hill is inherently complicated and this is just the latest example.

In the end, if the case can be made that the practical advantages this legislation offers to small and mid-sized companies trump more abstract political concerns, the LRRA will be successfully modernized.

Stay tuned for additional inside reports on how this legislation is progressing on Capitol Hill.

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Regulatory Overreach Compromises Workplace Safety Initiatives

In case you had any doubt that the current public debate over the scope of federal regulation is more about political ideology rather than practical reality, look no further than OSHA’s ramped up oversight of workplace safety issues.

Now on the surface, this may sound like a laudable focus because almost everyone agrees that there is a role for government in making sure that sensible workplace safety standards are established and adhered to. But of course, in this current political climate Obama regulators just don’t know when to say when.

Specifically, OSHA has recently started to subpoena workplace safety audits prepared by workers’ compensation self-insurers and insurance carriers. Keep in mind that that these audits are prepared on voluntary basis so that employers/insurers are better able to proactively address any safety deficiencies that may exist. Such audits are particularly important tools for workers’ compensation self-insurers because they “own” every dollar saved on payments to injured workers.

Historically, OSHA has not attempted to access such audits because everyone understood that employers would likely stop preparing these risk management tools if they could be used against them in regulatory enforcement and/or legal proceedings.

This precedence has been overturned by a recent federal district court ruling stating that OSHA does have the right to subpoena safety audits and related documentation. Specifically, the ruling in the case of Solis v. Grinnell Mutual Reinsurance Company concluded that audit subpoena are generally enforceable if:

1) They reasonably relate to an investigation within OSHA’s authority;
2) The requested documents are relevant to OSHA’s investigation;
3) The request is not too vague
4) Proper administrative procedures have been followed; and
5) The subpoena does not demand information for an “illegitimate purpose”

According to OSHA’s internal policy regarding voluntary self-audits, the agency will not “routinely” request such audits at the beginning of an inspection, or use the audits to identify hazards to inspect.
But now with a favorable court ruling in their back pocket, it’s very reasonable to expect that OSHA regulators will, in fact, make safety audit subpoenas a routine part of their investigative process.

Of course, and ironically, the real victims are the workers as many employers are likely to curtail such formal audits in response to OSHA’s invasive zeal. Another classic example of “no good deed goes unpunished” apparently embraced by this administration.

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Inside Politics in Michigan Demonstrate That Self-Insurance Priorities Are Too Easiliy Dealt Away

Michigan Governor Rick Snyder is poised to sign legislation that would impose a one percent tax on medical claims paid by health plans, including self-insured group health plans. This is big news and is certainly a disturbing development for those concerned about the erosion of ERISA preemption. But there is a more interesting story behind the headlines that is instructive for self-insured employers in other states as well.

In anticipation of this legislative development, I spoke with senior representatives from a leading Michigan employer organization to explore possible response options, including litigation coordination if necessary. When asked specifically what their appetite was for legal action assuming the legislation is signed into law, their answer was pretty clear – “zero.”

Given that this association represents many self-insured employers such strong push back was surprising to say the least. Then the “off the record” discussion began.

It turns out that there had been some significant wheeling and dealing between the Legislature, the governor and the business community in order to craft various budget reform initiatives designed to head off a projected deficit.

My contacts confided in me that their organization is privately opposed to the health plan tax proposal but will not go on record to say so, much less getting involved in possible litigation. They cite two reasons for this seemingly contradictory stance.

First, their membership includes health insurance companies in addition to self-insured employers and they believe an outspoken defense of self-insurers would alienate this other membership constituency. The other rationale is if the boat was rocked on this issue, then some of the other “deals” presumed to be favorable to the employer community could fall apart.

Of course, the big picture was not taken into account. They acknowledge that the immediate negative financial impact for self-insured employers is bad but manageable. Not considered was that if state efforts to tax and/or regulate self-insured health plans are left unchecked, self-insurance may cease to be an attractive option for employers in Michigan and elsewhere, which would effectively trap employers in the traditional health insurance marketplace – a much more ominous situation than being subject to a one percent tax as problematic as that may be.

My contacts appreciated this analysis and agreed that there are, in fact, bigger issues at play. That said, the bottom line is that many within the leadership of their very influential organization would likely applaud an effort to push back against the health plan tax, but this would be private support with no organizational fingerprints.

So there you have it. The very important fight over ERISA preemption has been dealt away in Michigan in favor of other business community priorities that likely are less important to employers from a P&L perspective. It’s uncertain how things will eventually play out in Michigan, but this look behind the curtain on the relationship between state employer organizations and government exemplifies why the self-insurance industry has an ongoing challenge at the state level.

While the ability of employers to self-insure is more significant than most tax and regulatory initiatives (again from a P&L perspective), self-insurance issues simply do not get much attention for state organizations, which tend to have more broad-based legislative agendas. To be fair, this is understandable because these groups generally have diverse membership constituencies and not have the resources to focus on issues that only a single constituency. Moreover, the member representatives do not generally insist that their organization put self-insurance issues front and center.

To the extent that employers can be mobilized to rattle the cages of state business associations to pay more attention to self-insurance issues we may be able to turn “private support” to visible public advocacy on the future threats that are almost certain to arise.

Let the cage rattling begin.

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Understanding Insurance Company Financial Ratings

Understanding Insurance Company Financial Ratings
by Richard F. O’Boyle, Jr., LUTCF, MBA

Triple A, Gone Away

Well, it’s official: The United States Government no longer has a perfect credit score. On August 5, 2011 its credit rating was lowered by Standard & Poor’s to AA+ from AAA. The rating on the debt of the federal government and some specific agencies such as mortgage giants Fannie Mae and Freddie Mac was lowered because S&P deemed it more risky due to the ballooning federal debt and the inability of the political process to reform entitlement programs.

In theory the four top rating agencies – Standard & Poor’s, Moody’s, A.M. Best and Fitch’s – are the arbiters of the Country’s credit score. Despite all the sound and fury from the politicians in Washington, there are some real-life implications for people on Main Street. The lowering by S&P by one notch effectively brings the country’s FICO score down to something like 775 from 800.

It’s not that dramatic since only one of the top four rating agencies took such a drastic approach (the others said the Government’s problems are long-term and would not immediately affect their ratings). I’d like to note that some smaller agencies had already taken the politically unpalatable step of lowering the country’s rating. Let’s also keep in mind that S&P has been under serious political pressure to “get real” about its rating since it did such a pathetic job of rating all of those toxic mortgage-backed securities (see “The Big Short”).

Given all of the political pressure from Congress regarding the mortgage securities fiasco of the last three years, it’s ironic that they should come to downgrade the U.S. Government’s rating. Expect to see “show trials” (i.e., Congressional hearings) in Washington demonizing the rating agencies. Again, it’s ironic since the U.S. has been less than reliable when accounting for future liabilities such as Social Security and Medicare.

But, again, let’s put politics aside and investigate the “real life” implications of the aforementioned “downgrade:”

Insurance Company Ratings: What Do They Mean?

In tandem with the downgrade of the Government’s credit rating, S&P also lowered the AAA rating of a handful of the most stellar insurance companies. They also put the rest of the insurance industry on a “Negative” outlook (downgraded from “Stable”), mainly because of the heavy exposure they all have to U.S. securities in their reserve portfolios.

Companies downgraded to AA+ (Negative Outlook) from AAA (Stable Outlook):
New York Life
Northwestern Mutual
Teachers Insurance & Annuity Association (TIAA-CREF)
Knights of Columbus
United Services Automobile Association (USAA)

Companies rated AA+ with “Stable Outlook” reduced to “Negative Outlook:”
Guardian Life Insurance Company of America
Berkshire Hathaway, Inc.
Assured Guaranty Corp.
Massachusetts Mutual Life Insurance Co.
Western & Southern Financial Group, Inc.

Does this mean that your life insurance company is about to go bankrupt ? Most likely, not. What it does mean is that S&P has decided that insurance companies that invest heavily in one country’s bonds can not have a higher credit rating than the actual bonds that they hold. So, in lockstep, if the U.S. rating goes down, so must the companies that hold a lot of U.S. debt. Needless to say, the affected insurance companies say they are unfairly being hit due to Washington’s political gridlock and that they still merit AAA ratings.

Going forward, the insurance companies will bolster their overall credit ratings by selling off their lower quality assets and buying higher quality ones. This may effectively improve their balance sheets over the long term and even increase their exposure to U.S. debt instruments. S&P maintained AAA ratings on many municipal bonds, so there still are high-quality assets for the insurance companies to put into their reserves. The reason the top handful of companies actually had the best ratings is that often they are better judges of quality than even the rating agencies.

The lowering of the U.S.’ credit rating, in the immediate term, has not led to a sell-off in U.S. Treasury assets. But indeed, we have seen a “flight to quality” as many investors see the U.S. Treasury Bonds as the “cleanest shirt in a hamper full of dirty shirts.” (I believe I can credit economics guru Nouriel Roubini for this analogy on Bloomberg Radio). In effect, U.S. assets at AA+ are still better quality than many European bonds.

Ultimately, the jury is still on whether interest rates on mortgages and credit cards will spike up. Longer term interest rates will be affected more by the strength or weakness of the overall economy and the amount of stimulus provided by the Federal Reserve and Congressional budget committees.

Why Ratings Still Matter

So why do we even care about ratings attributed to countries or businesses or individual financial products? Haven’t the rating agencies done an awful job to date? Are the folks with the green eyeshades who are crunching the numbers and giving their seal of approval so corrupted by the profit motive or fearful of political retaliation that they can’t “do the math” objectively?

In short, there are two reasons: First, we need some type of financial yardstick to compare countries, companies and bonds. There really are no guarantees associated with a rating of “AAA,” for example. It’s just a relative measure and only useful when compared to something with a “B+,” for example. Secondly, a rating gives us the assurance that someone who is somewhat objective with some kind of sophisticated financial education has looked at all the footnotes and read all the fine print… because G-d knows nobody else has (sometimes not even the salespeople). Of course, recent events have dramatically shown that the current system has failed. Unfortunately, it’s the only system we have.

So let’s take a look what the ratings of life insurance companies really mean. Given the hundreds of life insurance companies offering policies in the U.S. it can be a challenge to compare their relative financial strengths and ability to pay claims. The top rating agencies review in detail the accounting statements of publicly traded companies as well as private or mutual life insurance companies. Based on their reviews and further research into competitive intelligence and other sources, they will give an opinion on the credit-worthiness of the life insurance company and assign letter grades to each company and its subsidiaries. Furthermore, agencies will often note what direction they think future rating will head in their “outlook” for the company or industry.

Keep in mind that while the core attribute the rating agencies look at is “financial strength,” they also take into account how well the company operates as a business, the size of their market share, exposure to other businesses (such as investment management advice or property & casualty lines) and overall business mix. For example, every year, S&P positively noted New York Life “outstanding field sales force” as a competitive advantage.

How to Compare Life Insurance Company Ratings From Different Agencies

I’m a big fan of the old adage, “Life is too short to drink bad wine.” With the hundreds of available life insurance companies out there, does it make sense to go with a middle-tier company when there are already so many top-notch ones? Similarly, with all the five star mutual funds rated by Morningstar, why would you invest in a three star fund? A life insurance company’s rating is effectively a guide to its underlying financial strength and its ability to pay its claims when the time comes for you to collect the death benefit.

Keep in mind that many companies have subsidiaries that have similar sounding names (often due to state regulations or their own business strategies). When researching your specific company make sure that you are looking at the actual company that is underwriting the life insurance contract. For example, “MetLife” may actually be “MetLife Investors” if it is the 30-year term plan in New York. Your agent should be able to give you the exact company name. Your state insurance commission will have regular filings from each company that sells life insurance it that state.

Each rating agency uses its own proprietary methodology and mathematical model to assess the strength of the insurance companies they review. They look at factors such as the quality of the insurer’s assets and reserves; their source(s) of funding; profitability based on a review of public financial records and filings; market share in different product categories; management talent; and competitive market analysis compared to other insurers.

Here’s how the various rating agency “grades” match up:

Rank	A. M. Best	Standard & Poor's	Moody's	Fitch	Numerical Grade (*)	Comdex Score (#)
1	A++ Superior	AAA Extremely Strong	Aaa Exceptional	AAA	9.0	100
2	A+ Superior	AA+ Very Strong	Aa1 Excellent	AA+	8.3
3	A Excellent	AA Very Strong	Aa2 Excellent	AA	8.0	90
4	A- Excellent	AA- Very Strong	Aa3 Excellent	AA-	7.7
5	B++ Good	A+ Strong	A1 Good	A+	7.3
6	B+ Good	A Strong	A2 Good	A	7.0	80
7	B Fair	A- Strong	A3 Good	A-	6.7
8	B- Fair	BBB+ Good	Baa1 Adequate	BBB+	6.3	70
9	C++ Marginal	BBB Good	Baa2 Adequate	BBB	6.0
10	C+ Marginal	BBB- Good	Baa3 Adequate	BBB-	5.7
11	C Weak	BB+ Marginal	Ba1 Questionable	BB+	5.3
12	C- Weak	BB Marginal	Ba2 Questionable	BB	5.0	40
13	D Poor	BB- Marginal	Ba3 Questionable	BB-	4.7
14	E Under Regulatory Supervision	B+ Weak	B1 Poor	B+	4.3	20
15	F In Liquidation	B Weak	B2 Poor	B	4.0
16	S Suspended	B- Weak	B3 Poor	B-	3.7
17		CCC+ Very Weak	Caa1 Very Poor	CCC+	3.3
18		CCC Very Weak	Caa2 Very Poor	CCC	3.0
19		CCC- Very Weak	Caa3 Very Poor	CCC-	2.7
20		CC Extremely Weak	Ca Extremely Poor	CC	2.0
21		R Regulatory Action	C Lowest	C

(*) Numerical Grade conversions courtesy of The New York Times
(#) Comdex ranks insurance companies based on what other rating agencies have given them. The companies are then graded on a percentile system with only the top five companies in the 100th percentile, and others falling into the scale below that. The placement of the numerical rankings in the chart is my approximation.

Links to Rating Agencies
AM Best
Fitch
Moody’s
Standard & Poor's
Weiss
Comdex Score

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Three Simple Steps to Avoid Probate

Tricks of the Trade: Three Simple Steps to Avoid Probate
by Richard F. O'Boyle, Jr., LUTCF, MBA

Much is said about the value of avoiding probate, the legal process where your will (if you have one) is validated and its provisions carried out. Complicated estates can be tied up for years with legal maneuvering and family wrangling. Most cases are straight-forward and uncomplicated – but they can still be time-consuming and emotionally draining.

First, you can free up some resources for your heirs by carefully naming them as beneficiaries on savings and checking accounts, adding them to the title of a car or boat, or including them on the deed of a piece of real estate. Designating some assets as “payable on death,” “transfer on death” or “in trust for” can accelerate the transfer of these assets to your intended beneficiaries. They just need to show copies of their identification and your death certificate to the bank or motor vehicles department.

If you are concerned that your heirs will have trouble paying taxes or expenses immediately after your death, carefully take stock of your smaller assets. This is particularly helpful for people who do not have a will or are not legally married to their spouses. You can free up these resources for them while the estate works itself through the probate process.

Second, most of your big assets such as your house, life insurance, pension, retirement plan or investment account should already have named beneficiaries or joint owners, which means they pass to the intended person (or trust) immediately upon death and avoid probate. Make copies of the signed and dated beneficiary designation forms and keep them in a safe place with your other financial records. Banks and insurance companies are not infallible – they lose these documents all the time! Make sure that you name contingent beneficiaries and tertiary beneficiries. The last thing you want is for these important assets to wind up in your estate. They will be subject to death taxes, the vagaries of the probate process and (in the case of IRAs) immediate taxation.

Finally – but most importantly – make sure that you have a will. While this doesn’t “avoid” probate, it simplifies the process dramatically. If you have minor children, an unmarried spouse or even remotely complicated family affairs, at a minimum you should have a simple will. Attorneys can prepare a simple will for a few hundred dollars or you can use a software product or online service for a fraction of that cost. If you don’t already have a will, or it hasn’t been updated since you have had major changes in your life, make it a point to get one signed before the end of the year.

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