Regulation


Growth in U.S. liability claims could accelerate to 5-6 percent in the near future, according to a just-released report by Swiss Re sigma.

The slowdown in U.S. liability claims paid after 2008, primarily due to economic drivers such as the recession and weak recovery, is expected to reverse.

Why the change?

Cyber risk and the liability from emerging technologies including hydrofracking and autonomous cars, combined with stronger economic growth will drive liability claims costs higher, sigma says.

Interestingly the report suggests that the effects of tort reform, which contributed to a slowdown in claims growth in the mid-2000s in the U.S., were a one-off benefit and will no longer suppress claims growth to the same degree.

It notes:

Often these types of reform have only a temporary effect on claims growth, which fades as the rules eventually soften again or the legal profession learns how to optimize the pursuit of claims in the new framework.”

Tort reform in the U.S. has focused on medical malpractice and class action claims, the report says.

Many early studies concluded that medical malpractice reforms such as limits on lawyers’ fees and non-economic compensation were effective in reducing medical malpractice liability. However, some of these caps were later overturned by state supreme courts.

Despite passage of the Class Action Fairness Act in 2005, empirical evidence on the effects of federal class action reform in the U.S. remains inconclusive, sigma adds.

The report also warns that litigation funding, in which a third-party funding company pays the costs of litigation and is paid only if the litigation is successful, is still in its infancy in the U.S. but developing.

There are fears it will grow, driving up litigation and future claims costs for insurers.”

Check out this I.I.I. backgrounder on the U.S. liability system here.

I.I.I. chief actuary James Lynch reports from Day 2 of the WCRI annual conference in Boston:

Health insurance and workers compensation are sort of kissin’ cousins, in that changes that affect one inevitably affect the other.

But that’s my metaphor. Dr. Richard Victor, executive director of the Workers Compensation Research Institute (WCRI), likens the impact of health care reform to a hurricane.

Like a storm whose path is not quite defined, health care reform could take a significant toll – but we don’t know precisely where. Since workers comp differs from state to state, the impact of the Affordable Care Act (ACA) will differ from state to state. Like a good weatherman, Dr. Victor told an audience of about 400 at WCRI’s annual conference in Boston on Thursday he could make some educated guesses what might happen.

He is assuming the ACA is enacted exactly as written – a tough assumption but as good a starting point as any. In that case, the increase in insured Americans will increase demand.

The marketplace might decrease the use of doctors, relying instead on well-trained nurses or even sophisticated computers to help provide care.

Or doctors might raise prices in the face of rising demand.

What actually happens will differ by state. Some states make it difficult to take diagnosis and treatment out of the doctors’ hands. In those states, medical costs – and their kissin’ cousin, comp costs — are likely to rise. Elsewhere, the effect will be muted.

Other insights:

● Health care reform will result in a healthier work population. This will tend to help the comp system, because healthy workers are less likely to get hurt on the job, and if they do get hurt, they get well faster.

● Changes in billing, Dr. Victor said, will “absolutely” lead to upcoding – in which a doctor exaggerates the severity of a treatment to receive a bigger reimbursement. The practice is well-documented in workers comp, he said, citing examples from Florida and California.

● Changes are likely to shift into workers compensation. That’s because many employers are increasing deductibles that employees pay for treatment. Workers comp, meanwhile, has no deductibles and no co-pays – giving an employee the incentive to label an injury as work-related.

I blogged about Day 1 of the conference here. Other highlights from Day 2:

● Alex Swedlow, president of the California Workers Compensation Institute (CWCI) noted that even after all appeals are exhausted only about five percent of denials of comp claims are overturned. Swedlow also said evidence-based pain management guidelines effectively control costs; and a comparison of California and Washington pharmaceutical costs show that more cost savings are possible.

● Harry Shuford, chief economist of the National Council on Compensation Insurance (NCCI), argued that underwriting cycles are closely linked to bond yields and that when it comes to managing their business, insurers in the long run “do a much better job than other financial intermediaries” like banks.

The Insurance Research Council (IRC) has taken a closer look at the potential effects of the Affordable Care Act (ACA) for property/casualty insurers.

Its analysis – which doesn’t make any specific estimates of the potential cost implications for the P/C industry – identifies the possible ways in which P/C insurance claim costs will be affected by the Act.

The upshot is that the IRC believes the most significant impact will be cost shifting by hospitals and other providers from public and private health insurers to p/c insurers.

According to the report:

Cost shifting will occur in response to increased cost containment efforts by public and private health insurers, and will appear in the form of higher charges and a higher volume of billed services.”

And:

Cost shifting will be particularly severe in state jurisdictions and with coverages where the differences between public and private health insurance reimbursement levels and property-casualty reimbursement levels are greatest.”

The potential magnitude of the cost-shifting is likely to be major, the IRC notes.

To mitigate this potential impact, the IRC suggests that P/C insurers should consider options to ensure that the prices paid as reimbursement for medical services are consistent with prices paid by public and private health insurers.

While market-based fee schedules and bill review authority are among the tools often applied to address medical pricing issues, the IRC says P/C insurers should also consider alternatives to ensure that only medically necessary and appropriate treatment is provided to P/C insurance claimants and reimbursed by insurers.

Utilization review authority, evidence-based treatment guidelines, and the authority to deny reimbursement for unnecessary or inappropriate treatment are among the tools that P/C insurers should consider, the IRC suggests.

PC360 reports on the IRC analysis here.

The Affordable Care Act (ACA) will have both potential positive and negative effects on the property/casualty insurance industry, according to a recently published paper by Travelers.

In the paper, Travelers notes that medical trends impact workers compensation, general liability, and auto insurance costs, which make up about 5 percent of health care revenue.

Key ACA components expected to affect the P/C industry are:

– Extended healthcare coverage – a 15 percent increase in demand for a fixed supply of healthcare services

– Black lung presumptions – any miner (or surviving spouse) with 15 or more years of underground coal mine employment and a totally disabling respiratory or pulmonary impairment is presumed to be disabled due to pneumoconiosis and eligible for Black Lung benefits.

– Pharmacy and durable medical equipment (DME) taxes and assessments – the potential to increase costs 1.5 percent and 2.3 percent, respectively.

– Medical data – enhanced electronic record-keeping and sharing of data among providers.

Some of the potential positive effects of the ACA on P/C insurers include increased wellness – a healthier and better conditioned population – and a decreased incentive to file questionable P/C claims, Travelers says.

However, on the negative side, the ACA could result in decreased access to care, increasing indemnity costs as prompt access to physicians is reduced and return to work is delayed, the paper notes.

Travelers also cautions that there could be increased cost shifting from Medicare to P/C payers by physicians and hospitals due to declining Medicare reimbursement rates.

Hat tip to Claims Journal for its report on P/C insurer impacts of the ACA here.

High taxation has become the number one threat to global business, soaring up the rankings from 13th to 1st place in the last two years, according to the third Lloyd’s Risk Index.

Other top risks concerning more than 500 of the world’s most senior business leaders in 2013 are loss of customers/cancelled orders, cyber risk, increased material costs and excessively strict regulation.

Interestingly, the survey found that U.S. businesses feel even more unprepared to deal with the risk of high taxation than their European counterparts.

While both regions put high taxation as their number one risk, U.S. respondents rank their preparedness at 37 out of 50, compared to European businesses at 21 out of 50.

But does the increase in volume on the subject of corporate taxation reflect reality? Not necessarily, Lloyd’s says.

It cites data showing that corporate taxes have actually declined or remained static in the past few years, despite the financial problems of most major economies.

Still, personal tax rates in some economies have risen, which particularly affect global businesses competing for international talent, it adds. Indirect taxes are also on the increase.

Lloyd’s says:

The reality for businesses appears to be that government ambiguity about business taxes, whether about extending jurisdictions, amending legislation or changing rates, may actually be more damaging for business confidence than the reality.”

In a press release Lloyd’s chief executive Richard Ward warns that focusing on near-term issues at the expense of longer-term strategic decision making can leave organizations over-exposed to future business challenges:

With business tax in the spotlight and rising up the political agenda, executives are understandably concerned. Yet the danger is that an emphasis on near-term, operational issues comes at the expense of significant, strategic decisions that have previously exercised business leaders.”

First published in 2009, the Lloyd’s Risk Index is run in conjunction with Ipsos MORI.

Many factors, including demographics, economic conditions and the litigation landscape, can affect an insurer’s decision to operate in or to continue doing business in a particular state. The regulatory environment is another important consideration for insurers.

According to the 2012 Insurance Regulation Report Card from non-profit think tank R Street Institute, Vermont, Illinois and Ohio had the best property/casualty insurance regulatory environments in the U.S. this year, receiving ‘A+’ grades.

At the other end of the scale, Florida was the only state to receive a failing grade, falling more than two standard deviations below the mean (the mean was -3.1).

Other states falling more than one standard deviation below the mean include Alaska, Michigan, New York, California, Massachusetts and Texas.

Interestingly enough the best state, Vermont, only scored 26 out of a maximum possible score of 55.

R Street based its assessment of states on 14 objective metrics, including:

- the concentration of their home and auto insurance markets and relative size of their residual markets

- the effectiveness of state solvency and fraud regulation

- the transparency and politicization of insurance regulation

- the tax and fee burdens placed on insurance markets and the proportion of fees used to support insurance regulation

- the relative freedom granted to insurers to set risk-based rates, including through the use of credit and territorial information

A press release cites the report’s author R.J. Lehmann saying:

Overall, in 2011 and early 2012, we saw continued modest trends toward greater consumer and business freedom in the homeowners and automobile insurance markets, as well as real efforts in some states to scale back, or otherwise place on more sound financial footing, residual insurance markets and state-run insurance entities.”

Those are positive trends, and we hope this report card encourages other states to move forward in that direction over the next year.”

Stay tuned.

Yesterday’s U.S. House of Representatives’ hearing on Congressional ‘Oversight of the Financial Stability Oversight Council (FSOC)’ has made for a number of headlines.

Check out coverage of the hearing in the Wall Street Journal, the Hill’s Finance and Economy blog, a Reuters report via Insurance Journal and PropertyCasualty360.com.

A new Insurance Information Institute (I.I.I.) white paper provides insights on the property/casualty insurance industry and systemic risk.

In the paper co-authors Dr. Robert Hartwig, president of the I.I.I. and an economist, and Dr. Steven Weisbart, senior vice president and chief economist for the I.I.I. remind us that not one property/casualty insurer failed as a result of the financial crisis or the ensuing “Great Recession”.

As financial regulators consider criteria for determining which financial institutions might be systemically risky, the authors note that P/C insurance is fundamentally different from banking, and poses no systemic risk to the financial system.

Inappropriate inclusion of P/C insurers could cause harm not only to insurers, but to consumers and the efficacy of financial institution regulation in general, the paper concludes.

Check out the I.I.I. issues update on regulation modernization.

Regulation and financial stability will be key issues for the insurance industry in 2011, according to international insurance think tank, The Geneva Association.

Hat tip to Business Insurance for more on this story.

Patrick Liedtke, secretary general and managing director of the Geneva Association, observed that the direction of international insurance regulation is going to be critical for the industry this year.

Major regional projects such as Solvency II, which have gained reference status even beyond Europe, and global projects such as International Financial Reporting Standards (IFRS) reforms and International Association of Insurance Supervisors (IAIS) initiatives will see key decisions in 2011.”

Getting the next wave of regulation right is critically important, not only for the industry, but for continued economic growth and development, he said.

On financial stability, Liedtke noted that while systemic threats do not emanate from insurance activities there are a number of issues that remain poorly understood or simply have not been discussed but where important decisions will be taken by governments in 2011.

The key is to ensure that regulatory imprecision or over-stretch do not hamstring well-functioning industry and damage societal interests.”

Two longer term issues that are also of importance are climate change and demographics.

Climate change presents insurers with both long and far-reaching challenges and also opportunities. The shift towards longer life expectancy and ageing populations will change the way societies view risks.

Check out I.I.I. facts and stats on U.S. demographics and information on climate change and insurance.

This just in from the Insurance Institute for Highway Safety (IIHS): bumpers on cars and SUVs don’t line up leading to huge repair bills in what should be minor collisions in stop-and-go traffic.

The Institute’s crash test results show that in fender-benders with SUVs, cars often end up with excessive damage to hoods, engine cooling systems, fenders, bumper covers, and safety equipment like lights. SUVs don’t always come out unscathed either, often needing extensive work.

Hat tip to the New York Times Wheels blog for more on this story.

The Institute conducted 10mph front-into-rear crash tests involving seven pairs of 2010-11 models, each composed of a small car and small SUV from the same automaker.

In the tests, an SUV going 10mph struck the back of its paired car, and then the test was reversed with the car striking the back of its paired SUV.

Damage repair costs in the tests varied widely, but ran into the thousands of dollars, even for the best performers.

Total damage estimates ranged from $2,995 to $7,444 in the SUV into car tests, and from $3,601 to $9,867 in the car into SUV tests. It’s worth noting that the SUV didn’t always have the lower damage estimate either.

In the words of Joe Nolan, the Institute’s chief administrative officer:

“In the real world that money comes straight out of consumers’ wallets through deductibles and insurance premiums.”

So what’s the solution?

According to the Institute, regulating SUV bumpers would ease the burden.

While bumpers on cars are designed to match up with each other in collisions (a federal standard requires all cars to have bumpers that protect within a zone of 16 to 20 inches from the ground), a long-standing gap in federal regulations exempts SUVs from the same rules.

The Institute is calling on regulators to require bumpers on SUVs and pickups to match up in the same way as cars, shielding both from costly damage.

Check out I.I.I. facts and stats on auto insurance and info on auto crashes.

You may have read yesterday’s USA Today article on the National Transportation Safety Board’s (NTSB) call for mandatory helmet laws for all motorcycle riders in the United States.

Motorcycle rights groups oppose the move by the NTSB, criticizing it for interfering in state affairs and proposing laws that are not needed, while highway safety groups are in favor.

According to the NTSB, motorcycles comprise just 3 percent of vehicles on the nation’s road but are involved in 13 percent of fatalities. Head injury is a leading cause of death in motorcycle crashes, says the U.S. Department of Transportation.

A map accompanying the USA Today article shows those states that require helmets for all riders, states that require helmets for some riders and states that have no helmet laws.

This got us thinking about motorcycle helmet laws around the world.

According to the World Health Organization (WHO), motorcyclists wearing a good-quality helmet can reduce the risk of death in a road crash by almost 40 percent and the risk of severe injury by over 70 percent.

Yet, only 40 percent of countries have motorcycle helmet laws that cover both riders and passengers, and mandate quality standards for helmets.

A map shows helmet laws and standards by country.

The WHO also has information on road safety laws by country relating to other key risk factors, such as speed, drink-driving, seat belts and child restraints.

Check out the I.I.I. issues update on motorcycle crashes.

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