Thursday, October 28, 2010

LIMRA Panel Discusses Lessons Learned From the Great Financial Crisis

National Harbor, Md.
Representatives from two major life insurers discussed lessons learned on working with producers during the recent financial crisis during the LIMRA annual conference here.

During the first days of the economic crisis which hit with full force in mid-September 2008, very few consumers reached out to financial advisors and when they did, it was rarely initiated by advisors, according to Patrick Leary, assistant vice president-distribution research with LIMRA, Hartford, Conn. Leary moderated a panel titled ‘Top Producer Support: a Model for Tomorrow.’

The career agents at Principal Financial, numbering over 1,000 advisors, took it upon themselves to contact clients and provide them information, according to Nick Cecere, Principal’s vice president-individual distribution. As a result of the financial crisis, the company has learned to do a better job of communicating its financial situation to both agents and clients, he said.

Jim Thomsen, senior vice president-member services with Thrivent Financial for Lutherans, said that immediately after the crisis, there was a loss of confidence in the insurance industry both on the part of advisors and consumers. He recounted attending a social event the Saturday after the meltdown hit and having another guest, upon learning what business he was in, say “that used to be an honorable profession.” On Monday, Thrivent management decided that the insurer had to tell its story and its advisors also needed to talk about the company and how it is on good financial footing.

Cecere said that public perception is a very powerful force as evidenced by the fact that from October 2008 through March 2009, Principal’s stock price declined from $70 to $5 per share and began to rebound when the company announced that it would not take government TARP funding. In early 2009, Principal decided to launch its “America Rebuilds” campaign and is now following up with an “America Dreams” campaign.

Thrivent’s Thomsen told panel attendees that “We need to shore up advisors” because they need to feel like they are part of a community.

Monday, October 25, 2010

Dickens Was Right: It is the Best and Worst of Times. Here’s Why.

National Harbor, Md.
Challenging times call for a new way of looking at the insurance business, according to Robert Kerzner, president and CEO of LIMRA, LOMA and LL Global, Inc., who opened the organization’s annual meeting here.

During the opening session, Kerzner asked attendees to think of Coke, a company that successfully reinvented itself as being in the fluids business and not just the soda business. He rallied attendees by telling them that when they offer new products and distribution, there companies will see growth.

Recent studies, he stated, show that people want face-to-face interaction but with technology, face-to-face meetings can also take place on a computer, iphone or ipad. Underwriting and issuing a policy can be done in real time, he said.
Distribution is shrinking and new ways are needed to reach people who need life, annuity and savings products.

Increasing product sales is important because insurers “have more things facing us than ever before at one time,” according to Kerzner. The risk-reward balance has been upset, he added. Some products have slipped into single digit return on equity (ROE) rather than double digit, he continued. He cited a number of causes including unpredictable lapses due to investor-originated life insurance, higher operating costs, and riskier products, among other factors.

Indeed an afternoon panel featuring industry CEOs affirmed the challenges the industry faces but also left room for optimism if the insurers rise to the challenge. Edward Rust, Jr., chairman and CEO of State Farm Insurance Co., said that risks that must be addressed now include finance risk, understanding political forces and populism, and how the advent of new ways of reaching people such as social networking will fundamentally change the business.

David O’Malley, chairman, president and CEO with Ohio National Life Insurance Co., says he fears the regulatory environment in the near future, a climate he says goes beyond the National Association of Insurance Commissioners, Kansas City, Mo., and includes the new Federal Insurance Office, a federal office of consumer protection, an accounting industry pushing for mark-to-market standards and new, unfavorable international accounting standards that will disadvantage American insurers. “We are faced with more threats at one time that could have a very, very serious negative effect on our companies. It causes me a great deal of stress to see how this could unfold.”

What it does, according to O’Malley, it to create a level of uncertainty and predictability about how to manage our business. For instance Kerzner and the CEO panel discussed the current low interest rate environment and its impact on business. State Farm’s Rust said that insurers will have to get their minds around what looks like the longer term implications for embedded portfolio yields which have been coming down 100 basis points a year. It will have an impact on pension funding assumptions, discounts and liabilities as well as pricing assumptions, he continued.

Kerzner noted that the recent financial meltdown of 2008 brought a number of insurers to their knees in the downturn throwing risks out of balance with rewards. This lack of balance could make capital reluctant to invest in the market, he added. And with solvency and accounting initiatives in Europe, there could be “a negative disrupter of epic proportion.”

Consequently, small companies may be acquired, mid-sized companies merged, and non-core businesses sold, he said. Fewer companies will exist and the insurance industry will be transformed, he added.

Even with this daunting list of challenges, Gary Bhojwani, president and CEO with Alliance Life Insurance Company of North America, found cause for optimism and “the great opportunity we have” to provide guaranteed income to baby boomers. He cited a recent survey his company completed which found that 80 percent of 3,300 baby boomer participants would rather pick up 4 percent guaranteed income than have the opportunity to earn up to 8 percent.

Kerzner said that there are a “myriad of opportunities” to grow the life insurance business. For instance, LIMRA will offer virtual classes incorporating its research and plans to add more research in the retirement space. “The next decade really could be our best and indeed even our golden age. We are in the eye of storm. Much is behind us but it is not over.”

If the insurance industry wants to reach that Golden Age, then it needs to not only cut costs but empower that consumer, Terry Jones, founder and former CEO of asserted. Today, “choice happens instantly. Information has found its freedom.” The balance of power is shifting to the consumer and insurers who can provide consumers with information will be the successful ones, he said. Jones noted that 45 percent of US policyholders visited an insurance site last year. The first thing they did after a face-to-face meeting where they received a quote was to go online and look for competing quotes, he added.

Saturday, October 23, 2010

NAIC Adopts Final Medical Loss Ratio Regulations

During a joint session the Executive and Plenary committees of the National Association of Insurance Commissioners (NAIC) voted to adopt a model regulation containing the definitions and methodologies for calculating medical loss ratios as required by the Patient Protection and Affordable Care Act (PPACA). The model will be delivered to Health and Human Services (HHS) for certification by Secretary Kathleen Sebelius. The vote took place during the fall NAIC meeting in Orlando.

The PPACA signed into law on March 23, 2010, requires that beginning in 2011, insurance companies meet new medical loss ratio requirements designed to ensure premium dollars go to health care. The law requires that the NAIC provide recommendations for the definitions and calculations of these ratios to HHS by December 31, 2010.

"I commend the work of our regulators and staff as we considered a number of very challenging issues as it moved through the committee process. The committee model regulation on MLR passed with only technical amendments, which is a testament to our inclusive and transparent process," said Jane L. Cline, NAIC President and West Virginia Insurance Commissioner. "It is with a great deal of pride we present these recommendations to the Secretary."

The law also tasks the NAIC with a number of additional provisions to consider, including rate review and consumer information. The Health Insurance and Managed Care Exchanges subgroup has already begun work on their recommendations to HHS. They have been tasked with creating guidelines and recommendations to facilitate the implementation of health exchanges, due to be operational in the states by January 2014.

The work of staff continued prior to the vote during the October 17 meeting with the Life and Health Actuarial Task Force when it met to consider redefining the methodology to include contract reserves in the MLR rebate calculation.
The request was made to send the issue back from the “B” Committee to LHATF, to consider the issue and then report back to commissioners so that the decision could be included in the final joint vote.

Bill Weller, representing America’s Health Insurance Plans, Washington, said that in the individual major medical market, said that expected loss ratios are met over time and that there are factors such as how that market is used that needs to be considered. The individual market is used by those between jobs who terminate as soon as they find work and are insured under group coverage, according to Weller. So, the expectation is that premiums increase consistent but to costs, but not necessarily matching them, he added. That has to be considered in the rebate calculation, according to Weller. It is important for the purposes of a rebate calculation that a net level methodology consistent with pricing assumptions be used, according to Weller.

Minnesota regulator Julia Philips, who had worked on the development of the MLR guidance, said that regulators were concerned with gaming and the elimination of rebates. She said that she wanted a reference to the NAIC’s Accounting Practices and Procedures Manual so that this would not happen.

Frank Horn, a New York regulator said that there needs to be consistency with the way the regulation is calculated because there seems to be ways in which the MLR can be artificially raised.

The intent was to avoid any gaming or opportunity for gaming, according to Steve Ostlund, an Alabama regulator, who added that he believed that the regulation did say that statutory accounting should be used.

Tim Yost, an NAIC funded consumer, said that it was his understanding that reserves claimed for MLR purposes would be the same as those in the annual statement. He expressed concern over gaming. The annual statement requires certification under oath by an actuary and if a company decides to use different MLRs, there is concern over how they will be calculated, he said.

Yost also expressed concern that the packet of IRDs put together by the subgroup is sound and now changes are being proposed to the regulation. He noted proposals on national aggregation experience for large groups, proposed changes to credibility levels and now the proposal for contract reserves. “None of these proposals favor consumers,” Yost asserted. The goal here is just to reduce MLR rebates, he continued. It should be to increase efficiency and the amount spent on quality improvements and these proposals are undoing that, he added.

Rowen Bell, representing the American Academy of Actuaries, Washington, said that the Academy had sent a lengthy letter explaining why it was important to decouple contract reserves associated with the MLR from statutory reporting in order to avoid gaming. He noted the tremendous diversity among companies and even within entities. The Academy was offering a way to calculate MLR regardless of how statutory reporting is done so that all entities can be treated fairly.

Barbara Yondorf, an NAIC consumer representative and former Colorado insurance regulator, said that the issue of gaming is going to be a recurring theme and will surface again when exchanges are discussed. She expressed reservations about altering agreed upon language because when you have something that is delicately put together and you start pulling at threads, there is a real question of how it will fit together.

Lou Felice, a New York regulator, said that any decision on MLRs needed to include an accounting as well as an actuarial viewpoint and that no changes should be made unless both are considered.

Ostlund made a motion that LHATF support the subgroup’s proposal regarding contract reserves. Minnesota’s Philips said that contract reserves are really defined in a general sense and does not say that it needs to match the financial statement.
AHIP’s Weller said that he considers what is being voted up to executive/plenary as significantly different from what he considered it to be.
Ostlund’s motion carried 9-2.

During the NAIC meeting, it was also announced that Ostlund and Felice had been awarded the Robert Dineen award for advancing the work of state regulations for their work on PPACA.

Friday, October 22, 2010

NAIC Elects Officers for 2011

Insurance commissioners elected officers to lead the National Association of Insurance Commissioners, Kansas City, Mo., for 2011. The election took place during the organization's fall meeting in Orlando.

The leadership for next year is as follows:
• President: Iowa Insurance Commissioner Susan E. Voss
• President-Elect: Florida Insurance Commissioner Kevin M. McCarty
• Vice President: Oklahoma Insurance Commissioner Kim Holland
• Secretary-Treasurer: Louisiana Insurance Commissioner James J. Donelon
The newly elected officers will assume their duties on Jan. 1, 2011.

Wednesday, October 20, 2010

Rule 151A Issue Put to Rest; Annuity Disclosure Advances

A long disputed rule issued by the U.S. Securities and Exchange Commission, Rule 151A to regulated indexed annuities (IAs), was withdrawn this week, attendees were told during the fall meeting of the National Association of Insurance Commissioners, here.

The details were provided by Jim Mumford, Iowa’s first deputy commissioner of insurance, during the Life Insurance and Annuities “A” Committee. Iowa was one of the states that was leading the effort for states to retain the right to regulate IAs. He explained to members of “A” Committee that on July 21, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contains a Section 989J, known as the Harkin/Meeks amendment. That amendment voided 151A and its interpretation that IAs and potentially other insurance products were securities and thus under SEC purview.

Mumford then went on to explain the progress made on the Annuity Disclosure Model Regulation which provides standards for the disclosure of information about annuity contracts and includes guidelines for illustrating these products. Mumford detailed for Connecticut Commissioner Tom Sullivan, “A” Committee chair and members of the committee the progress that had been made since the summer meeting in August.

Sullivan had made it clear that the project needed to be completed and the Annuity Disclosure working group’s charge met. The working group has been working on the model since 2008.

Toward that end, the working group, the American Academy of Actuaries and the American Council of Life Insurers, both based in Washington, and consumer representatives including NAIC funded consumer rep Brenda Cude, a professor at the University of Georgia, met weekly. On October 17, the group met to put final technical touches on the draft before voting it up to “A” Committee. It was agreed to separate a Buyer’s Guide from the model so that it could be updated in the future without having to reopen the whole model.

Steve Ostlund, an Alabama regulator on the working group noted how fast the project had moved to advance it to “A” Committee and recommended that the model be exposed for 30 days. Mumford recommended that the exposure be limited to new items in order to prevent the same issues from being raised again. The “A” Committee agreed to the exposure and to charge the working group with the development of a Buyer’s Guide.

Following the meeting, ACLI representative Kelly Ireland said that any comments
submitted to the ACLI would be technical in nature. She noted that the ACLI supports illustrating annuities and actually advanced the idea. Kelly said that usually Buyer’s Guides are general information documents and not designed to be overly technical.

Lee Covington, representing the Insured Retirement Institute, Washington, noted how important it is to focus disclosure on features of the contract being purchased and not to have a document that includes broad disclosures on all features in an annuity contract. He maintained that with the advent of summary prospectuses from the SEC, that there was not really a need to duplicate the effort with a Buyer’s Guide.

During the weeks of conference calls, industry had raised this point and regulators had pointed out that the prospectuses had not yet been developed and that it did not seem to be a priority for the SEC. Regulators said that there was a need to have information in place at least until a summary prospectus was developed.

Tuesday, October 19, 2010

Disclosure Focus of NAIC, NCOIL RAA Solutions

State insurance regulators and legislators say they are going to focus on disclosure as a way to avoid possible misconceptions over retained asset accounts, according to discussions during the fall meeting of the National Association of Insurance Commissioners here.

Toward that end, state insurance commissioners will work on a bulletin that they say can be adopted uniformly by states. State insurance legislators are developing a model law titled ‘A Beneficiary’s Bill of Rights’ which they plan to adopt next month during the National Conference of Insurance Legislators, Troy, N.Y.

RAAs, which are accounts that offer one option to distribute death benefit proceeds to beneficiaries that are similar to checking accounts, have come under intense scrutiny in recent months over whether they are protected like bank accounts, whether they pay interest and whether consumers have ready access to the funds deposited in accounts.

A working group under the direction of Connecticut Insurance Commissioner Tom Sullivan, charged with looking at the issue, sent out a survey to insurers to learn more about how RAAs are handled. As of Oct. 15, 2010, 30 companies had responded to the call. Thirteen do not offer RAAs. Those which do provided information that was incorporated into the following preliminary findings:

--companies generally portray RAAs as checkbooks against which the death benefit proceeds can be drawn down rather than draft accounts which add another step to the equation because the institution listed on the draft withdraws funds provided by the insurer. The difference in the type of account can lead to confusion, according to the RAA working group findings.
--companies do not always tell the beneficiary where the funds are kept—either with the insurer or with the bank listed on the draft statement.
--while companies indicate interest will be earned, they do not generally provide the interest rate to be earned in the initial disclosure form.
--companies do not always clarify whether funds are insured by the Federal Deposit Insurance Corp. (FDIC).
--companies do not reference the fact that contracts are protected by guaranty fund coverage.

Other findings indicate that most companies use RAAs as a default option if the beneficiary does not say how they want to be paid. Some say that they only use RAAs if the death benefit exceeds $5,000. And, most companies accrue interest daily but only post monthly, thereby reducing the amounts payable to consumers on full liquidation.

New Jersey Insurance Commissioner Tom Considine introduced a motion to develop a bulletin on RAAs, a form of disclosure which Connecticut’s Sullivan has argued is a quicker, more effective way to put guidance in place quickly. The bulletin will require that information be provided about guaranty funds and FDIC coverage. It will address areas that the survey found could be improved. It will also require a filing of disclosure documents with the company’s insurance department.

During the discussion, legislators testified that a provision that was in the original NCOIL model was removed. The deleted provision would have required beneficiaries to opt in to an RAA and would have prevented an insurer to put a beneficiary’s money in an RAA by default if the beneficiary to not select an option.

Indeed, during a consumer liaison meeting which followed the RAA session, NAIC funded consumer Daniel Schwarcz said that he was disturbed by NCOIL’s decision to drop the provision. He expressed concern that both the NAIC and NCOIL were relying solely on disclosure. Empirical evidence shows that default options that are made available to consumers do make a difference. And, he added, personally, he would recommend that any beneficiary take the lump sum death benefit and put it into a bank account.

Insurers have argued throughout the debate that they pay competitive and sometimes more than competitive interest rates on monies in RAAs.

After the RAA session, state Rep. Brian Kennedy, D-R.I., said that the default provisions were removed from the model after receiving input from a wide range of stakeholders who had indicated that a focus on disclosure was preferable.

Monday, October 18, 2010

Are Separate Accounts Being Used to Skirt Nonforfeiture Requirements?

The question a number of regulators raised is whether product standards are being used to help life insurers skirt nonforfeiture requirements, which guarantee contract holders some value if their contracts lapse or are surrendered.

The discussion during the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., focused on the Interstate Insurance Product Regulation Commission, Washington, and some standards that are up for consideration by the entity which provides a single source of filing for life insurance products.

The issue, raised by Blaine Shepherd, a Minnesota regulator and life actuary, involves index linked features for individual deferred variable and non-variable annuities. The benefits are offered through a separate account and are not subject to the strictures of nonforfeiture requirements, according to Shepherd. These are fixed annuity products offered through a separate account, he explained. Fixed products are usually backed by an insurer’s general account. Consequently, there needs to be a discussion of the real purpose of the use of a separate account, Shepherd continued. “It seems that separate accounts are being used to accomplish ends that could not be accomplished if they were not funded through a separate account,” he continued.

Utah regulator Tomasz Serbinowski agreed that the “real question is what is the proper use of a separate account?”

The issue ties into another issue of whether separate accounts are insulated from the general account and an insurer’s creditors in the event of an insolvency, added Richard Marcks, a Connecticut regulator and life actuary.

Serbinowski asked why companies should have the option to file these products as either a variable or fixed annuity product depending on what suits them best. “There is an issue here. There is no objective standard.”

Sunday, October 17, 2010

New Group Annuity on Regulators' Radar

A new product that is described as looking like a typical group annuity but is actually a wrap product has recently surfaced in the market and regulators say that they need to watch it to make sure that there are no problems that may occur in the future.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., regulators of the Life & Health Actuarial Task Force were careful to say that the product needs to be discussed among regulators and might actually be useful to consumers.

However, they did discuss some of their potential concerns. The product issues was raised by Blaine Shepherd, a Minnesota regulator and actuary who said that the product is a form of wrap where certificate holders can exercise a form of living benefit if the assets in the product are depleted. The product, referred to as a contingent annuity, offers a living benefit guarantee to certificate holders if mutual funds which are part of the product lose their value. The insurer then steps in and pays benefits for the life of the contract holder. So, if there is no depletion of assets, then an insurer may never have to provide a benefit, according to the discussion.

Utah regulator Tomasz Serbinowski noted that the product seems to be marketed to pension plans. A number of pension plans are prohibited from investing in variable annuities and this product is pitched as an alternative, he explained. One interesting point about the product, he added, is that you don’t get a certificate when you start paying for the product, but only when the fund value goes to zero.

Larry Bruning, a Kansas regulator and LHATF chair, said that it sounds similar to a derivative product. Among the issues he said need to be examined is whether the product is properly reserved and risks are being properly managed. “I’m sure AIG [American International Group] thought it had gold in its hand when it wrote credit derivative swaps.”

Regulators plan to discuss the issue in a closed conference call.

LTC ‘Moderately Adverse’ Rate Recommendation Advanced By Regulators

Orlando, Fla.
A motion to advance rate guidance for long-term care business that is deemed ‘moderately adverse’ was advanced so that regulators at the National Association of Insurance Commissioners, Kansas City, Mo., could consider whether changes need to be made to existing LTC regulation.

The motion which passed unanimously after considerable discussion among states defines 'moderately adverse' as being 20 percent of the experience of both the present value of lifetime claims experience and the present value of future lifetime claimes experience.

The vote took place during the October 17 meeting of the Accident & Health working group at the NAIC fall meeting here. It will be considered later today by the Long-Term Care (EX) Task Force.

The discussion among regulators and actuaries underscored the delicate balance of establishing rates that are neither too low nor too high.

Minnesota regulator Julia Philips said that a number of companies she has worked with came up with their own definition of ‘moderately adverse’ experience in the 10 percent range so that the 20 percent rate in the motion would be much higher. She noted that if consumers pay a higher rate and there are fewer increases later that would be a good thing but that if claims experience improves, then they would be paying too much.

Alabama regulator Steve Ostlund, chair of the A&H working group, said that by setting the rate at 20 percent, companies are receiving profit if the moderately adverse claims experience does not materialize.

Florida regulator Dan Keating said that while he did not know if 20 percent was the right rate, he did know that 5-10 percent increases for most companies is too low. Everyone who bought these policies is paying more than 20 percent of what they paid initially were charged for them, he noted.

The motion and the discussion in general reflect the struggle regulators have had with defining ‘moderately adverse’ and putting a number to it, said John Rink, a Nebraska regulator. “Is 20 percent correct? I don’t know but it mirrors the struggle we have had in trying to determine what it is. My feeling is that it may continue to be a struggle.”

California regulator Perry Kupferman said that companies are breaking through the 10 percent rate very quickly.

Bill Weller, representing America’s Health Insurance Plans, Washington, said that while initially a company’s future morbidity claims experience compared with current morbidity may not be 20 percent, if a company waits four to five years until it reaches 20 percent, rate increases will actually be higher. But, he continued, if the increase is allowed sooner, rate increases are likely to be lower.

Bonnie Burns, an NAIC funded consumer representative, said that regulators need to consider “real world effects to consumers.” She offered an example in which a person aged 60 buying a $100 a day tax qualified long-term care insurance contract with a 30-day waiting period could pay a range of premium ranging from $1,123 to $5,548 a year. “That’s an astonishing range for similar benefits,” she said. If that same person was looking for a lifetime policy with the same benefits, the rates range from $962 to $9,725 a year, she added. A lifetime policy is less than the three-year policy of $1,123, she added. The NAIC needs to look at this issue and find out why rates are so diverse, Burns asserted.

California’s Kupferman suggested that Burns read policies for differences, check underwriting standards and check for any differences in contract administration. Burns said that even so, there is still a huge disparity and added that consumers buy long-term care insurance based on price and are not going to look at claims administration or what policy says. She asked what administering a claim means to a consumer.

“The NAIC needs pay attention to fact that there may be companies building in rate increases at the front end through this moderately adverse standard,” Burns cautioned.

LHATF Actuaries Want To Weigh In on IASB Proposal

Actuaries are discussing how to weigh in on international accounting standards that some insurers say will have a significant impact on the way business in the United States is done.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., actuaries were cautioned that changes proposed by the International Accounting Standards Board, London, could limit products available to consumers.

South Carolina regulator Leslie Jones asked why regulators need to be concerned about this proposed standard and what effect it will have effect it will have on the United States market.

By using a risk-free rate in discounting, valuation conditions will be created that could limit insurers’ desire to offer long-term products in the United States, according to Ed Stephenson of Barnert Global, representing the Group of North American Insurance Enterprises, New York. Stephenson warned that the same thing has happened in other jurisdictions.

Stephenson said that there is still a lot of work that needs to be done in this area before the IASB advances this concept. He noted that creating one model doesn’t adequately capture the nuances of both the life insurance and property-casualty industries. He also noted that reinsurance in general is not well understood in project. Rather, he continued, it creates potential arbitrage by which reinsurers would recognize upfront profits but ceding companies would not.

Another concern Stephenson cited was the potential to require unbundling of insurance contracts for accounting purposes, a proposed standard which he says is unclear. It is not certain how it will affect universal life products, he added. In fact, Stephenson continued, many of the ideas are new and untested and need far more study to determine the potential effects on insurance industry.

South Carolina’s Jones and Larry Bruning, a Kansas regulator and LHATF chair, said that it is important to weigh in on these issues and that regulators need to have a group of regulators to follow what is going on and to get up to speed so that they can comment on the proposal before the December deadline. Donna Claire, representing the American Academy of Actuaries, Washington, said that the Academy has been following these issues and could provide assistance to any group that is formed.

Other regulators including Tomasz Serbinowski of Utah and Richard Marcks of Connecticut said that it would be difficult to provide insight on the issue because the issue is complex and would require a significant commitment of time to understand. Other LHATF members said that is exactly why a small group of two to three LHATF regulators is needed to track the issue.

Thursday, October 14, 2010

Commissioners Ready Response to HHS on Medical Loss Ratios

State regulators are about to forward recommendations to the U.S. Department of Health and Human Services about how to treat medical loss ratios (MLRs).

MLRs are the minimum amount of premium per dollar that must be paid out in claims by health carriers. Under the new Patient Protection and Affordable Care Act (PPACA), the minimum MLR is 80 percent or 80 cents on the dollar. If carriers do not meet this minimum, they must rebate premium to those enrolled in their plans.

How medical loss ratios are constructed is important, a number of insurance commissioners say, because without at least a phase-in in 2011, 2012 and 2013, carriers may decide to withdraw from their states. A number of carriers are already raising the issue with their insurance departments, according to comments from NAIC leadership made a few weeks ago after a meeting with President Barack Obama and HHS Secretary Kathleen Sebelius.

State insurance commissioners put final touches on proposed recommendations that will be put to a final vote at the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., when it meets in Orlando this coming week.

The Health Insurance and Managed Care “B” Committee discussed and adopted work developed by the NAIC’s Life & Health Actuarial Task Force that would allow for rebates to be calculated into the medical loss ratio during the transition period.

The discussion then turned to the issue of credibility and how a 50 percent requirement could have a negative impact on small groups. Addressing credibility could offer smaller health groups relief and remove some of the urgency to consider national aggregation, Kansas Insurance Commissinoner Sandy Praeger and "B" Committee chair commented. One way to reduce the strain on small groups would be to start with an 80 percent credibility requirement and phase it back to 50 percent, she said. Another option would be to leave it at 80 percent.

A decision was made to hold the issue and discuss it at the NAIC executive committee/plenary session in Orlando when the committee is supposed to have data provided by Milliman, actuarial consultants, to make a more informed decision.

Oklahoma Insurance Commissioner Kim Holland, NAIC Secretary-Treasurer, said that it is imperative that some relief be provided to carriers so that they remain solvent and remain in the states. New York regulator Lou Felice remarked that while he understands that concern, it is important that regulators “keep their eye on the ball,” namely to retain access to health insurers for states’ residents. If carriers are given too much latitude on MLRs, there will be less aggressive pricing and less access to insurance, he explained. Felice added that there will be a big transformation in 2014 when new requirements become effective and wondered whether the outcome will just be delayed: states will lose carriers in 2014 rather than in 2011 if they are given latitude now.

Connecticut Insurance Commissioner Tom Sullivan asked Felice whether the large group market is broken. Felice responded that “pricing is more aggressive in New York large groups which are in the 80s already. They can meet [MLRs] on a state and national basis.”

Kansas’ Praeger said that she fully understood that rebates should be an occasional and not a regular occurrence. In response to a question from Illinois Insurance Director Michael McRaith, Praeger said that there could be a reconsideration of decisions recommended by the NAIC at a later point if needed. She emphasized that regulators need to do everything that they can to minimize market disruptions.

On the issue of credibility, the adjustment to account for random statistical fluctuations in claims experience for smaller plans, there was discussion on an 80 percent permanent rate or phase back to 50 percent. It was noted that the American Academy of Actuaries, Washington, illustrated a 90 percent permanent rate to minimize market disruption.

However, it is not endorsing it, according to Academy spokesperson Andrew Simonelli. In fact, the Academy's Medical Loss Ratio Regulation work group has recently focused on an 80 percent level. It has identified flaws in the 50 percent rate, he continued. And, he added, the work group has said that, “Increasing the magnitude of the credibility adjustments may help keep insurance markets attractive to smaller competitors, which would enhance consumer choice.”

Tim Yost, a consumer advocate, agreed that the goal is not to pay rebates and suggested that the 80 percent credibility requirement could be used for the smallest groups which are most likely to face challenges.

Barbara Yondorf, another consumer advocate and a former Colorado insurance regulator, said that health plans in her state were very concerned with aggregation and believed that health care should be addressed as a local issue.

Wednesday, October 13, 2010

Is It Soup Yet? Opinion Divided Over Annuity Disclosure Work

Proposed annuity disclosure requirements are about to be advanced by state insurance regulators after over two years of work. But insurers and actuaries are raising concerns over whether the work is ready.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., next week, a draft of the annuity disclosure model regulation will be moved from the working group to its parent “A” committee as required by the group’s charge.

But the project, which has been under discussion for over two years and has had numerous drafts exposed for public comment, is receiving kick back from the American Council of Life Insurers, the American Academy of Actuaries, and the Insured Retirement Institute, all based in Washington.

At the end of the most recent discussion today, Kelly Ireland, an ACLI representative, asked whether broad support to hold the draft for a short time period might be given consideration. Jim Mumford, chair of the working group and Iowa’s first deputy insurance commissioner, said that a draft needed to be advanced. He suggested that interested parties who want to hold the draft for more discussion should take it up with the NAIC’s “A” Committee. He said that if the “A” Committee does decide to hold up the model, it should look at take a few specific points of concern and examine them rather then re-exposing the whole model since it had been through a number of exposures already. However, Alabama regulator Steve Ostlund said that the draft should be re-exposed because the latest draft with a number of changes is expected to be released on October 14 less than a week before a vote.

The differences in approach in crafting the model were illustrated during a discussion on use of a current rate to illustrate fixed indexed annuities. For instance, Utah insurance regulator Tomasz Serbinowski maintained that seven to 10 years would be a good time period to illustrate favorable and unfavorable performance in an indexed product so that the product could be understood by consumers. The discussion continued about whether there was value in illustrating for up to 30 years and whether that extended illustration better identifies how the index works over time.

Lee Covington, representing the IRI, said that showing the guaranteed rate for a prolonged period of time puts the product in a better light. But Iowa’s Mumford pointed out that the 30-year time period was taken from life insurance illustrations and that consumers keep life insurance products longer than they keep annuity products. Covington responded that most financial planners are creating retirement plans that span to age 90-95 for clients and that more long-term planning is now more important with new fiduciary standards. He argued that a shorter illustration would put insurers at a competitive disadvantage with other sectors of the financial services market.

Barbara Lautzenheiser of Lautzenheiser Associates, Hartford, Conn., said that using both current and long-term guarantees as well as high and low scenarios in an illustration provides the consumer with a better understanding of where she is and where she needs to go.

Mumford asked if a reasonable cap of 8 percent for current interest rates in illustrations could be established. The ACLI’s Ireland responded that the ACLI had offered a solution which would feature a high and low scenario and a cap of 6 percent for fixed annuities. Mumford said that he would take a look at it.

Kim O’Brien, representing the National Association for Fixed Annuities, Milwaukee, said that financial planning organizations such as the Financial Planning Association, Denver, did not have specific standards for the number of years a financial plan should encompass. IRI’s Covington followed up by saying that a limit of 15 years could conceivably prevent a company from illustrating annuitization values, the cash streams created by turning a lump sum value in the annuity to regular income. He said, for example, that if the annuity was purchased at age 50, then the consumer could not see the annuitization value at age 70.

Tuesday, October 12, 2010

IASB, EU Weigh in on Issues Affecting Insurers

European regulatory and judicial bodies are weighing in on issues that will impact insurers’ accounting requirements as well as the use of gender to determine premium rates.

Next week, the International Accounting Standards Board, London, will hold a board meeting during which it will discuss post-employment benefits including an exposure draft on defined benefit plans, recognition of changes in the defined benefit liability or asset as well as the disaggregation of changes in the defined benefit liability or asset.

Immediately following the IASB board meeting, will be a joint meeting of IASB and the Financial Accounting Standards Board, Norwalk, Conn. The fair value of a reporting entity’s own equity instruments will be discussed.

The decisions of the IASB and FASB as these bodies attempt converge international accounting standards over the next two years will have a major impact on insurers’ competitiveness and how they conduct address issues such as volatility, insurers say.

That competitiveness could be further challenged if the European Union moves to outlaw gender as an insurance risk factor. The October 11 issue of Moody’s Weekly Credit Outlook says that the opinion issued on September 30 by the Advocate General of the European Court of Justice would be a ‘credit negative’ for insurers. The opinion, according to the Moody’s piece by Blake Foster states that “such discrimination should be illegal.” However, according to Moody’s, the opinion would address the issue prospectively and use a three-year phase-in period.

Moody’s points out that the opinion is not legally binding but is often used by the Court. It says that it would regard such use as a ‘credit negative’ because it would take away a valuable pricing tool.

Wednesday, October 6, 2010

Life Industry Showing Signs of Life, Guardian Panel Says

New York
After a dark year and a half, the life insurance industry is financially stronger with sales showing signs of an upswing, according to a panel brought together by Guardian Life Insurance Co. of America, New York, detailed.

The panel included remarks offered by Robert Broatch, executive vice president and chief financial officer of New York-based Guardian Life; Joel Levine, the life insurance team leader and senior vice president with Moody’s Investors Service, New York; and, Michael Ferik, senior vice president, individual life with Guardian.

Levine says that life insurers’ fundamentals improved enough to upgrade the industry to ‘stable’ in May of this year from a ‘negative’ outlook that had been put in place in September 2008. But the impact of the crisis has shifted the ratings distribution of 53 groups to ‘A’ from ‘AA’, he noted. Even so, life insurers are replenishing their balance sheets, he added.

Levine discussed how some stock companies depending on independent producers shifted to products such as variable annuities with living benefits and universal life contracts with secondary guaranties. These products increased companies’ risk, he said. While pricing has been changed, there is still legacy business creating risk and creating volatility.

Companies’ levels of capital are at a historic high, he continued, with the average risk-based capital in the Moody’s universe at 450 percent, an ‘AAA’ level. And, he added, capital formation continues to improve. However, there will be more volatility associated with capital, Levine continued.

Guardian’s Broatch said the company decided to maintain an ‘AA’ rating in order to have both a strong rating and increased financial flexibility. Later, during a question and answer period, Broatch said that the company’s investment team sees an opportunity to take advantage of good prices and add commercial real estate investments to its investment portfolio. He noted that the focus was on commercial and not on residential real estate and said that currently, there are virtually no subprime investment holdings in the company’s investment portfolio. He added that Guardian does its own research on potential opportunities.

The improvement detailed by Levine was supplemented by a Guardian study which indicated that those under 40 were more likely to take actions to prepare for the purchase of life insurance. For instance, the under 40 age group had a 10 percent better response rate than the 40+ group when asked whether they spent a lot of time considering the purchase of whole life (43% to 33%.) Guardian’s Ferik said. The responses of participants in the survey suggest that the younger group is more concerned about stability and guaranteeing protection, he added. Ninety-four percent of the under 40 participants said that they would do everything possible to be financially secure compared with 76 percent for the older group. Seventy-six percent of the younger group emphasized the importance of being debt free compared with 63 percent for the 40+ group.

Friday, October 1, 2010

Principal Financial Exits Medical Market

The Principal Financial Group, Des Moines, Iowa, announced that it was exiting the insured and self-insured medical insurance business. As part of that exit, Principal has entered into an agreement with UnitedHealthcare to renew coverage for Principal customers as it transitions out of the business over the next 36 months.

The company says the departure is a strategic decision because the medical business has been declining in size for a number of years in comparison with the company’s retirement and asset management businesses. Sales will cease and the renewal process will begin immediately, according to Principal. The company says that of 1,500 employees in the medical insurance business, the jobs of 150 will be impacted. Those employees will be considered for other positions, Principal adds.

Larry Zimpleman, the company’s chairman, president and CEO, says the decision will allow Principal to better focus capital and to use resources in the asset accumulation and asset management businesses, both domestically and internationally.

The Principal estimates this action will negatively impact third quarter 2010 EPS operating results by $0.03-$0.04 and full-year 2010 EPS operating results by $0.18-$0.20 due to the exclusion of the business from operating earnings. However, the company expects to release between $100 million and $120 million of capital (which primarily reflects the capital allocated to the medical insurance business less a reduction in the diversification benefit that will result from the exit of this business) over the next 36 months as a result of this change.

Principal says that the decision was a business and strategic one and not related to current health insurance reform. “Our decision did not hinge on reform,” says Susan Houser, a Principal spokesperson. “As we indicated [in the announcement on Sept. 30,] this was predominantly a business strategy decision given 97% of our operating earnings come from our growth businesses (asset management and asset accumulation/retirement etc), while medical insurance represents less than 3% of our business. In addition to strategic fit going forward, we considered numerous additional factors (including the regulatory environment), but our strategy and ability to invest in our growing businesses was the real driver.”

Currently, state insurance regulators are working on the development of medical loss ratios under the new federal Patient Protection and Affordable Care Act. Medical loss ratios are percentages of premium that must be paid out as claims under the new law. The National Association of Insurance Commissioners, Kansas City, Mo., is working on MLRs to make sure that they comply with the new PPACA requirements.

State insurance commissioners said last week in a discussion with President Barack Obama and the administration, that there was concern that some companies would exit the market because of the new MLR requirements. The commissioners recommended a transition period. States including Iowa and Maine made formal requests in letters to the administration. Florida held a hearing to consider such a request. Iowa Insurance Commissioner and NAIC President-elect Susan Voss, noted that several companies had indicated that the new MLR requirements might make it necessary for them to leave the market.

Most recently, on a call of the NAIC’s Accident and Health Working Group, there was a discussion concerning how a small group is defined. The working group said that the law specifically states that small group is a group of insureds ranging from 2-50and that a group of 1 would need to be in the individual market, according to a strict reading of the law.