• Chris Burand

Different Rules for Different Companies and Distributors?

Here is an interesting, maybe distressing, fact: Almost 100% of all health insurance carrier impairments between 2014-2016, inclusive, were the direct result of the ACA. Approximately 20 such carriers have become impaired according to A.M. Best.

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These insurance companies were created specifically as a result of the ACA so their lives were short. Insurance companies that have such short lives are almost, in my experience, always seriously incompetently managed without an adequate appreciation of capitalization, how growth affects capital, and why actuarial projections, especially for a start-up in a fast changing health insurance environment, will have high margins of error thereby necessitating a larger than normal capital cushion. These points are simply logical. Rocket scientists are not required to figure this out and yet all these companies failed. The question I have is whether they were required to meet the same capital standards as other companies? I am not confident they were. I can look up the data and the data suggests they were not but that is not the same thing as suggesting different rules were applied. It is worth considering though.

I do not share this information to beat up the ACA or to suggest insurance departments are not doing their job or that the rating companies did not do their job (most of the companies were not rated, maybe for a reason). These are not the relevant points. Instead, the question that is important is whether regulatory and rating organizations are creating multiple sets of special rules for a variety of new players. Another example is how a particular distributor of health insurance was discovered and made public to be operating without licenses and not even all the states fined them. Similarly, when one insurance department pressed them regarding rebating, certain politicians overrode the insurance department stating that rebating cannot apply to a technology company. Regardless of who is distributing insurance, whether it be a technology company or a guy with a typewriter and carbon paper, rebating is rebating. A second set of rules was created.

It seems a level playing field is best for consumers, for distributors trying to do what is right, and for existing insurance companies trying to provide the best combinations of price, service, claims and stability. I do not see how special differentiating rules can benefit consumers but I see how these new entities can be enriched under special rules.

Another example is requiring greater clarity relative to the quality of capital. I know the various capital adequacy ratios (CAR) consider quality of capital in their calculations. This fact is extremely valuable to consumers, agents, and quality carriers. But the reality is, most people have never heard of CAR ratios. Most people even in the industry have no idea. While I applaud the few companies that have A++ ratings and even those with A+ ratings, few consumers or agents care if a company has an A++ rating or, unfortunately, an A- rating. However, in my experience, if I explain that a company has surplus notes, agents and consumers understand quickly the quality of surplus is maybe less than par or even less than acceptable. I find most agents are incredulous that surplus notes are even allowed. I am not opining on whether surplus notes are good or bad but transparency makes a difference.

Another capital example is relative to a true reciprocal. I meet agents all the time selling policies backed by reciprocals who do not know what a reciprocal is. They somehow have missed the importance of the powers of attorney they ask clients to sign. When I explain the insureds are creating the surplus, and you can read this in A.M. Best's reports where A.M. Best is clear the surplus backed by policyholders is critical to their calculations, agents have been known to turn ashen. We lose when we use numbers and letters without explaining key elements.

A different example of different rules is the use of nonactuarial pricing. Companies may have surpassed regulators' abilities to monitor whether all pricing is actuarially based. For example, price elasticity definitely seems to be employed. The best example of this, a well-known example, is how companies charge so much more for renewals versus new business rates. There is absolutely no way both the new business and renewal pricing is truly actuarially based, especially when the renewal price is always higher. The only possible actuarial explanation for this is every account this company writes gets worse when that company writes it. If that is the case, the company probably should be shot out of mercy.

As detailed in the book, Everybody Lies, by Seth Stephens-Davidowitz (page 262), a specific firm, Optimal Decisions Group, built a model to learn how much customers are willing to pay for life insurance. The amount people are willing to pay does not have an actuarial basis. From a completely different angle, as reported in "Freaknomics," term life internet pricing transparency caused rates to decline a total of $1 billion per year. Transparency is not actuarially based.

One set of true actuarially based rules should apply or no actuarial requirements should exist. But if the rules exist and good companies try to follow them while others find ways around the rules and are not caught, the industry and consumers are not served well. Agents often know the difference too and those that try to steer clients toward the stronger companies can lose business as a result.

A new example of imposing different sets of rules involves differentiating between human and non-human distributors of insurance. Non-humans are artificial intelligence entities. I have read actual legislation that has been written and likely will pass, based on my sources, that will require human distributors to carry a license and be responsible for their actions. A non-human's responsibilities will not include carrying an insurance license. I understand that licenses are for humans but this does not require absolving other entities from carrying a license. It may be a different kind of license that imposes responsibilities but the abdication of any license is clearly assigning different rules for different players.

Insurance is a highly regulated business because it is so important to society on so many levels. It greatly reduces the cost of financing. It greatly enhances the recovery from catastrophic losses. It greases the wheels of our economy and society. Without regulation, insurance is one of the easiest industries in which to operate huge financial scams and Ponzi schemes. Without regulation, it is so easy to promise coverage years from now, collect the money, and disappear. With the exception of the ACA companies, few regulated insurers have left insureds hanging in the last decade but prior, even a few well-known rated insurance carriers did go insolvent when mismanaged, arguably for personal gain.

One level playing field and one set of rules for everyone makes the most sense for the industry and consumers. I heard a well-connected speaker recently advise that some insurance commissioners wanted to relax the rules for some new entities because they were really technology companies promising to deliver a far better consumer experience. I am all for a better consumer experience but math is awesome because X capital - Y losses always equals the same. Therefore, X capital is always the same regardless of whether it is an old fashioned insurance company or a new tech model. The industry is not sexy and we would do everyone a favor by accepting the reality that math applies to sexy tech companies too.

Consumers who are injured through bad robotic advice are just as injured as when they get bad human advice. The same kind of license should equally apply. The same rebating rules should apply. The same kind of capital requirements should apply or carry warnings. Different rules for different players is a slippery slope to huge industry wide problems. 

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.