Each month we summarize the latest research relevant to the insurance industry. Highlights from the January issue include:
And much more…..
On Tuesday, December 17, the House approved a package of bills that includes a seven-year reauthorization of the Terrorism Risk Insurance Act (TRIA) and funding for the National Flood Insurance Program until September 30, 2020.
Numerous insurance industry groups applauded the extension of TRIA. The act has been an important support in the effort to supply terrorism insurance through the private market. Since it was enacted, the percentage of companies purchasing terrorism insurance has risen to 80 percent, and the price of coverage has fallen more than 80 percent.
The $1.4 trillion spending package also includes:
The bill is expected to pass the Senate and be signed by President Trump before government funding expires on December 20.
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By Loretta Worters, Vice President – Media Relations
The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared. “Everyone was impacted, not just those working in banks. Because the price of debt, the ability to get financing changed, a lot of things happened. So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.
Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said. “Leadership needs to be thinking about the risks in their company. Not just the credit risks, but all risks related to their business.”
What leads to credit risk and how can companies protect themselves?
The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.
Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson. “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.
What is Credit Risk Insurance?
Credit risk insurance is a tool to support lending and portfolio management. It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.
What can impact credit risk?
The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.
For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.
“At the end of the day, political risks have the ability to impact credit risks. Credit risks rarely impact political risks,” she said. “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.
“We all talk about biases. Everyone thinks they’re better off and it’s always someone else that has the issue. It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people. That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”
“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson. “Know, too, there are a lot of tools available to help you mitigate against those risks.”
Private workers compensation insurers were slightly less profitable in 2019 than their 2018 record, according to a preliminary analysis by the National Council of Compensation Insurance (NCCI). NCCI estimates the combined ratio – a measure of insurer profitability – for 2019 will be about 87 percent, the second-lowest in recent history after last year’s record-low 83.2 percent.
These results, reflecting the segment’s sixth consecutive year of underwriting profitability, are part of NCCI’s State of the Line Report—a comprehensive account of workers’ compensation financial results.
Workers’ compensation net premiums written (NPW) fell 3.9 percent in 2019, to $41.6 billion from $43.3 billion in 2018, the report says. Before 2018, cession of premiums to offshore reinsurers stalled NPW growth. But the Base Erosion Anti-Abuse Tax (BEAT) component of the Tax Cuts and Jobs Act of 2017 – which limits multinational corporations’ ability to shift profits from the United States by making tax-deductible payments to affiliates in low-tax countries – spurred NPW growth to almost 9 percent in 2018.
While the BEAT’s residual effect and the strong economy may place upward pressure on 2019 net premiums written, recent decreases in rates and loss costs are likely to more than offset these factors.
Changes in rates/loss costs impact premium growth and reflect several factors that impact system costs, such as changes in the economy, cost containment initiatives, and reforms. NCCI expects premium in 2019 to fall 10 percent, on average, as a result of rate/loss cost filings made in jurisdictions for which NCCI provides ratemaking services.
The State of the Line Report was presented at NCCI’s Annual Issues Symposium (AIS) in May.
By Max Dorfman, Research Writer
The U.S. Federal Emergency Management Agency (FEMA) is being pressed to adopt innovative methods to increase insurance penetration for floods and other natural disasters. In a draft report, FEMA’s National Advisory Council suggests that in order to increase financial preparedness for householders and local governments, novel financial models must be considered. The report notably mentions parametric triggers as a way to grow the insurance markets and protect against future disasters. Blockchain is also recommended as a means to create a land and property registry stored off-site in a secure platform.
What are parametric triggers, and how can they help?
Parametric insurance is a type of insurance that agrees—before the triggering event—to make a certain payment, instead of compensating for the pure loss. Parametric insurance pays out immediately when a certain threshold, such as water depth or wind speed, is reached; thus, expediting funding and reducing overall administrative costs.
What does the future hold for this new model?
“When added to the ubiquitous nature of smartphones and other levels of connectivity, the opportunity for expanding parametric insurance protection to individual households may merely be a matter of connecting the dots, for which FEMA is uniquely placed to lead this effort,” the Council’s report states.
Indeed, the Council believes that FEMA should “look towards a new model of insurance” in an age when natural disasters increasingly threaten both public and private interests.
The draft report also includes many suggestions to improve disaster preparedness, such as better building codes and code compliance, better preparedness for Indian tribes and rural communities, building resilient infrastructure and increasing funding for mitigation.
To close the insurance gap the report recommends:
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A bill to reauthorize the Terrorism Risk Insurance Act (TRIA) of 2002 was passed on November 20 by the U.S. Senate Committee on Banking, Housing, and Urban Affairs. The unanimous decision was made only a day after the U.S. House of Representatives voted to renew the federally backed terrorism insurance coverage backstop program, which is set to expire in December 2020.
The bill includes a provision to study cyber terrorism and the availability and affordability of coverage, specifically for places of worship.
“The bill being considered today would not only avoid significant uncertainty in the marketplace, but it also preserves the taxpayer reforms included in the last reauthorization,” said Senate Banking Committee chairman Mike Crapo (R-Idaho) in a statement.
The 2015 reauthorization “required the private insurance industry to absorb and cover the losses for all but the largest acts of terror”, Sen. Crapo said. This included requiring total insurance industry insured losses for certified acts of terror to exceed $200 million before federal assistance would become available and increasing the industry’s aggregate retention amount to $37.5 billion.
The decision was met with resounding approval from insurance industry representatives and other stakeholders.
The next steps are for the Senate Banking Committee version to be approved by the full Senate, any differences between the two measures (which are said to be virtually identical) to be reconciled, and the final bill to be signed into law by President Trump.
Jimi Grande, senior vice president of government affairs at the National Association of Mutual Insurance Companies (NAMIC) said, “With passage of TRIA reauthorization legislation out of the House on Monday, today’s unanimous passage of an identical bill out of the Senate Banking Committee demonstrates that there is little daylight between the two chambers or between the two sides of the aisle. There is no reason Congress shouldn’t be able to get a bill to the president’s desk by the end of the year.”
To get an idea of what could happen without a government terrorism backstop we’ve been searching our database for news items that appeared in the aftermath of the terrorist attacks on September 11, 2001, before the federal program was in place. Below is an abstract citing a Wall Street Journal article about the impact on workers’ compensation. This line would be one of the most affected by a lack of a backstop because, unlike other insurance lines, workers’ compensation insurers have no choice but to include terrorism coverage in their policies.
By Max Dorfman, Research Writer, Insurance Information Institute
As the opioid epidemic continues to roil the country, it’s easy to forget the number of issues that contribute to its severity. Indeed, for workers injured on the job, compensation can include opioid treatments—which can lead to opioid dependence. With this subject in mind, I spoke to Dr. Vennela Thumula, an author and policy analyst with the Workers Compensation Research Institute (WCRI), who was able to provide insight into opioid dispensing for injured workers.
This interview was modified for clarity.
What are you seeing as far as general trends in prescribing opioids for workers injured on the job, particularly as the opioid epidemic has become a more visible issue?
Our study – Interstate Variations in Dispensing of Opioids, 5th Edition – examined recent trends in opioids dispensed under workers compensation for workers from 27 states who had more than seven days of work loss due to their injury but who did not have a major surgical procedure related to the work injury.
Opioid dispensing to injured workers has decreased substantially in recent years in all 27 state workers’ compensation systems studied. Between 2012 and 2016 injuries followed for an average two years postinjury, the percentage of injured workers with prescriptions receiving opioids decreased by 8 percentage points (in Illinois) to 25 percentage points (in California). Among injured workers receiving opioids, the average morphine milligram equivalent (MME) amount of opioids dispensed per worker in the first two years of a claim decreased in nearly all study states, with 30 percent or higher reductions seen in 20 of the 27 states studied.
Which states are you still seeing higher-than-average prescribing rates for workers injured on the job? Why do you think these states are still seeing such high rates?
After the declines, opioid dispensing continues to be prevalent in some states. At the end of the study period, the percentage of injured workers with prescriptions receiving opioids ranged from 32 percent in New Jersey to 70 percent in Arkansas and Louisiana across the 27 states, and the average MME per worker in Delaware, Louisiana, Pennsylvania, and New York continued to be the highest among the 27 study states.
For instance, in Delaware and Louisiana, the average MME per claim was more than three times the amount in the median (middle) state and over five times that in the state with the lowest amount, Missouri. We should note that although New York is among states with the higher-than-typical amount of opioids, there were substantial decreases in opioids dispensed to New York workers over the study period. We should also caution that these four states have implemented other opioid reforms towards the end or after the study period whose impact could be monitored with more recent data.
I see non-pharmacologic treatments are being used more often for workers injured on the job. What are the most common non-pharmacologic treatments utilized under workers’ compensation?
We see that providers have switched from multi-pronged pain treatments, which involve pain medications (including opioids) and other restorative therapies, to a treatment protocol that more frequently relies solely on non-pharmacologic services. The most frequent non-pharmacologic services billed and paid under workers compensation were physical medicine evaluation; active and passive physical medicine services such as electrical stimulation and hot and cold therapies; and passive manipulations such as manual therapy and massage.
How are these non-opioid pain treatments changing the landscape of workers’ compensation for patients and insurance companies? Are these treatments now prioritized over opioids?
Our first look at the data suggests a shift in treatment patterns away from opioids to non-pharmacologic services, which conforms to the recommendations of opioid prescribing and pain treatment guidelines and policies implemented in a number of states. Many questions remain answered, including the impact of these changing treatment patterns on claim outcomes. We will be talking more about alternatives to opioids for pain management at WCRI’s 36 Annual Issues & Research Conference, March 5 and 6, 2020, in Boston, MA.
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