Government in Insurance Flashcards
Why is government participation in insurance necessary?
- Private market unwilling to offer certain coverage which are in the publics interest (e.g crop or flood)
- Private market may not be willing to offer coverage to individual insureds (or classes of insureds) it believes are too risky (e.g. properties in coastal areas exposed to wind storms or employers of high risk occupations)
- Convenience as the government can appropriate funding whereas the private market needs to obtain funds
- Greater efficiency as government can leverage other departments which offer necessary services
- Social purposes including state workers’ compensation department produce rehabilitation resources and vocational training to reduce work place injuries
Levels of Participation of Government in Insurance
- Exclusive Insurer: the government may operate as the sole insurer meaning that all insureds must purchase insurance through them (e.g. monopolistic state workers’ compensation funds).
- Partner with the Insurer: the government may establish a program to offer insurance to non-standard insureds (e.g. automobile insurance plan or FAIR).
- Competitor to the Insurer: the government may establish a program which acts as a direct competitor to insurers offering insurance to all classes. This may work since the government acts as a not-for-profit whereas insurers are for-profit.
What is the involuntary (or non-standard or residual) market?
For statutory coverages (such as personal auto or workers’ compensation), classes of insured may be too risky for an insurer’s risk appetite. The involuntary market provides coverage for these classes.
What are characteristics of non-standard personal auto insurance?
- Typically, only minimum statutory limits are offered
- Higher deductibles
- Higher premiums
- Exclusions for certain coverages (e.g. medical payments)
(Note: these actions are all intended to limit underwriting losses)
What are residual market programs used in personal auto insurance?
- Joint Underwriting Associations (JUA)
- Automobile Insurance Plans (AIP) or Assigned Risk Plans (ARP)
- Reinsurance Facilities
How are gains (losses) allocated for Joint Underwriting Associations?
Gains (losses) are pooled for all insurers and shared amongst the insurers in proportion to their premiums. The policies are serviced by the servicing carrier.
For example, if there were two insurers, ABC and XYZ, who write 80% and 20% of premiums respectively. If the JUA incurred $1 million in losses and received $0.9 million in premiums, then ABC would be responsible for $80k of losses and XYZ would be responsible for $20k of losses.
How are gains (losses) allocated for Automobile Insurance Plans (Assigned Risk Plans)?
Individual non-standard insureds are assigned to insurers based on the distribution of premiums. The insurer is then directly responsible for the gains (losses) associated with those policies. The policies are services by the insurer.
For example, if there were two insurers, ABC and XYZ, who write 80% and 20% of premium respectively. ABC was assigned 80% of the non-standard insureds and XYZ was assigned 20% of the non-standard insured. ABC incurred a gain of $100k for this class of insureds and XYZ incurred a $200k loss for this class. ABC is directly responsible for the $100k gain and XYZ is directly responsible for the $200k loss.
How are gains (losses) allocated for Reinsurance Facilities?
Typically, insurers must offer a policy to all applicants. If they believe the risk for the insured is too significant, they have the option to cede the policy to the Reinsurance Facility. Then the gains (losses) of the Reinsurance Facility are allocated to the insurers based on the distribution of premiums. The policies are serviced by the insurer.
For example, if there were two insurers, ABC and XYX, who write 80% and 20% of premium respectively. ABC and XYZ both wrote and ceded 5 non-standard policies each to the Reinsurance Facility. These policies incurred a loss of $100k which was shared amongst ABC and XYZ. ABC was responsible for $80k of the loss and XYZ was responsible for $20k of the loss.
What are FAIR plans and how do they function?
FAIR = Fair Access to Insurance Requirements
For properties which are in areas which are believed to be too risky (e.g. urban areas with high exposure to riots or coastal areas with exposure to wind storms), the private market may refuse to write these policies. If insureds are unable to find coverage, they may apply for coverage to the FAIR plans (if the property is not vacant, not damaged, and built in accordance with building codes). These policies are serviced by a syndicate or private company and the gains (losses) are shared by all property insurers based on their share of premiums.
What is the NFIP and why was it created?
NFIP = National Flood Insurance Program
The NFIP is federal program which offers flood insurance for property owners, renters, and businesses. The program was created to fill a gap in the market as private insurers were unwilling to offer flood coverage due to the significant catastrophic risk it exposed them to. The NFIP is funded through several mechanisms: premiums, fees, federal appropriations, and [in extreme circumstances] borrowing from the Treasury.
Criticisms of the program include:
1. Since rates are subsidized, it overcharges lower risk insureds.
- It provides incentive for individuals to purchase property in flood prone areas.
Challenges for private insurers who wish to offer flood insurance
- Private insurers do not have the data available to model the risk
- Private insurers may not be able to compete with the NFIP as they receive subsidy from the federal government
Challenges for NFIP if private flood insurance became available and options on how they may be addressed
- Decreased revenue from low risk insureds who purchase private insurance which does not include rate subsidy would cause the NFIP to have to raise rates for high risk insured or obtain more federal appropriations. One solution may be that the NFIP continues to subsidize only high-risk insureds with federal appropriations.
- Availability of private flood insurance may cause municipalities to drop flood codes and increase the risk. One solution may be that FEMA requires that municipalities adopt flood codes to be eligible for FEMA aid.
Questions to ask when evaluation government participation in insurance
- Is government participation necessary (for availability or affordability) or does it achieve a social purpose which cannot be accomplished by the private market?
- Is it an insurance program or a social welfare program?
- Is the government insurance program efficient?
- Is government participation accepted by the public?
What is crop insurance? What resulted in increased usage in the 1990s? What are some criticisms of crop insurance?
Crop insurance covers farmer’s crops if they are destroyed due to certain events [including winds, floods, droughts, fires] and in some cases even provides coverage if yields are less than a certain threshold.
In the 1990’s, government expanded the locations and crops covered by crop insurance and also authorized the use of government subsidy.
Crop insurance has received criticism that it promotes farming in areas which are not ideal for farming, causing harm on the environment.
What is the FHCF and why was it created?
FHCF = Florida Hurricane Catastrophe Fund
The FHCF is reinsurance coverage which property insurers in the state of Florida must participate in. It was established after Hurricane Andrew when the future of the property insurance market in Florida was threatened. It ensured affordable reinsurance protection would be available to Florida property insurance companies. The FHCH is funded through premiums, post assessments, and in some occasions through borrowing (by selling bonds).
