Government Involvement Flashcards
Coverage Restrictions for High-Risk Drivers
In addition to higher premiums
- higher deducibles
- lower limits
- exclusion of certain coverages
Assigned Risk Plan (ARP) / Auto Insurance Plan (AIP)
Process
- Driver applies to and gets rejected by the voluntary market
- Driver applies to assigned risk plan (ARP)
- Driver is assigned to an insurer based on market share (by WP)
- Regulator set uniform rates
- Insurer fully services policy as if it was voluntarily written
- Insurer retains P/L
Ineligible for Assigned Risk Plan (ARP)
Reasons
- no valid driver’s license
- crime conviction within the past 36 months
- has a habit of breaking the law
Joint UW Association (JUA) / Reinsurance Facility (RF)
General process
- Driver applies for insurance in voluntary market
- Forwards to JUA serving center / RF
- Insurer shares P/L/expenses in proportion to their market share
- All insurer in state must share P/L/expenses even if they have not been assigned any risks
Joint UW Association (JUA) vs. Reinsurance Facility (RF)
- policy is serviced by the JUA servicing center vs being serviced by the insurer (RF)
- JUA sets the rates vs insurer sets the rates (RF)
Fair Access to Insurance Requirements (FAIR) Plans
Risks, rationale, operation, eligibility
Risks
- properties in areas susceptible to crime/riots
- insureds with high # of prior claims
Rationale
- property owners in urban areas couldn’t find coverage due to crime/riot risk
Operation
- policies serviced by a syndicate or private company
- P/L shared by all property insurers in state
Eligibility
- must have been denied by the private market
- not be vacant
- not be damaged/poorly maintained
- meet building codes
Reasons for Government Involvement in Insurance
FCC(ES):
- Filing needs that is not met by private insurance (ex. TRIA)
- When insurance is compulsory but not offered by the private market (ex. WC)
- Convenience (ex. NFIP) - when government may already have necessary structures in place
- Efficiency - agents commission removed –> lower ER –> lower premium
- Social purposes (ex. Medicare) - since private market is driven by profits, sometimes at the expense of social purposes
Levels of Government Involvement in Insurance
- Government as sole provider (social security, unemployment insurance)
- Government as provider in partnership with private insurance (NFIP)
- Government as a provider in competition with private insurance (WC competitive state fund)
Critera for Evaluating Government Insurance Programs
- Is the program welfare or insurance?
- Does it achieve social purposes?
- Is it efficient?
- Public acceptance?
- Is it necessary?
Crop Insurance (Partnership)
Process, coverage, pro/cons, mitigate cons
- government sets rates, acts as reinsurer, reimburses insurer expenses, subsidize premiums
- coverage: protect farmers against low yields and low prices
- pro:
- provide stability to important sector of economy
- con:
- encourages over-production and farming in risky areas
- private insurers make money while taxpayers subsidize the loss
- mitigate shortcomings:
- limit coverage
- shift loss-sharing more towards private insurers (less taxpayer burden)
Federal WC Programs
Programs, insureds, motivation
Federal Employees Compensation Act (FECA)
- For non-military government employees
- Costs are controlled because there is no litigation
Longshore & Harbor WC Act
- For non-seaman workers injured on or near naviagable waters
- Created because it wasn’t clear which state’s WC program would apply
Black Lung Benefit Act (BLBA)
- Wage replacement and medical benefits for totally disabled coal miners
- Created because of inadequate state compensation
State Government Involvement in WC Insurance
Mechanisms, benefits
- Partnership: state defines benefits but private insurers write policies
- More choice for consumer but still assured of minimum benefits
- Exclusive State Fund: state is sole provider, no private WC allowed
- No advertising or agent commissions –> pass savings to consumer
- Competitive State Fund: state competes with private insurers
- Competition help keeps costs down
Pros/Cons of State Funds
Advantages:
- No ads or commissions for state funds –> lower cost to consumers
- Provide coverage for high-risk customers
Disadvantages:
- Private markets are more innovative - competition drives prices down
- Private markets can operate more efficiently
State Mechanisms for Residual Markets
Motivation, mechanisms
Context: WC is mandatory but some states have no state fund or state fund is not an insurer of last resort
1. State assigns applicants to carriers based on WC market share
2. State uses a reinsurance pool (P&L shared among all insurers in proportion to market share)
3. State authorizes a joint U/W association (JUA) (P&L shared among all insurers in proportion to market share)
WC: State Funds vs Residual market
Similarities:
- Markets of last resort
- Lower expenses vs. private insurers (no commissions)w
Differences:
- Residual markets insures high risks rejected by voluntary market vs. state fund insurers all risks
- Residual markets requires proof of denial from voluntary market
National Flood Insurance Program (NFIP)
Administration, purpose, government involvement
- Administered by the federal emergency management agency (FEMA)
- Main provider of primary residential flood coverage
- Flood coverage is unaffordable if private insurer charges actuarially sound rates –> NFIP fills a unmet need in the marketplace
- Partnership with government –> private insurer services policies
NFIP Policy Goals
- Provide access to primary flood insurance (by transfering some financial risk to federal government)
- Mitigate and reduce flood risk through floodplain management standards
NFIP Objectives
RASH
- Risk-based premiums
- Affordability
- Sustainability (premiums covering claims+expenses)
- High participation rate
NFIP vs Traditional Private Insurance
Including non-insurance goals
Social goals - provides coverage to high-risk customers who cannot find affordable coverage in the private market
Non insurance goals:
- provide flood risk information via flood plain
- require that communities follow land use and building standards for participation in order to NFIP
- reduce the need for post flood aid
- protect lenders against mortgage defaults due to uninsured flood losses
Where is Flood Insurance Mandatory?
- for property owners in special flood hazard areas (SFHAs) with a federally backed mortgage
- when a mortgage lender requires participation (even outside SFHA)
NFIP Rates not Risk-Based / Actuarially Sound
- Pre-FIRM (Flood Insurance Risk Maps): properties built or improved before 12/31/1974 or before first flood insurance risk map (FIRM) for their community
- Newly mapped: properties mapped to a special flood hazard area (SFHA) on/after 4/1/2015
- Grandfathered: properties originally built in compliance with FIRM (even if they mapped to higher-priced class later)
Ways Private Insurer Involvement in Flood Insurance
- Service Policies (marketing, selling, writing, claims management)
- Assume a portion of risk as a reinsurer
- Assume full risk as primary insurer
Private Insurer Servicing Arrangements within NFIP
Direct servicing agent (DSA) (13%)
- Sells NFIP policies (on behalf of FEMA) to property owners that want to buy flood insurance directly from NFIP
Write-your-own (WYO) (87%)
- Private insurer write and service NFIP policies
- Private insurers compensated for their service
NFIP Risk Management Tools
Private Reinsurance
- purchased from a group of reinsurers with each bearing part of the risk
Capital Markets
- reinsurance backed by catastrophe bonds
- risk transferred to capital market investor who buy the bond
- investors pay a certain percentage of the loss from a large scale event
NFIP Pros/Cons of Using Private Reinsurance
Advantages:
- Federal emergency management agency (FEMA) will know some of the cost up front
- Reduces volatility of losses
Disadvantages:
- Expected long-term cost will increase becasue reinsurers must be compensated for taking on the risk (profit margin)
- NFIP may have insufficient funds to pay out claims because of paying reinsurance premiums
- NFIP may have insufficient funds to fulfill other goals and objectives after paying reinsurance premiums
Why Private Insurer Considers Flood Uninsurable?
- Catastrophic nature of flooding
- Pricing difficulties – data volatile year to year
- Adverse selection – only high-risk customers buy flood coverage
- Affordability – unaffordable for high-risk customers who need it the most
Issues / Barriers to Flood Insurance with Solutions
Private insurer cannot compete with NFIP subsidized rates
- reform NFIP rate structure so prices match what a private insurer would charge
Private insurer don’t have credible flood data, FEMA cannot release NFIP data
- remove personal information from NFIP data and then make data public
Coverage must be “at least as broad” as NFIP- hard to determine
- replace “at least as broad” with “comply with state regulations” - easier to determine
Low participation rates - insurers need higher participation rates to diversify their portfolio
- require all SFHA properties to buy flood insurance, not just those with a federally-backed mortgage
Effect of Private Insurer in Flood Insurance
Good for insured:
- insureds have more choices for coverages and higher limits
- low-risk insured may be charged with lower rates vs NFIP
Bad for NFIP
- NFIP will experience adverse selection. Low risk insured will go to private insurers, leaving higher risk insureds to NFIP
- if more insureds choose private insurers, NFIP will have less money to pay for flood mapping or floodplain management
Terrorist Risk Insurance Act (TRIA)
Motivations
- Fill unmet need - private insurers/reinsurers withdrew coverage after 9/11
- Convenience - government can set up program quickly and work with the Treasury regarding compensation
- Social purpose - lessen economic disruption from lack of terrorism insurance availability (ex. new construction projects couldn’t get require insurance)
TRIA Goals
And how they are met
Stabilize private markets
- Government provides reinsurance over a certain threshold
Protect consumers by ensuring availability and affordability
- TRIA requires insurers that offer commercial insurance covered by TRIA to provide terrorism coverage
Preserve state regulation of insurance
- States can still regulate rates
TRIA Loss Sharing Criteria
Certification
- Terrorism must be certified (by the SOT, DOHS, AG)
- Losses 5M or more in the U.S.
Federal Government Threshold
- Aggregate insurance industry losses 200M or more for federal assistance to start
Coverage - only commercial P&C
Deductible - 20% of direct commercial EP
Coinsurance - insurer pays 20% above deductible / government pays 80%
Federal Government Limit - 100B
- Insurer not required to provide coverage above this point
Surcharge
- If aggregate losses 37.5B or less, SOT must add surcharges (% of TRIA premiums) to recoup 140% of federal coverage
Elements of Insurable Risk / Insurability of TRIA
C-MAC
Credible - need a large # of insureds and events to make losses predictible
- not credible - low # of events, coverage not mandatory
- solution: use a terrorism model (similar to other low-freq high-sev events)
Measurable - losses must be definite & measurable
- yes - terrorism event can be measured in dollars
Accidental - losses must be foruitous (happen by chance) and accidental
- not accidental - terrorist attacks are planned
Catastrophic - losses must not be catastrophic
- depends on how concentrated the insurer is
