Milklnavi

Archive for September, 2011

To understand the issues, let’s start with a quick tour of ZIP codes. They are used by the US Postal Service to sort the mail faster. Once sorted, bundles of mail are delivered by staff who know the ground. This plan was not devised to help set insurance rates. Indeed, when you look at the boundaries on a map, you see how arbitrary they are, often lumping completely different groups of people together regardless of social class or property value. Basing the calculation of premium rates can therefore look unfair in urban areas where, on one street all vehicles can be parked off the road in locked garages overnight whereas, round the corner, the quality of the neighborhood just changed for the worse and crime affecting vehicles parked on the roads is rampant. Imagine how people who have lived on that second street feel. They have been paying their premiums for years and now must suddenly pay more because they have no choice but to stay – sadly, with the collapse of the housing market, it’s no longer easy to sell and move to a “better” area. In other words, basing the premium rate on the address rather than the safety record of the driver looks unfair.

Let’s now move over to Milwaukee where State Senator Tim Carpenter has introduced State Bill 289 to prohibit insurers from relying on ZIP codes to set premium rates. This is yet another attempt to repeat the success in California where, in 2008, John Garamendi, the Commissioner for Insurance, finally pushed through the regulations to reduce the insurers’ reliance on ZIP codes. Note the regulations do not outlaw the practice. The Californian insurers can still use the ZIP codes as one of the factors when setting the rates. But the codes can no longer be one of the “main” factors. Why not outlaw it altogether?

The answer depends on the difference between the insurance policies. Liability cover pays out to any third parties we may injure through our bad driving. This can be and, for the most part, is based on our individual safety record as drivers. Where we live is never going to be terribly relevant to where we drive once the vehicle is in motion. The problem comes with collision and comprehensive cover. Both types pay out to you if your vehicle is damaged in a collision, by a vandal or by a tornado. Where you park your vehicle must therefore be an important factor in deciding the risk you might get hit. Similarly, the local crime rate when it comes to vandalism is as relevant as whether you live in an area frequently hit by tornadoes, floods, landslides, etc.

So, comparing these different policies, you might find cheap car insurance if all you want is the minimum liability cover. Where you live is always going to be less important. But when you move on to collision or comprehensive cover, where you live become far more important. For this reason, Tim Carpenter’s bill is going to struggle in Wisconsin. Although the insurers there are exaggerating when they say this bill will mark the end of cheap car insurance, only a compromise between the state and the insurers will produce a fair outcome.

Whether you are negotiating a fronting fee with an insurance company for the first time, as you have a “start up” captive insurance company, or you are looking to renegotiate a “renewal” captive company fronting fee, you are going to be in for the insurance education of a lifetime.

The cost of “fronting” goes up on the very basis that there is a shortage of insurance companies willing to “front.” The insurance market losses companies like Quanta Capital, Alea, etc. and thus reduces the options available. Where are the new fronting insurance companies going to come from? Hurricanes Katrina, Rita, and Wilma have brought havoc to the property captives, where we see fronting fees rising to 15%. The new Bermuda companies will acquire U.S. insurance company platforms and will be the “fronting” insurers of the future.

Owners of captive insurance companies must realize that “fronting” insurance companies need to be approached on various levels of management, with preferably senior management getting into the decision making process early on in the negotiations.

Underwriting Departments are playing a greater role in captive fronting, with the financial departments looking closely at the credit risk of the parent transaction. For instance, several years ago, construction companies would capitalize captive insurance companies just to insure the self-insurance deductible under their Owner Contractor Insurance programs. Now “fronting” insurance companies are examining the financial statements of these same construction companies to make sure they can sustain the ownership of the captive insurance companies. Interestingly enough, captive owners need to continue to monitor the financial statement of their fronting insurer, and to be on top of any potential rating downgrades by the rating organizations. Insurance company management historically has had a tendency of “failure to disclose” negative results.

Fronting insurance companies are playing a greater role in the selection of the domicile for the captive insurance company. Domestic versus offshore domicile continues to be debated. Even on shore domiciles like New York State, with its 35 captive insurance companies, are trying to expand the captive concept by reducing the threshold, $100 million parent net worth to $25 million parent net worth captives. More advertising needs to be injected into the New York captive initiative.

Most of the experienced, fronting insurance companies, have shown the ability and expertise to “front” captives from Vermont domiciles to Hawaiian domiciles, and from Barbados to Bermuda. The focus has been to continually drive down overhead expenses and those domiciles doing this are attracting all the new captive formations.

Interestingly enough, domestic captive domiciles did not lead in 2005 formations, with Bermuda and the Cayman Islands accounting for 134 captive formations. Vermont with 37 captive formations led the United States.

Fronting insurance company pricing for the risks going into captives are getting a closer look by the actuarial profession. Captive owners have come to recognize they need their own actuarial support when disagreeing with the fronting insurance company’s assessments of what is the correct price for the risk. Whether you are a residential contractor in California or a nursery home in Florida, your captive requires adequate pricing executed by the fronting insurer. We are going to see more litigation in the future between captive owners and their front insurance companies, as the disagreements over pricing continue to persist on each renewal.

Captive owners want their front insurance companies to come up with independent prices for each risk, and that concept continues to be a problem with the front company. When it is admitted, and has to use their filed rates. Insurance company market conduct reports are going to expose front carriers that they are violating their rate filings when writing primary insurance products which are reinsured back to the captive insurance company.

The more mature captive insurance company, with over five years of financial history, needs to have a committee of its Board of Directors look closely into the entire costing structure of the fronting fee. This would be a great excuse for members of the captive board to understand this important transactional cost.

What are the detailed components of the fronting fee? How are they monitored by the captive owner? When was the last time a new fronting company was asked to quote on the captive? Once the captive board gets this training, the Boards will not be “rubber stamps” and exercise more judgment at insurance decision making.

More and more mature captives are looking to write their Directors and Officers Liability Insurance into their captive. The front insurance company writes the traditional D and O form, and that risk in then ceded back to the captive, acting as reinsurer. The exclusions in the traditional D and O policy are then covered by a direct procurement policy from the captive, eliminating the need for the front. The pricing for the direct procurement policy should be controlled by the owner of the captive. In some aspects, a captive writing direct insurance policies in the United States should apply for an A.M. Best’s rating. If we remember captives are a long time investment and by getting an “A” rating from Best’s, the captive becomes a substantial asset.

Reciprocity among captive owners can be another way of eliminating the “fronting” fee. Each owner uses the “A” rated captive for each other’s risks, and purchases a sophisticated reinsurance program behind both captive insurance companies. When fronting fees approach double digits, it is necessary for captive owners to seek alternatives to “fronts.” Creative solutions need to be implemented, and captive company budgets need to have the financial resources to explore alternatives.

Finding “fronts” for Contractors Pollution Liability Insurance is another area that is getting significant attention. General contractors, residential or commercial, trade contractors, carpentry and plumbing, specialty contractors, foundation and pipeline, and remediation contractors, are all candidates for captives, and in the early years require “fronts.” Captives can substantially reduce the insurance costs of traditional pollution coverage for contractors, especially when layering of policy limits is introduced above the captive retention. Customary pricing above the captive retention follows the simplistic approach that the lower liability layers are priced higher than the upper layers, again giving the captive owner a “pricing” discount.

The identification of the “fronting” carriers has not changed dramatically in the last few years:

1. AIG

2. ACE

3. Old Republic

4. Zurich

5. Liberty Mutual

6. Discover Re

7. Chubb

8. Hartford

9. Arch

The negotiating process with each of these carriers has always been a challenge for captive owners. Insurance company “fronts” are a dynamic group, and with people constantly changing positions, requires that you pay significant attention to your fronting carrier to continually provide favorable relationships and eliminate misunderstandings. When was the last time you asked your fronting carrier, how is my program going rather than react to their letter saying they are going to cancel your “fronting” relationship because they are returning from that particular insurance product line.

There have been a number of studies on what the “fronting fee” includes, or should include. The amount of these fees keep changing but the overall concept remains the same. Focus and concentrated efforts are required to keep this “fee” economically effective.

Among the recent “fronting fees” the following is included:

1. State Premium Taxes (not negotiable);

2. Federal Excise Taxes (not negotiable);

3. Government schemes (not negotiable, but try and get how they are arrived at);

4. TRIA charges (usually not negotiable);

5. Aggregate protection (negotiable, look at the concept of purchasing this yourself from outside the structure); and

6. Profit margin for carrier/fronter (negotiable).

If loss ratios are attractively low for your captive insurance company, make every effort to obtain a lower “fronting fee.” Insurance carriers are always seeking low loss ratio business even as a “front.” If you can, try to influence the decision maker. Many “fronting fees” get renewed as is when they are comparatively high in mature, and it is in the carrier’s interest to renew as is because there is little additional costs in doing renewals. It is the “lifeblood” of the insurance company.

On the basis of regulatory and rating agency fear, “fronting” carriers have made a conscious effort to require and substantially increase the collateral requirements they are asking for from captive owners. This is an area of negotiation and as many Agent Owned Captive Insurance Company Owners have found out, too late, over collateralized programs lead to the inability of the agent to fund the letter of credit and therefore the “front” cancels the program.

Captive Owners need to know that over-funded collateral is another way a “front” company can access additional capital for growth. You need to understand the true components of the collateral required:

1. Loss Reserves (Schedule F – loss reserves plus unearned premium reserves and Incurred But Not Reported losses) … IBNR deserves the most attention since these are estimates, and does the Captive Owner want to pay for an independent actuarial study for the loss payout pattern, and full development.

2. Many “front” companies want funding that would include funding the letter of credit equal to high loss ratios, this is despite the fact they had set the pricing on the “fronted” policy. Owners need to have the expertise to challenge the methodology of the pricing.

In conclusion, “fronting” insurance companies provide “licensed paper,” which is asset value; they provide regulatory compliance and finally support services. Remember if fronting fees are greater than 5%, and mostly in the 6-10% range. When going over 10%, it is imperative that you look for another option.

Commercial vehicle insurance is needed insurance protection for owners and users of commercial vehicles. Commercial vehicles are vans, business, cars, or equipment vehicles used in conjunction with a commercial or business purpose. Just as consumer motorists need insurance protection to cover their autos, business owners need protection to cover the repair and liability costs that are a part of operating and using a commercial vehicle.

Business owners need to consider both their coverage requirements and budgets when looking for the right commercial vehicle or van insurance for their vehicles. An insurer that specializes in commercial vehicle insurance is able to successfully communicate the various coverage options and costs to buyers. A business owner needs to consider their insurance requirements prior to the purchase of a commercial vehicle, if possible. Certain types of vehicles may require specific coverage. A customer should explore the benefits and costs of coverage and take them into consideration before purchasing a vehicle for commercial use.

Van and haulage are two of the more common types of commercial vehicle insurance. Many companies use vans as part of the every day performance of their business. Other companies haul equipment or other items to perform business operations. There are a variety of general and specialty commercial insurance plans available, however, to protect users of a variety of vehicle types.

While some features of commercial vehicle coverage are necessary and are unavoidable with regard to premium costs, there are some tips that are helpful in reducing costs of commercial vehicle coverage. The best way to reduce premium costs on an ongoing basis is to avoid claims. As is the case with all insurance protection, insurers base much of premium costs on the amount of risk for claim by the insured. Many commercial insurers offer discounts anywhere from 20-60% for no claims over time.

Another important factor that affects premium costs is the number of drivers covered by the policy. Some businesses have many drivers of their vehicles, but if a business can restrict the number of drivers of a specific vehicle, an insurer often offers big discounts if it only has to cover a few drivers.

For companies that carry goods, tools, or other items in their commercial vehicles (like the back of a van), commercial vehicle insurance does not cover these items. Some type of ‘goods in transit’ insurance protection is required if a customer wants to protect expensive tools or other business items. This cover would protect against stolen items, or items damaged in transit.

Commercial vehicle insurance costs add to the expense of doing business. However, the benefits of protection provide long-term viability that overcomes the up front premiums that owners pay. It is important the business owners consult with knowledge providers who specialize in commercial vehicle insurance protection. Experts in this type of protection can help find the right coverage benefits to protect the business from risk. They can also help customers find the most affordable solutions.

In the long-distant past, the law of the land was directly administered by the rulers. They sat as judges on all major disputes and dispensed justice as they saw fit. It was not until civilization spread a little that we saw anything like today’s courts and lawyers emerged. This was a law-and-order strategy. Before courts, people used to resort to a little self-help to get what they thought they were owed. Blood feuds and riots were therefore quite common. Giving people “independent” judges to decide matters defused the violence and kept the peace. All we had to wait for was the inevitable corruption to die away. In theory, today’s judges are to recuse themselves if they know any of the parties or have a financial interest in the outcome. Yet there’s still great unhappiness with our legal system, many people blaming our law of tort for many of our economic ills. Attorneys are routinely attacked for distorting the legal system in order the maximize their profit rather than to protect the interests of their clients.

The real problem comes from the simple rule in tort that, if you cause loss or harm to another, you should pay money to that other to make good the loss. This sounds a great idea. It’s financial responsibility in action. In a shop, if you break it, it’s yours. The only problems are the delays in getting a case decided and the cost. There are too few judges to deal with all the cases efficiently. Months can therefore pass before it’s your turn again to move forward a little. Then attorneys seem to think they can charge you for breathing the same air as you. So, to cut out all the delay and reduce costs, some twenty-four brave states decided to abandon the tort system in favor of no-fault. In effect, everyone in those states is self-insured. If you’re injured in an accident or you need to repair your vehicle, your own insurance company pays out no matter who’s to blame. The only question when you submit a claim is whether the amount you ask for is a reasonable estimate of the loss. This can usually be agreed quite quickly and life goes on.

In other countries, the no-fault system has produced major savings. With the need to pay attorneys almost completely removed and staff levels in the insurance companies reduced to a minimum, everyone enjoys excellent value for money. Unfortunately, our wise law-makers decided to add in a few zingers which have conspired to keep the premium rates among the highest in the land. As a result, we’re down to only twelve no-fault states today plus Puerto Rico. It’s a case of a good idea largely sabotaged in the implementation.

However, when it comes to pricing the car insurance rates, the measures and classifications are basically the same. No matter what the legal system for resolving claims, the insurers are still estimating the number of accidents and the total amount of losses. Once they have those numbers, the total is divided among their policy holders, they add their administration costs and profit margin, and there you have the final rate. Car insurance may sound like rocket science but it a Model T rocket.

Personal Injury Protection (PIP) covers against medical expenses and some of the losses that inevitably follow a traffic accident where drivers and their passengers are injured or killed. So, for example, you can claim loss of earnings and the equivalent of damages for pain and suffering. Where the driver dies, funeral expenses are also recoverable. Such policies are standard in the no-fault states. It’s expected claims will be settled without having to prove negligence, so you claim all your losses from your own insurer. Even in the at-fault states, holding a version of PIP, e.g. Auto Medical Payment cover, gives peace of mind, leaving it to the insurance company to sue in your name if the driver at-fault refuses to reimburse your insurer. Note that PIP cover is mandatory in 14 states, but the terms differ in their detail between those states. You should check through the small print before making a final decision on which policy to buy.

Such policies are supposed to make everyone’s life easier if they are injured, so it’s sad to see one insurer consistently refuse or reduce its customers’ legitimate claims. USAA is now facing its third class action law suit alleging a formal strategy to collect in the premiums and then refuse claims. In one sense, this is extraordinary given ASAA’s focus on the families of both serving and honorably retired members of our armed forces. A company that prides itself on looking after the interests of those defending our shores should offer top-class service. Instead, this latest law suit alleges the company is more interested in its bottom line, in effect cheating service personnel and their families.

The Plaintiff alleges USAA conspired with a second company, Auto Injury Solutions (AIS), to carry out a fraudulent cost containment program. Although the pleadings are quite general, it seems AIS produced dishonest reviews of medical claims which USAA then relied on in denying legitimate claims. What makes this particularly egregious is that this is the third law suit alleging a formal strategy not to pay out on medical claims. The first two suits were settled by USAA paying large sums in compensation. Under such circumstances, there’s a good case to be made for stripping USAA of its license to sell insurance.

Anyway, putting this particular case to one side, there’s an important underlying message here. The premium rates for PIP coverage are usually quite low. In Texas, for example, it costs about $5 per month. When you consider the very high costs that may follow injuries in an accident, this is really cheap car insurance. Remember this is additional to cover you may already have through a health plan at work, private health insurance or a Worker’s Compensation Plan. The possibility of overlapping cover can create problems for you to resolve. You cannot make double claims for costs and losses arising from the same accident. That would be you “making a profit” from your injuries. So before you confirm the claims, you should discuss the situation with the hospital or clinic intending to bill for treatment costs. Similarly, you should notify the insurers to ensure they contribute to the decisions on overlaps in cover. It would be a tragedy if this cheap car insurance caused you problems when a claim arose.