Davy Jones’ Locker

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Meet Mr. Dave Jones, California’s elected insurance commissioner.  “Elected” is important in that opening sentence because that inherently makes the regulation of insurance in California a political activity.  As is typical in current California electoral politics, Mr. Jones is from the left side of the political spectrum, and seems particularly sympathetic to the green lobby.  Witness his concern over insurance company investment portfolios that dare to include any companies that derive 30% or more of their revenues from fossil fuels.

Mr. Jones has made waves in recent months by asking that insurers doing business in California provide an annual accounting of their fossil fuel investments. Although he has graciously stated that divestiture in such assets is voluntary, he warned that insurers who do not divest themselves of fossil fuel firms will be publicly identified and subject to examinations due to the concern that such assets might damage the insurer’s financial health.  Giving Mr. Jones the benefit of the doubt, it’s possible that he is simply reading the not-so-subtle tea leaves of political statements such as Hillary Clinton’s admonition that “we’re going to put a lot of coal miners and coal companies out of business.”  If that political ambition has a genuine chance of being realized, then yes, there is a concern that such investments on an insurer’s balance sheet could impede their long-term claim-paying ability.  But this smacks of a chicken-and-egg conundrum… is Mr. Jones acting as a prudent regulator of insurance companies, or is he currying political favor with his fellow leftists to propel his own political ambitions and to eventually lead to the realization of a crumbling fossil fuel industry?

The cynic in me leans toward the latter.  There is another effect of this action that concerns me.  California does tend to be out in front of (and often alone) the rest of the country on many left-leaning political initiatives.  Many of the insurers doing business in California also do business in other states.  If the California Insurance Commissioner takes it upon himself to manage the individual investments in an insurer’s portfolio to advance a political agenda that is not directly related to the business of insurance, is that not usurping authority from the other 49 insurance commissioners?  What’s a national or regional insurer to do if all 50 state insurance commissioners begin picking favored and dis-favored industries for their regulated insurers to hold in their investment portfolios?  Couldn’t the Michigan insurance commissioner take a similar approach toward Silicon Valley tech companies since there has been talk of another tech bubble inflating?

We all like to assume that our elected public officials truly have the best interests of their constituents at heart when they exercise the authority of their office.  Unfortunately, I think we’ve witnessed increasing evidence that many such actions taken in the last 10-20 years have been politically motivated and self-serving.  My instinct tells me that this is the case here with California’s chief insurance regulator using his authority to sink fossil fuel investments deep into Davy Jones’ Locker – not for the good of insurance companies or customers, but for the advancement of his own political agenda and ambitions.

Brexit Surprise

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Besides being a fun word to say, “Brexit” has suddenly become a historical term that will now appear in history books for years to come.  Not more than 24 hours ago, as the votes were being cast in the United Kingdom, the clever term seemed to be headed for the dustbin of over-hyped media-coined phrases.  The conventional wisdom was that the UK would remain part of the European Union, and “Brexit” would be forgotten much like “Grexit” was cast aside last year.  The U.S. stock market certainly priced that expectation into the 230-point Dow Jones Industrial Average rise on June 23.  The surprising victory for the “leave the EU” faction caused worldwide financial markets some whiplash, with the Dow falling 610 points on June 24.  And just like that… Bam! The “Brexit” star is born.

Financial markets abhor uncertainty, and the now imminent departure of the UK from the EU will not be quite so imminent as there is a two-year process ahead for negotiating the terms of disentangling the UK from the EU.  That means two years of uncertainty, and probably a few more surprises and unintended consequences.  Welcome to the Brexit-induced damper on all things financial and two-year Chinese water torture of volatility.  The Federal Reserve, along with the rest of the world’s central bankers are going to be doing an awful lot of re-thinking in the months ahead.  I could be wrong (as I was about the Brexit-outcome) but I wouldn’t count on seeing anything that resembles a “normal” interest rate environment in the next two years.  Heck, we might not even see another 25 basis point increase in U.S. interest rates for that long.

There are so many Brexit-related things to think about… there are many political implications and backstories, but at the heart of the Brexit-surprise seems to be a nationalistic fervor that sovereignty still matters.  That could have parallels here on this side of the pond in November’s presidential election.  Channeling Forrest Gump, “That’s all I have to say about that.”

Now, what about the effects on risk management and insurance?  [I know, I know, you wondered where I was going with this Brexit rambling.]  Well there’s great speculation today about the future of London as an international insurance hub.  Not that it will cease to be an insurance hub, but more about what frictions and complications may be introduced by the need to re-structure firms, obtain new licensing, and yes, perhaps re-locating some resources, once the UK is no longer a part of the EU’s shared economic and regulatory framework.  Will Brexit impede London insurance firms’ access to the EU markets?  What about EU insurance firms serving the UK market?  All fair questions, and all will need to be sorted out over the next few years.  I realize it’s not the same, but I think it might be useful to think of Brexit in terms of the potential economic considerations that would arise if Michigan were to suddenly secede from the United States (Miexit?) and left us all to figure out how to transact business with Indiana and Ohio.  It could kill the export market for Mackinac Island fudge!  Oh the inhumanity that could be wrought.

More broadly, put your risk management hat on and think about the enterprise risk management dimensions of Brexit.  Isn’t this one of those unique sorts of risks that ERM was intended to address?  The political and economic risks associated with Brexit clearly fall into the strategic risk quadrant that traditional risk management relegated to the C-Suite, but ERM’s Chief Risk Officers are supposed to be ready for such vast strategic risks.  So how are CRO’s with operations in the UK and/or the EU reacting today – particularly since most of the world was shrugging off Brexit as a soon-to-be non-event just yesterday?

Add Brexit to your list of worries, concerns, and market volatility triggers to monitor for the next few years.  Oh, and one more piece of advice.  Don’t check your 401(k) balance today.  In fact, it’s probably best you just keep that long-term investor perspective and leave those statements unopened until, say, 2020.

 

 

Easy Come, Easy Go

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It is often said that the legislative process is similar to sausage-making: Neither process is much fun to watch.  Four years ago, in the process of working out the Michigan state government budget, auto insurers found themselves with an unintentional tax credit that is reportedly worth $80 million in the current fiscal year.  Naturally, the legislature and Michigan Governor Rick Snyder are keen to fix this budgetary snafu.  That is likely to happen very soon as both the Michigan House and Senate have sent the fix to the governor’s desk where it will be signed.

How did this windfall come about?  Long story short, the prior budget deal transferred the Michigan assigned claims plan from the Secretary of State to the Michigan Automobile Insurance Placement Facility (MAIPF) in order to gain efficiencies and better claims handling.  Apparently, no one realized that this switcheroo now entitled insurers to tax credits on the additional funds that were now being channeled through MAIPF.  Oops.

The opposition to the legislative “fix” for this accidental tax credit has argued that the loss of the tax credit could cause auto insurance premiums in Michigan to increase by as much as $40 per vehicle.  That may well be true, but it’s a difficult political argument to keep such a vast tax break in place when everyone openly acknowledges that it was unintentional in the first place.  Michigan’s auto insurance premiums are the highest in the nation.  Loss of the accidental tax credit is certainly not going to bring them down, but perhaps it will remove a distraction so that the legislature and governor can finally devote some serious attention to reforming the Michigan auto insurance system – like the fact that medical providers can charge different fees for the same services based solely on whether the patient was involved in an automobile accident or not.  For example, an MRI paid for by Medicare, $484.  Same MRI paid by a no-fault auto insurer $3279.  Now that’s worthy of some legislative attention now that the politics of the easy-come-easy-go tax credit is resolved.

You Get What You Pay For

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One year ago this month, my hometown of Portland, Michigan was struck by a tornado.  The storm damaged several homes, businesses, and churches.  Thankfully, no one was seriously injured, and one year later the town has largely recovered.  I know of several good friends who have recently moved back into repaired and rebuilt homes and offices, thanks to the benefits provided by their insurance providers.  However, it has not been an easy road back for everyone.  I blogged about the storm and some of the recovery struggles last fall.

Some of my friends who are ecstatic to be back in their home or office have mixed feelings about the sometimes long and arduous claims process they endured to get there.  There are also a few situations where people are still not back in their damaged homes primarily because the insurance coverage they purchased was insufficient.  Two such situations involve older, shall we say “vintage,” homes whose owners understandably want the repairs done with like-kind and quality materials rather than similar or functionally equivalent materials.  The trouble is that like-kind and quality materials in vintage homes are much more expensive and not typically covered by traditional homeowners insurance policies.  Therein lies the source of conflict and the delay in getting these policyholders back in their homes.

I can certainly empathize with these policyholders who understandably assume that the insurance they bought would indemnify them by restoring them back to their pre-loss state regardless of their purchased limits and the loss settlement technicalities of the insurance contract.  Most insurance consumers fail to understand that there is no direct correlation between their home’s market value and the true cost to rebuild it.  Furthermore, the typical insurance policy provides for similar or functionally equivalent materials because that is perfectly acceptable to the vast majority of homeowners and makes the cost of the insurance policy more affordable.  For those consumers with vintage homes that they want to have restored with like-kind, quality, and workmanship, the simple truth is that it costs more to do so.  It likely requires that the consumer purchase higher limits and also loss settlement provisions that reflect this desire.  That means paying a higher premium – something most consumers resist even when all of this is explained to them.  My late father was a smart man, and he often used the phrase, “Son, you get what you pay for.”

I feel bad for my Portland brethren who are still embroiled in disputes with their insurance companies almost a year after the storm.  It’s no fun for the insurers either, as they take a black-eye in public relations even though they are abiding by the contract that was sold.  Nevertheless, the industry, and especially the agents who sold these policies, must shoulder some of the blame for not being more careful at the time of sale.  I am not going to name names here, but agents who become “order-takers” rather than personal risk advisers to their clients are doing their clients and themselves no favors.  I would much rather see an agent take the time to understand the nature of a client’s home, and if it’s vintage or has vintage elements, the implications for insurance coverage must be fully explained and proper coverage for the client’s expectations must be recommended.  Perhaps the customer is fine with losing some of the vintage charm of his/her home by replacing ornate doors and trim with contractor-grade materials because they don’t want to pay more in premiums.  The point is, that discussion must occur and the agent/personal risk adviser needs to have the client “sign-off” on such decisions.  If they want to fully restore their damaged home to its vintage charm, then they must invest the time with their agent and underwriter to obtain that level of coverage and pay for it.  “You get what you pay for,” or another apropos phrase my father often used, “There’s no such thing as a free lunch.”

 

NFIP Hatchet Job

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The National Flood Insurance Program (NFIP) administered by the Federal Emergency Management Agency (FEMA) is a mess.  The program’s fiscal house is far from being in order, and now a PBS/NPR documentary reveals the ineptitude of the government management of the program.  In the process, the insurance industry gets attacked and left with a black eye, partly because it didn’t fight back against the inherent bias in the reporting.  According to the report, no insurers agreed to be interviewed for the documentary – that looks great.

In the meantime, the reporter grills interviewees about “how much profit are the insurance companies making on this program?”  To be clear, the claims are paid by the government, and the insurers are receiving fees from the premiums collected to cover the services they provide in administration of the policies.  Yet, the report makes a convoluted argument that insurers are delaying or settling claims for low-ball amounts because of concern that Congress will kill the program if costs are not kept down.  Totally illogical given that the insurers are not paying the claims with “their money” and if there is a true concern about “killing the golden goose” then why would the same insurers be charging excessive fees for their administration services?  Still, no insurers step up to defend themselves.  Personally, my response to the self-righteous reporter’s question about “how much profit?” – “Not enough for having to deal with the federal government bureaucracy, sweetheart.”

Okay, so I’m no public relations genius.  Nevertheless, it’s irritating when the media launches these investigative hatchet jobs on predictable targets and perennial “bad guys” such as the insurance industry.  Where are the reports vilifying the manufacturers of hammers and toilet seats after the exorbitant Pentagon spending on such commodities made news years ago?  Worse yet, why won’t the insurance industry fight back?  The allegations of “excessive profit-taking” (an oxymoron to a free-market capitalist libertarian such as myself) are left out there, hanging in the air, polluting the image of the industry at the same time we are trying to convince young people to consider a career in the industry.  You want to see a really ugly mess?  Let the federal government manage the entire program – from policy issuance to claim settlement. [Insert your favorite postal service joke here.]

Insurance is a noble industry and profession.  We help put people’s lives back together (when the government stays out of the way), and we grease the cogs of economic activity.  It’s time for the insurance industry to stand up for itself more forcefully.

The Insurance Blockchain

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In my pre-academic life, I spent a couple of decades as a technologist, consultant, and entrepreneurial software developer serving the risk management and insurance industry.  To this day, I get excited about cool technologies and their potential impact on the risk and insurance industry.  In other words, I’m a geek.

The latest shiny object for me to fixate on is blockchain technology.  In case you haven’t encountered this term yet, it is a foundational technology underlying the Bitcoin digital currency, and you can get a Blockchain crash course here.  A gross oversimplification of blockchain is to think of it as a decentralized, distributed, secure, database of transactions that eliminates the need for a central authority to verify trust.  Which makes perfect sense when you think of the Bitcoin digital currency that needs an underlying ledger to keep ownership of the digital currency secure and prevent double-spending without any centralized “bank” acting as the common intermediary to all transactions.  But what does blockchain have to do with insurance?

At first glance, one might think that we’re talking about transacting insurance business (i.e., collecting premiums, paying claims) in Bitcoin digital currency.  I attended a RIMS education session on this possibility back in 2015, so it is likely to happen if it isn’t already somewhere.  But the implications of blockchain technology are much, much deeper than mundane Bitcoin transactions. (See how quickly technology evolves?  Bitcoin is already “mundane.”)

Articles and papers discussing various blockchain applications in insurance are beginning to appear.  Blockchain technology may reduce or eliminate claim fraud by allowing insurers to instantly avoid duplication of payouts, and customer service could excel with smart contracts using blockchain technology to speed up claim payouts, or even proactively disbursing funds to repair/replace property that the Internet of Things reports as damaged.  And we’re just scratching the surface.

I am currently reading “The Business Blockchain” by William Mougayar in an attempt to wrap my own head around the possibilities of blockchain technology.  Mr. Mougayar asserts that the evolution of blockchain technology in all business contexts and industries will be as revolutionary as was the advent of the commercialized World Wide Web in the 1990’s.  As I learn more myself, I am entertaining a few intriguing research projects on the use of blockchain technology in risk and insurance.  If Mr. Mougayar is correct, the next 5-10 years are going to be very exciting.

Minimum Wage Thoughts

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Proponents of hiking the minimum wage have been gaining momentum in recent years, and $15/hour is already happening in some cities like Seattle.  The economics arguments for and against are well-known.  Proponents argue that raising the minimum wage is a matter of basic fairness and survival for those at the bottom of the economic ladder.  Opponents argue that minimum wages in general, and especially one that spikes higher suddenly, create market distortions that cause job losses and reduced job opportunities.  Nothing new there.  Both sides  seem to have merit.

Not to take sides here, but there is more to the argument against minimum wage laws than just job losses.  Okay, so maybe I am taking a side.  Personally, I tend toward libertarian thoughts, especially when it comes to economics.  I do not begrudge anyone earning a fair rate of pay for the work they perform.  I have raised three daughters, two of whom are still college students and working in relatively low-paying hourly jobs that pay roughly the minimum wage or very close to it.  Would I want my daughters to work for less than their current pay rate if it were legal to do so?  Not especially, but if the alternative were for them have no job at all, forcing them to extend their dependence on me… Uh uh.

The current push for $15/hour wages nationally raises several concerns… for one thing, it’s inflationary.  The Wall Street Journal published an article this morning which described the tensions created by “wage compression” which occurs when those at the bottom are suddenly thrust ahead on the pay scale and begin earning nearly the same as those who have much more experience and seniority.  Now the employer is faced with some unhappy experienced workers who become less motivated to perform.  The employer may feel obligated to elevate their pay as well to maintain equity in the workplace.  All of this leads to some tough choices… eliminate some positions or raise prices or both in order to cover the added payroll costs.  Inflation ensues.

And what about insurance?  Workers compensation premiums are based on payroll, and workers compensation benefits are based on wage rates.  Higher minimum wages leads to increased premiums and increased benefit costs.  Inflation.  And then there is Obamacare.  How will those folks feel about smaller tax credit subsidies to help pay for their mandatory Obamacare insurance policy once their higher income kicks in (assuming they still have a job)?

When all is said and done, and the political winds calm down, we will likely see a new national minimum wage that could be as high as $15/hour.  The earth will continue to rotate and the stars, moon, and sun will still be in the sky.  But I have to wonder… if $15/hour is going to be so great for the American working class and our national economy overall, then why stop there?  Why not $20 or $25 or even $50 per hour?  If $15/hour is great then a $50/hour minimum wage should end poverty and hardship forever.  No, you say?  $50, $25, $20 are arbitrary and ridiculously high pay rates.

So is $15 for entry-level jobs that were never intended to be a career.