Monthly Archives: June 2016

Brexit Surprise

brexit

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

tax_breaks

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

tornado

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.”