Category Archives: politics

Davy Jones’ Locker

dave_jones_ca

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

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.

Flint Water – A Catastrophic Failure of Government

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Since it seems that everyone else is piling on to the dialogue regarding the Flint (Michigan) water situation, I suppose it’s my turn.  It is not my intent to light a political brush fire here, but given the current election season and the emotional charge of this catastrophe, that may be easier said than done.  My guess is that I will tweak someone’s political sensibilities before I’m done here even if that is not my intent.  So here goes.

The lead-poisoned water in Flint is a result of failure in so many ways that it’s difficult to catalog all of the failures.  Moreover, I think the fact that the failure spans so many levels and departments of government is the heart of the problem.  Infrastructure is one of the most basic and primary of all duties of government.  As a society, we elect officials to be good stewards over our collective taxes and hire good people to administer the basic needs of society: roads, defense, courts, and other basic infrastructure.  Honestly, all the rest of the activities of government (e.g., social programs, public education, etc.) are “add-ons” that have become a distraction and resource drain on the fundamental duties of government.

The situation in Flint is disturbing, and that’s putting in mildly.  Even more disturbing to me is the race to the bottom on full display among the political class and ideologues.  Everyone is blaming someone else, covering their own backsides, seeking political advantage in what amounts to a sickening display of political gamesmanship.  All while Flint residents continue to rely on bottled water and filters when what they really need is world-class emergency infrastructure project to replace the water pipes – something that a properly incentivized private sector contracting firm could pull off if the political class would just shut up and recognize this.

The political left is hanging this all on Michigan Republicans.  The political right is blaming Michigan bureaucrats and the Obama-led Environmental Protection Agency.  The fact is, every level of government has failed Flint here.  Democratic and Republican politicians along with unaffiliated bureaucrats working in a flawed administrative state all bear responsibility.  Government fails because it’s incentives to manage such complex systems are all screwed up.  There is no accountability, and that’s by design.  It’s the EPA Animas River fiasco all over again.  Same screwed up results, different year.  Government fails.  Big government fails big.  Then the political class rushes in to assign blame, capture a political public relations advantage, and convince us that even bigger government is the only solution.

The late Harry Browne (Libertarian presidential candidate in 1996 and 2000) used to say, “Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'”  The Flint water catastrophe is a failure of government risk management, administrative management, oversight, and more.  I don’t believe that any one person set out to poison the people of Flint, but that’s not what Michael Moore would have you believe.  Then again, Michael Moore wants Governor Rick Snyder arrested so that he can sensationalize the entire disaster to help his leftist political causes which will only serve to give us larger and more incompetent government.

Why do we continue to trust and put our faith in behemoth government bureaucracies at the state and federal level when they have so often and so spectacularly failed?  Seems to me that this catastrophic failure of government at all levels and of all political stripes should be enough to convince us that maybe, just maybe, we should try downsizing the behemoths and trust ourselves at the local level just a bit more.  We’ve tried everything else and I don’t see how it can get any worse.

 

 

Crop Insurance Cutback

crop_insurance

It has been a big week for political news.  We had the election of a new Speaker of the House in Rep. Paul Ryan.  We had a Republican presidential candidate debate that was allegedly tainted by media bias.  We had a two-year federal budget deal that presumably takes debt-ceiling crises and government shutdowns off the table until 2017.  But there’s something within the budget deal that has received relatively little attention.  Lurking in this budget deal is a $3 billion cutback (over ten years) in the federal subsidies for crop insurance.

Naturally, this cut (which reportedly came as a complete surprise) has midwestern legislators up in arms, characterizing the cut as “devastating” to the crop insurance industry.  I am the son of a farmer, and I fully understand the nature of the economic risk that farmers and ranchers face.  Droughts and storms have wreaked havoc on farmers in recent years.  The federal crop insurance subsidies support the availability and affordability of crop insurance.  When I do the math, a $3 billion cut over ten years is a reduction of $300 million per year, for a program costing north of $9 billion per year, which is roughly a 3% cut.  Devastating?  Really?

Opponents argue that farmers have already endured a $12 billion cut in the crop insurance program since 2008, and a further erosion of federal crop subsidies in last year’s farm bill.  There is also the argument that this could have a long-term negative effect on the viability of the U.S. agricultural economy and our affordable food supply.  Farmers in some parts of the U.S. have been challenged with extreme droughts and I’m sure that crop insurance cutbacks must feel like yet another whack to the head for them.

As sympathetic as I am to the agricultural business, my personal skepticism about government intervention in any market causes me to wonder if it isn’t a long overdue weaning of the industry off of government supports.  I remember my father declining to participate in subsidy programs in the 1970s and 1980s that could have paid him handsomely but he felt they were “government nonsense” that served no practical purpose other than subjecting him to a myriad of government rules and bureaucracy.  These latest crop insurance cuts hardly strike me as “devastating” although perhaps the cumulative effect with previous cuts may appear to be devastating.  Then again, government economic interventions tend to be highly distorting over time and so perhaps it is time to “devastate” this free market distortion and allow the free market to work as it should once again.

Agree or disagree?

Environmental Destruction Agency

epa

It’s been a bad week for the EPA.  And an even worse week if you’re a fish or other wildlife living in or near the Animas River of southwestern Colorado.  A mine cleanup project being conducted at the direction and under the control of the EPA resulted in a massive breach that caused millions of gallons of toxic crud to spill into the Animas River.  Some perspective on the staggering impact of this “oops” can be found here.  But don’t worry folks, EPA chief Gina McCarthy says she’s sorry.  Now let me think… how did an expression of remorse from BP’s ex-CEO Tony Hayward work out after the 2010 Deepwater Horizon oil spill?

The double standard that exists when it comes to mistakes made by private enterprise compared to those made by government is staggering.  I actually caught some video of the Democratic governor of Colorado, his own state being damaged by the EPA’s incompetence, expressing unbelievable forbearance explaining that this was a “human event” and that humans are not perfect.  The Governor also made some reference to differences between environmental damage caused by profit-seeking ventures and those from well-intentioned clean-up efforts.  Huh?  Tell that to the fish, wildlife, residents, and business owners along the Animas River.  I don’t think they care who pulled the plug on the mine sludge nor what their intentions were.  To be fair, the Governor has declared the disaster to be “in every sense, unacceptable” and then in a bit of political theater he drank water from the Animas.  The Wall Street Journal opinion page took this disaster up a few days with a clever Ghostbusters spin.

What is most troubling to me is that the EPA has been empowered like never before under the current administration, even to the point of crossing the line and being rebuked by the Supreme Court a few times.  At the intersection of growing bureaucratic power, incompetence, and lack of accountability lies disaster – witness the Animas River destruction at the hands of the very agency charged with protecting it.  The crux of the issue is our irrational faith and trust in the competency and altruism of government agencies juxtaposed with an equally irrational distrust of profit-seeking private enterprise.  Why?

The incentives of government bureaucracies are so screwed up that accountability does not exist.  Who has been held accountable for the debacle at VA Hospitals? For the politicization of the IRS?  On the other hand, BP paid dearly for its sins, primarily from its own coffers as a largely self-insured corporation, and BP’s CEO resigned.  Who will pay for the Animas River disaster?  I’m guessing you and me… the taxpayers.

So let me get this straight.  EPA Director McCarthy has a high paying government job with what I’m sure is a generous pension.  Her agency is actually responsible for destroying what it is charged to protect, and who will bear the burden of the damage done by Ms. McCarthy’s incompetent agency?  The same people paying for her salary, benefits, and pension.  The worst possible outcome for Ms. McCarthy is that she may eventually have to escalate her apology to a resignation (though I’m not betting on it) and move on to collecting her pension without having to deal with those messy politics anymore.  Maybe she and Lois Lerner can share a beach somewhere.  What a great gig.  Now, tell me again why do we have so much faith in government?

The Iron Triangle

lobbyist_irontriangle

The health insurance industry has a new high-profile employee.  Marilyn Tavenner was the chief bureaucrat running Medicare, Medicaid, and the Obamacare exchanges.  Now she’s the CEO of the health insurance trade group America’s Health Insurance Plans.  No doubt, her deep connections to the Washington political class and the federal government’s new and deep role in our country’s health care system makes her an appealing hire.  It’s also a stark example of the “iron triangle” that is common in the top echelons of American political power.

Color me skeptical that this is a good thing for America’s individual health insurance providers, let alone consumers.

ACA Legal Challenge, Part 3

affordable_care_act

Just two weeks ago I wrote about the Supreme Court’s ruling that upheld nationwide federal subsidies and preserved the Affordable Care Act.  In my closing paragraph I said that the legal challenges now seem to be exhausted and its time that we accept the ACA and move on.  Personally, I am not a fan of the massive health care reform law but as a businessman and insurance professional I’m growing weary of the uncertainty surrounding the law.  Well, as it turns out, I was wrong about King v. Burwell being the final judicial word on the ACA.

There looms another potential judicial dagger aimed at the heart of the ACA in the lesser-publicized case of Sissel v. HHS.  The case lost at the D.C. Circuit when the three-judge panel applied logic that resembled a mental version of the game “Twister.” The plaintiffs are now seeking an en banc review of the case at the D.C. Circuit, and the next stop could be the Supreme Court.  [sigh] Here we go again.  What is an insurance professional attempting to help their clients with health insurance and benefit plans to do?

At its core, Sissel’s argument is that the ACA violates the Origination Clause of the Constitution which requires that all taxation bills must originate in the House of Representatives.  In the murky legislative mechanics that gave us the ACA, the bill originated in the Senate.  When the original 2012 Supreme Court (SCOTUS) ruling came down, it upheld the individual mandate because SCOTUS ruled that the monetary penalty for not purchasing health insurance was actually a tax.  Chief Justice John Roberts took a lot of heat for that tortured legal conclusion, just as he did for last month’s interpretation of the law’s language regarding subsidies.  The two milestone SCOTUS rulings on the ACA have seemed to give incredible deference to the ACA and its intentions, more than its language.

If Sissel v. HHS makes it to the SCOTUS in the near future, things will get very interesting.  The biggest problem for SCOTUS is that its 2012 ruling that proclaimed the ACA’s penalities to be taxes now gives Sissel an opening to challenge the entire law as a violation of the Constitution’s Origination Clause.  On its face, I wonder how Chief Justice Roberts will reconcile what appears to be a slam dunk argument.  How can SCOTUS possibly rule that the law includes taxes as the justification for upholding the individual mandate, and then not rule the entire law to be unconstitutional on the grounds that it violated the Origination Clause?

What happens next will be very interesting.  SCOTUS could refuse to take up the case and let the D.C. Circuit’s ruling against Sissel stand.  The problem with that is that the D.C. Circuit’s ruling essentially obliterates the Origination Clause, and SCOTUS may not be able to stomach that precedent.  If SCOTUS does take up the case, all bets are off.  Personally, I thought the plain language at the core of the issue in King v. Burwell was a slam dunk and I was wrong.  I am actually somewhat intrigued by the notion of a trifecta ruling in favor of the ACA and especially the judicial acrobatics that would most certainly come out of such a ruling on Sissel v. HHS.

I can anticipate a few such legal gyrations… SCOTUS might rule that the ACA bill did actually originate in the House because there was some monkey-business with “empty shell” bills from the House that were filled with the ACA language by the Senate.  That’s a political game that the nation’s Founders certainly did not intend but SCOTUS seems to be willing to give more weight to certain intentions than others these days (see King v. Burwell).  Another way out could be to somehow massage the D.C. Circuit’s logic that declared the ACA’s taxes were not intended to raise revenue but to expand health insurance.  So the ACA included a tax in order to uphold the individual mandate but it’s not a tax in the sense that it is not a revenue-raising bill that must originate in the House.  Huh?  What is a tax if not a means for government to raise revenue?  Good luck John Roberts.

One thing is certain… I do not envy my insurance industry colleagues who specialize in the health insurance market these days.  Does the ACA cover whiplash?

 

Affordable Care Act Survives (Again)

affordable_care_act

The U.S. Supreme Court has spoken on the highly anticipated King v. Burwell case.  Subsidies are legal in all 50 states, rather than only in the states with their own insurance exchanges.  The political debate continues and the Justices will receive criticism/praise (depending on one’s personal viewpoint) for having upheld the universal subsidies implementation of the ACA law.  This ruling seems to contradict the plain language of the law and the evidence that the language was intentionally written as it was to coerce the states into setting up exchanges.

Ironically, the Supreme Court found in 2012 that the federal government could not coerce the States into expanding their Medicaid programs under the ACA.  I can’t help but wonder if that specific ruling played into the Court’s ruling on King v. Burwell.  Stay with me… If the court had found that the plain meaning of the ACA language and the evidence (as provided by Gruber) suggested that subsidies were limited only to States setting up their own exchanges, then the Court would have to say that the federal government was once again attempting to coerce the States.  And since it already ruled once that the federal government could not coerce the States on Medicaid expansion, would it not then have to say that the subsidy/exchange coercion is also illegal and thereby throw out the subsidies entirely… in all 50 states regardless of exchanges?

If you follow and buy into my logic, then the Supreme Court Justices (most notably Chief Justice Roberts and swing vote Kennedy) were choosing between upholding the imperfect law as is, or a significant rebuke of the ACA’s subsidy system that would have left them with a glaring inconsistency with their 2012 ruling on Medicaid expansion, or a complete destruction of the ACA law by revoking all subsidies.  Given those choices, I’m not surprised that Roberts and Kennedy chose the first option.  The SCOTUS is not supposed to be political or partisan, but they are human.  I don’t believe that Roberts and Kennedy were comfortable with any of the choices other than upholding the subsidies, despite the statutory language and clear intent of the law’s architects.

Another effect of this ruling could be a further centralization of the U.S. health care system at the federal government level – an outcome that is likely fine with the Obama administration’s single-payer acolytes.  The New York Times suggested that the ruling removes a primary reason for States to establish and operate health care insurance exchanges, so many States may just let the Feds takeover the entire process.  Another bit of irony since that reasoning further supports the notion that the law’s intention was indeed to condition subsidies on State-run exchanges.

The political battle over the ACA will continue for years to come.  For now though, the significant legal challenges that might upend the law seem to be exhausted.  From an insurance perspective, it seems to me that it’s time we all accept the ACA as settled law, for good or for bad, and figure out how to best live with it.  And if you happen to believe that the law includes provisions supporting “death panels” then this may be easier said than done.

TRIA Extended – Is that a good thing?

terrorism

In recent weeks, the renewal/extension of the Terrorism Risk Insurance Act (TRIA) has been a very hot topic.  I’ve written about it a few times myself, here and here.  To the relief of many, the newly convened 114th Congress has now extended TRIA to 2020.  The House vote was 416 to five, in a rare display of unfettered bipartisanship.

But not everyone is happy about TRIA’s extension.  The Wall Street Journal’s Opinion Page called the measure’s renewal a “vast corporate welfare handout.”  Though this may be blasphemy among my risk management and insurance colleagues, I must confess to my libertarian leanings and admit that I am sympathetic to the WSJ editorial board’s disappointment.  On the other hand, I do take issue with some of the WSJ’s assertions.  In particular, the WSJ stated that “The private [insurance] market has healed [since the 9/11 attacks] and could price in and model the danger of terror attacks, but the permanent Washington backstop interferes with such commercial evolution.”  I’m not so sure I buy that.

Terrorism risk, particularly anything on the scale of the 9/11 attacks, is very difficult to price and model.  Among the textbook concepts that my students learn are the characteristics of insurable risks, and two such characteristics are that the loss potential should not be catastrophic, and the chance of loss must be calculable.  House fires and slip/fall liabilities meet all of the criteria for insurable losses, but using commercial airliners as weapons of mass destruction or detonating dirty bombs most definitely do not meet the aforementioned criteria.

The plain truth is that 9/11 changed everything.  Before that catastrophic event, terrorism exclusions were rare.  After 9/11, terrorism exclusions are all but certain in the absence of the federal backstop known as TRIA.  My libertarian economic philosophy is conflicted over this reality, but I would not characterize TRIA as a “vast corporate welfare handout” as the WSJ did yesterday.