Well-Meaning Decisions Yield Unintended Consequences
It would be difficult to find an industry more competitive than the insurance business. Our long-term results prove that to be true. Far more often than not, the industry loses money on what is supposed to be our core skill, underwriting risk. Rarely do we, as an industry, return our cost of capital. We have all come to accept these facts as inherent to the business of turning life’s uncertainties into something more predictable and palatable for our clients. Our balance sheets are filled with estimates that are, in large part, dependent on the future being somewhat like the past.
Due to continually evolving judicial interpretations of our policy obligations, we have become quite adept at adjusting policy language, reserves and underwriting rules to meet new and unforeseen requirements. Difficult regulatory environments can lead to increased prices and reduced capacity. Analyzed at the level of each transaction, the collective decisions are almost always intended to benefit the consumer and society. However, they often have quite the opposite effect in the long term.
Consider that, in general, the states with the highest rates and the largest surplus lines markets are those where the regulatory environment makes it more difficult to produce a consistent underwriting profit.
Unintended Consequences
As for court decisions that have backfired, consider the Ohio Supreme Court’s decision in Scott-Pontzer v. Liberty Mutual Fire Insurance Co., 710 N.E.2d 1116 (Ohio 1999). This decision granted uninsured motorists/under-insured (UM/UIM) motorists coverage on a commercial auto policy to all employees and their family members who lived with them, even when they were using their own cars on personal business on the weekend. After this decision, the Ohio legislature responded by passing a law removing mandatory UM/UIM offering requirements. Now, Ohio is the only state without a compulsory UM/UIM law.
Recent legislative activity in certain states to change commercial general liability policies issued to construction professionals, new state mediation rules and the federal government forcing the insurance industry to become an official record-keeper for Medicare, are well-meaning decisions that ultimately will have unintended, and expensive, consequences for the consumer.
Because of these challenges, contractors and their agents in many states have experienced an immediate, albeit small, reduction in available capacity. The ultimate impact lessened, for the time being, by the soft market and the yet-to-emerge tail on loss costs. Agents in neighboring states may have a problem with errors and omissions, as carriers that decided to leave those markets may be excluding those states from the definition of policy territory.
A state supreme court’s new rule for mandatory mediations requires that the representative of the insurer carry full authority to settle for the lesser of the highest demand of the plaintiff or the policy limit. Consider that most insurers go to trial because it is the least objectionable option. Many times, we believe our insured has no liability and/or the demand is unreasonable. This new rule establishes a bias for the plaintiff’s position over our insured’s, regardless of evidence. Over the long term, this could yield an increase in loss costs, delays in mediation conferences and restrictions in the marketplace. None of these will benefit the insurance-buying public.
Medicare Changes
New federal rules require insurers to log and report all payments and benefits to claimants to control the costs of Medicare. Yet, as of this writing, the Center for Medicare Services does not seem to be able to handle the volume of information it is receiving, which has eliminated any benefit the program may have experienced. Insurers are now exposed to conflicting court interpretations, fines and payments in excess of agreed upon settlements. These are all costs that eventually will be passed to the consumer.
The initial goal of these new rules, laws, regulations and decisions was to benefit society. Unfortunately, society always has to shoulder the higher costs, including those produced directly by fees and expenses or through increased uncertainty during ratemaking. Insurance executives can help by reaching out to our local agents’ associations, politicians, bar associations and other trade groups. However, we should not delegate the responsibility to our trade associations. All stakeholders, including our employees, the regulators, insureds and claimants, have a vested interest in a healthy and vibrant industry.