Government Insurance Programs

Residual Market Auto Insurance - Types

- Automobile Insurance Plan (AIP) - Reinsurance Facilities (RF) - Joint Underwriting Facility (JUA) - Maryland Automobile Fund (MAIF)

Biggert-Waters Flood Insurance Reform

- Increasing premiums - Reducing incentives for rebuilding in flood risk zones

Beach and Windstorm Plans - Operations

- LA & MS use single servicing carrier; other states the plan issues and services policies - Property insurers share in plan losses according to premium volume

Options for Managing and Financing Flood Risks

- Long term flood insurance contracts - Privatization of flood risks - Multi-peril HO policies covering flood - Community-based flood insurance contracts - Integrated watershed-based risk management strategy - Securitization of risks

NFIP Issues

- Many do not purchase flood insurance - Many misunderstand flood risk (100-yr flood = no more flood for 100 yrs after one occurrence) - NFIP rates not adequately reflect flood risk; however congress requires the coverage be widely available - Vulnerability duplicated from rebuilding (some areas are no longer suitable for rebuild) - Taxpayer money mainly go to wealthy counties - Hazard mitigation not always incorporated into risk management decision of gov and private sector (restrictive land-use zoning may conflict economic development)

Terrorism Risk Insurance Act (TRIA) of 2002 - Coverages

- No coverage for small losses - Medium losses: government's role is to spread loss over time and over entire industry (provides financial assistance to insurers and later recoups it via broad levy on the insurers) - Large losses: government cover most of the loss, and recoupment is also possible

TRIA - Exclusions

- Non-commercial - Federal crop and private crop/livestock - Private mortgage - Title - Financial guaranty - Med Mal - Flood - Reinsurance - Life

Beach and Windstorm Plans - Eligibility

- Only in designated coastal areas - Building constructed or rebuilt after certain date must conform to applicable building code - Not insurable: - Poor physical condition - Poor housekeeping - Violation of law/public policy

National Flood Insurance Program (NFIP) - Uninsurable

- Possibility of Cat losses - Only ppl with highest risks tend to purchase coverages - Difficult to accurately price - Risk of losses among insureds not independent --> requires very large risk load

Federal Crop Insurance

- Private insurers sell & service - Federal gov reinsures losses - Premium subsidized by Risk Management Agency (RMA) under USDA

Fair Access to Insurance Requirements (FAIR) Plans - Operations

- Property owner unable to get coverage through voluntary market applies to FAIR plan - FAIR plan may operate as a policy issuing syndicate - FAIR staff or service carrier handle the servicing of policies - Risks usually shared by insurers in proportion to market share

Post Biggert-Waters Reform Issues

- Revised analysis & mapping of non-accredited levees --> difficult to assess levee-specific risk and corresponding risk premium - Actuarial soundness, program solvency & affordability trilemma - Debt forgiveness - Development of an integrated disaster risk management approach (Congress initiatives beyond NFIP) - Private role in financing flood risk still unclear

NFIP - Causes for low participation

- Seen as not being worth the cost - Misperception about low probability risks and lack of information about NFIP - Lack of compliance with the mandatory purchase requirement - HO in risky areas may not have a mortgage

Fair Access to Insurance Requirements (FAIR) Plans - Eligibility

- Subject to inspection before acceptance - Cannot be refused coverage for environmental hazards beyond owner's control - Uninsurable if: - Vacant or open to trespass - In poor physical condition - Poor housekeeping - Violation of law - Not built in accordance with building and safety codes

Insurable Risk Criteria

- Sufficiently large number of insured to make the losses reasonably predictable - Losses must be definite & measurable - Losses must be fortuitous or accidental - Losses must not be catastrophic

TRIA - Structure

- Terrorist act must be certified - Industry losses > $100M - Each insurer has deductible of 20% of its direct annual commercial premium covered by TRIA - After the threshold, government covers 85%, up to industry aggregate of $100B. - No more coverage over $100B, nor is private insurer responsible for losses over $100B - Secretary of Treasury will recoup 133% via surcharges up to industry aggregate loss of $27.5B, with the discretion to apply surcharge to recoup amount over $27.5B

Guaranty Funds - Limitation

- Title, credit, mortgage, ocean marine, reinsurance, surplus lines - Stated limit on refunds of UEP - Max covered claim (WC is unlimited) - Claim deductible - Large net work deductible - Trigger of coverage (court found insurer to be insolvent and placed in liquidation)

WC interaction with Medicare

- WC is primary - Medicare kicks in if WC coverage is exhausted - Medicare Secondary Payer Act of 1980 --> Medicare is also secondary to liability insurance

Level of Government Involvement

1. Exclusive insurer - Social security (Federal) - State WC (State) 2. Partner with private insurer - NFIP, TRIA, Federal Crop (Federal) - FAIR, WC, Windstorm plans, Residual auto (States) 3. Competitor to private insurer - WC

Reasons for Government Participation in Insurance

1. Filling insurance needs unmet by private insurance 2. Compulsory Purchase of Insurance 3. Convenience 4. Greater efficiency 5. Social purposes

Residual Market Auto Insurance - Characteristics

AIP: Oldest, most pervasive RF: Avoids stigma; few states use RF JUA: Only in a few states; servicing carriers have greater control than AIP or RF

Residual Market Auto Insurance - Policy Servicing

AIP: insurer handles policy RF: insurer handles policy JUA: servicing carriers handle policy for fees MAIF: serviced by MAIF

Residual Market Auto Insurance - Assignment

AIP: plan assigns application to insurer based on market share RF: insurer can accept risk or cede to RF JUA: forwarded to servicing carrier (designated in state based on size and capability of providing wide range of services)

Residual Market Auto Insurance - Application

AIP: rejected in voluntary market, driver applies RF: applies to producer, who then submits to insurer JUA: applicants found unacceptable to voluntary insurer are forwarded to JUA servicing carrier MAIF: evidence of cancellation from one or rejected by two private insurers

Residual Market Auto Insurance - Profit/Loss Sharing

AIP: retained by insurer RF: operating losses of RF shared by all insurers based on a FORMULA JUA: results in pool shared by all insurers based on voluntary market share MAIF: kept by MAIF

Residual Market Auto Insurance - Rates

AIP: uniform for a given state (higher than voluntary market) RF: rates are not uniform JUA: based on experience of pool, but uniform for all servicing insurers (higher than voluntary market)

Government Workers Compensation Programs

Federal: - Federal Employee Compensation Act (FECA) for non-military federal employees - Longshore and Harbor WC Act (for maritime workers) - Black Lung Benefit Act (for miners) State: - Partnership with private insurers - State funds (insurer of last resort) - Competitive state fund - Exclusive State Funds (some allow self-insure) - Residual Market (no state fund as last resort) --> structured as reinsurance pool or JUA

Medicare Set-Aside

MSA calls for all parties to a settlement to agree to set aside money to be primary over Medicare, for the period where the individual is eligible for Medicare

Guaranty Funds - Overview

a. Established to protect PH from inability of an insolvent insurer to pay claims b. Not-for-profit unincorporated entities est. by state law c. Funds pay most claims and a portion of UEP