Insurance Three Card Monte
Happiest of New Years!"At present, the state of Florida is considering legislation to close "the gap in coverage issue" that they understand as a PEO issue and not an overall issue in general. It is unfortunate that once again they have targeted a specific industry for an issue that is much bigger than the PEO industry. The issue at hand is employers not providing workers compensation for their employees, whether it be through a PEO or not. This has been an issue for years, which is why I re-post the below to make sure everyone understands what the real issue is. Another thank you to Jon Coppelman, with Workers Comp Insider, for allowing me to express my opinion." - Paul Hughes
“History doesn't repeat itself, but it does rhyme.”— Mark Twain
We are very proud of our PEO client's ethical fabric, sophistication and professionalism. We consider them family.Logic would suggest statute, insurance departments and credit rating organizations each play a vital role in how my profession as an insurance agent is governed as well as the insurance carrier community of any given state. The process of formal governance for insurance carriers involves the issuance, and ongoing management of "Certificates of Authority”. This process ensures that only good people with enough money and who have proved to have the management team and platform to operate an insurer are allowed to. What types of products are allowed in the given state for any specific carrier fall on statute; which is then administered through the authorities granted that carrier. Unfortunately, I know of no state where a different size or solvency level needs to be in place to have the authority to offer a large deductible.Just three years ago, (seven now), author Jon Coppelman was kind enough to allow me a rebuttal to an article inferring that it was the PEO community that rendered another insurance carrier insolvent.The full story here... my piece below:http://www.workerscompinsider.com/2012/05/risk-transfer-a-1.htmlFollow Up - June 7, 2012After posting, I received a call from Paul Hughes, CEO of Risk Transfer (now Libertate Insurance Services, LLC), who is quoted above. While not contesting the premise that large deductibles are poorly managed in Florida (and elsewhere), he believes that I unfairly singled out PEOs in the blog. The fundamental issue is the failure of the state to adequately regulate and oversee large deductible programs. I agree.Please take a few moments to read Paul's response, which employs the useful metaphor of a casino for the risk transfer industry:
"The core issue to me is the role of the regulator versus the business owner in the management of the "casino" (insurance marketplace). That is one of the parts of Jon's article in Workers Comp Insider that blurs the line a bit on what the PEO's role is within the casino and whose job it is to set the rules. The casino is the State as they certify the dealers to play workers' compensation (Carriers, MGU's, MGA's, Agents and Brokers) and the State also certifies that the players are credible (not convicted of insurance fraud) and can pay/play by the rules of the house. The rules are set by the house and the games all require public filings - ability to write workers' compensation (certificate of authority), ability to offer a large deductible plan (large deductible filings), agent license, agency license, adjusters license and any other deviation from usual business practices (like the allegations that one now defunct insurance carrier illegally charged surplus notes to desperate PEO's in the hardest market the industry has ever seen). The "three-card monte" that Jon alludes to in this article is managed not by the dealers (carriers), but by the house (state). Would a real life casino consider it prudent to allow one of their dealers to expose 20% of their $5m in surplus through high deductibles sold to PEO's with minimal financial underwriting and inadequate collateralization? Would any casino write harder to place (severity-driven) clients to include USL&H, roofers etc with the minimum amount of surplus needed to even operate a carrier...? Of course not. These "big boy" bets would never be allowed in Vegas without the pockets being deep enough to cover the losses."
Unfortunately, it is 2015 and no states that I know of have large deductible language that addresses the inherent credit risk of the product. A few more carriers have gone insolvent as a result of this specific issue, many policyholders with lost collateral and deposit instruments and and the claims continue to pile up on the guaranty funds. The easy scapegoat is the PEO or Staffing Services policyholder, yet in these cases they were the consumer of a very highly sophisticated financial services product. Taking a $1m position on your workers’ compensation program is taking a bet on 90% of your expected losses. This is an extreme shift that deserves more attention by the regulators that manage the product. The carrier then takes the additional bet that the losses are going to be what is expected and that the entity buying the policy will be an “ongoing concern” for the 7-10 year payout pattern associated with the payment of workers’ compensation claims. AM Best does not factor credit risk on earned premiums so that $50m of manual premiums becomes $10-15m after the application of the deductible credit. If the expected losses under the deductible are not properly collateralized, “A” and “B” companies on paper one day are in run off the next.Logic would tell us that taxpayers should not have to bail out states that create law and the insurance companies that profit under it. Rules around credit risk for loss sensitive workers' compensation plans must be addressed or logic will tell us the same scapegoats will keep being the target with the same issues not prevented in the future.
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Contact Professional Employer Organization (PEO) Expert, Paul Hughes
Paul Hughes has been working with the Professional Employer Organization (PEO) industry since 1995 and data management since 2005. He is responsible for the day to day operations of both Libertate Insurance Services, LLC and RiskMD, which reports into the overall Ballator Insurance Group family of companies. Learn more about Paul.Specializing in PEO Services: Workers Compensation, Mergers & Acquisitions, Data Management, Insurance Focus on: Employment Practices Liability (EPLI), Cyber Liability, Health Insurance, Occupational Accident, Business Insurance, Client Company, Casualty, and Disability Insurance.