This article explores a “scenario”. Scenarios for insurance
people are sets of circumstances that could occur. After the common
occurrences, such as an auto accident in a parking lot, we move on to the less
common and determine if the cost to insure that scenario would be worth the
cost of the insurance.
What follows is a scenario looking at factors which could impact
our country (and the world) if significant change is made to our health care
delivery and insurance system. This is hopefully a “worst case” scenario but
one that needs to be considered nevertheless.
If people are required to participate in the government health
care plan or pay a penalty, they will be in the government plan (or as now appears, the penalty will be the smaller charge so they may just opt out). As a result,
most health insurance companies will fail due to loss of business. Some
companies might survive by writing supplemental medical policies but their
income will be greatly diminished.
Most health insurance carriers are also life insurance companies
and coverage currently provided by these life insurance policies could be in
jeopardy if these companies go out of business.
Many Life & Health Companies are also Property &
Casualty Insurers and vice-versa. So if the health insurance piece of the
insurance industry fails, and then the life insurance piece, the property &
casualty piece could be very close behind in failing.
For a short time, that might not be so bad since every state has
what is called a guaranty fund. A state guaranty fund is funded by
participating insurance companies that write business in the state. They are
required to do so. If a participating company goes bankrupt, the fund is used
to pay claims for the now defunct company. If the company which fails is
particularly gigantic (think AIG), the state guaranty funds could be quickly
depleted. Should that happen, there will be policyholders who had valid
insurance policies but cannot be paid for their valid claims simply because
there’s no money.
The scenario continues. Insurance companies buy insurance to
protect themselves from catastrophic losses. It’s done through a process called
Reinsurance. For example, ABC Company writes homeowners coverage in “tornado
alley”. They don’t want to be ruined by a bad summer of tornadoes so they share
the risk among other insurance companies who agree by a reinsurance policy
(treaty) to cover losses that exceed specified amounts. There are billions,
possibly trillions of dollars covered by these treaties worldwide. ABC Insurance Company may pass
off a portion of their risk to DEF Insurance Company, and DEF Insurance Company passes a portion on to GHI Insurance Company, and GHI
Insurance Company passes a portion of their total risk to ABC Insurance Company, etc. Many insurance carriers
specialize in Reinsurance and many are foreign owned.
Reinsurance works very well until DEF and MNO are defunct and
can’t honor those treaties. There was a time several years ago when placement
of insurance became difficult because the foreign reinsurers would not take as
much of the “action” as they had previously. They were fearful of insurance
company failures and large losses. This occurs after heavy hurricane losses,
losses such as 9-11, and a bad economy. They remain fearful of our “lawsuit”
happy society here in America.
When foreign reinsurers see companies failing in the US, they stop offering reinsurance
or charge a higher amount for it. When the reinsurance market hardens, many US companies
cannot risk writing more coverage due to the regulations placed upon them by
governmental entities. They may be forced to withdraw from the insurance
marketplace. Reinsurance does not “drop down” to cover first dollar on claims.
A reinsurer prices their product with the expectation that they will only be
involved in a claim after what could be described as a very high deductible is
handled by the primary insurance carrier. If they were forced to do this, by
some newly created law, they would not be able to meet the obligation because
they didn’t collect premium dollars to match that loss exposure. They would
simply close their doors.
To continue the scenario, if most US Life and Health companies
fail, followed by Property & Casualty company failures, these failures will
cause a real shortage of insurance coverage throughout the world.
Without insurance, banks won’t lend money for homes, cars,
businesses, equipment, goods in transit, payrolls, or building projects.
Commerce would grind to a halt without insurance because no one, individual or
corporate giant, is willing to put their money at risk without some recourse
for damage compensation. Commerce was the original driving force behind the
creation of insurance – to spread the risk of loss among many parties so that
no one person might face total ruin. If the number of participating parties
dwindles, there is less security for everyone.
If Humpty falls off this wall, it could take decades to put him
back together again, if it can be done at all.
An additional scenario following inception of the new Affordable
Care Act (ACA) is this. Insurance
companies are now, under the ACA, required to accept persons with “pre-existing
conditions” – and to do that without any increase in premiums to these people
even though it is an absolute certainty claims, usually large ones and
certainly frequent claims, will be submitted.
Without adequate premium dollars in their reserves to meet these certain
claims, the insurance companies will soon be unable to pay these claims – or ANY
claims, for that matter. As a result,
they will be out of business, thereby limiting access to insurance even
further.
As stated at the beginning of this article, only “scenarios” are
being presented here. Rarely, do
anticipated scenarios actually occur precisely as visualized when actual events
occur. It is always hoped by the
insurance industry that they have thought of everything in their scenarios and are
therefore prepared to handle actual claims resulting from the occurrence of the
“scenarios”. Sometimes things go well
and the anticipated claims match what has been prepared for. But often, catastrophic claims situations
arise that go far beyond what was anticipated and planned for. The burden of paying for catastrophic claims
always shows up in higher premiums for everyone.
Why? Why can’t these “rich”
insurance companies just eat the loss?
Oh, they will “eat” the loss if they have failed to plan correctly
(having large reserves and charging premiums so that funds will be in those
reserves to pay claims). They will “eat”
the losses until there are no more reserves and no more funds to pay
claims. At that point, the insurance
companies close, putting thousands of people out of work, creating a huge
shortage of available insurance (supply/demand=when the demand is greater than
the supply available, prices ratchet up very quickly.
I hope and pray I am incorrect in my developing “scenario”. However, if I am correct, look out for the
deluge and collapse, perhaps of biblical proportions.
Will the general public be extremely angry if these scenarios play out? Of course. Maybe that's why they want to confiscate guns from private citizens? Are they anticipating their own scenario?
Just for reference purposes, this writer has more than two decades of experience in the commercial property & casualty field and holds a Chartered Property and Casualty Underwriter designation and current licensing in Property/Casualty and Life/Health.
