Thursday, June 30, 2016

Broker Schmoker

Insurance is a highly regulated industry because it involves lots of money exchanging hands, which influences greed, and some can't control themselves.

Workers' compensation requires even tighter regulation because, in most states, it is essentially a captive market. Where workers' compensation is compulsory, free market theory is not adequate to keep people from getting ripped off.

Deceit is particularly acute when the lexicon of insurance is bandied about in the sales and purchase phase of insurance.

I'm willing to bet that even if you are in the workers' compensation industry, you'd have a tough time with these phrases: guaranteed cost, retrospective rating, reinsurance participation, collateral agreement, reinsurance treaty, retrocession, captive facility....

These are the terms that are at the heart of the California Department of Insurance's action against Berkshire Hathaway affiliates that were ordered to stop issuing or renewing EquityComp policies.

CDI yesterday took the unusual action of issuing a cease and desist order against California Insurance Co. and Applied Underwriters Captive Risk Assurance Co. for failing to file contracts and forms related to those fancy terms a couple of paragraphs up.

The problem, according to CDI, is that contracts that aren't approved by the department modify terms of approved forms and agreements placing policy holders (i.e. employers) at great risk of subsequent substantial debt because the agreements require the employer to reimburse the insurers for claim expenses.

In other words, a guaranteed cost program, where the employer knows up front what insurance is going to cost, gets substituted for a reimbursement program where the employer not only doesn't know what the end cost is going to be, but doesn't have any control over that cost.

Applied Underwriters and California Insurance are appealing CDI's action. They say the paper they are using doesn't require department approval, because of all the fancy terms they contain...

In the meantime, and partly in response to CDI's action, the insurance industry is sponsoring AB 1922, by Assemblyman Tom Daly, D-Anaheim.

The bill would excuse carriers from filing side agreements for policies with a deductible of $250,000 or more for large employers that satisfy three of four criteria, including:
  • Being represented by a broker during negotiations as well as a full-time risk manager or attorney.
  • Employing 500 or more workers.
  • Having annual payroll of $20 million or more.
  • Having a manual standard work comp premium of more than $1 million.
Many years ago my law firm was involved in negotiating a "large deductible" policy for an employer of the size described in AB 1922. Brokers were involved. They didn't help. In fact, they hindered the process. Brokers get commissions. Commissions don't get paid to either the buying or selling broker unless there's a sale.

In other words there's great incentive for brokers on both sides to push a sale through regardless of benefit, or detriment, to the employer/customer.

Just because an employer is represented by a broker and/or risk manager and/or attorney doesn't make the employer more sophisticated or less vulnerable to greed.

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