Insurance Exchange – I Don’t Get It

One of my favorite movies is “Big”, the movie that established Tom Hanks as a Hollywood star. In that movie Hank’s character is a 13-year old boy, who is magically transformed into an adult. He lands a job with a toy manufacturer and soon receives a promotion to a junior executive position. At a top-level production meeting, one of the other executives describes a prototype toy. Hanks comments, “I don’t get it” . . . a recurring line in the movie. That’s how I feel about the new insurance exchanges. I don’t understand why people would give up the advice they get from a local agent.

I don’t get it.

According to the AETNA website, the insurance exchanges will be popular. Their site states the following reasons:

  • Insurance Exchange is where citizens can access the exchange.

    The Affordable Care Act no longer allows insurers to deny coverage or charge people more based on their health status or pre-existing conditions. So, many people who were unable to buy coverage in the past will now start shopping for a health plan.

  • Starting in 2014, individuals are required to buy health insurance or face penalties. This is called the “individual mandate.” Although the penalty for not buying coverage is initially low, it will grow over time. As the penalty goes up, so will participation on exchanges.
  • The Affordable Care Act will provide tax credits and subsidies for individuals who qualify, to help make insurance more affordable, when they shop on a public exchange.

Not one of these three reasons offers an explanation of why our nation would spend hundreds of millions of dollars developing these public exchanges. These exchanges have nothing to do with forcing companies to accept customers regardless of health status or pre-existing conditions. The mandate requiring purchase of coverage does not require participation in an exchange. The tax credits and subsidies certainly could have been made available without public exchanges (One has to wonder why they aren’t.). Other advancements, such as including mental health problems in coverage, also could have happened without the creation of state or federal-owned and managed exchanges.

The editorial conjecture added above by AETNA to the factual statements would seem to reflect the excitement of an insurance company that is eagerly embracing an opportunity to sell much more insurance.

For example; Aetna added, “As the penalty goes up, so will participation on exchanges.” I would agree that as the penalty for not purchasing insurance goes up more people will buy insurance. That seems logical. But there is no logic that states there’s a connection between avoiding the penalty and making a decision to buy through an exchange rather than an insurance agency.

As a matter of fact, we have state laws requiring auto insurance in all fifty states. Yet, the percentage of autos that are uninsured in the United States is over 16%. It remains to be seen to what degree the purchase of health insurance will be regulated and enforced. There are states where the percentage of uninsured autos is over 25%. It appears to be a matter of political will and the lack thereof.

As I see it, public exchanges are nothing more than government owned insurance agencies. The state and federal government is spending billions to develop insurance agencies, and in the process putting many privately owned agencies out of business.

I don’t get it.

That same AETNA site states that experts predict that 25 million people will purchase their health insurance through an exchange by 2016. That would be about 7.8% of the population.
Our local “experts” (state officials) predict that about 1.3 million Minnesotans, or about one in five (20%), will use the Minnesota Exchange (MNsure) to shop for health insurance. About 700,000 of those will be Minnesotans eligible for the publicly funded programs, Medical Assistance or MinnesotaCare.

The projected budget for the exchange will be about  $54.7 million for 2015. That would work out to about $42 per person. That amount doesn’t include the huge amount of money spent to set up the Minnesota exchange. The MNsure website lists $110 million in grants received to develop the program. This does not include commissions that will be paid to agents, which will be paid by the insurance companies.

According to a Pioneer Press article health insurance agents in Minnesota are worried about losing about $50 million in commission. It follows that after all the dust has settled the cost per customer for this new insurance agency will be over double what it cost per customer to place health insurance in the past, as the average commission paid in Minnesota seems to have been in the area of $20 per person when you average all pans and new and renewal commissions.

How is this helping solve our health crisis?

I don’t get it.

I’ll readily admit I don’t know a great deal about health insurance issues. I’ve worked in the property and casualty business for five decades. During that time I’ve worked for insurance companies . . . and worked for and owned several insurance agencies. Currently I own a wholesale insurance agency. We placed business for about six hundred retail agencies last year.

I am not actively engaged in selling health insurance, nor is anyone in my employ.

A few years ago one of the largest private passenger auto insurers in the nation introduced a new program in Minnesota. Because my agency was at that time the largest single source of new business for that company in our state, our actions had a significant impact on their overall numbers.

Their new program provided what they termed to be “essential” coverage. Their strategy was to provide a low cost product for those who were making their buying decision mainly on price. On the surface their idea seemed to make sense, at least to bring new business in the door. According to a McKinsey Report, about 30% of the people in the United States with private auto insurance will shop their insurance this year. That 30% includes enough confirmed shoppers to be known as the least loyal and most price sensitive segment of the market.

That company designed its product to achieve a low price structure in part by addressing the issue of unidentified drivers in homes. Actuaries have found that people are paying inadequate premium for their true exposure because the company is unaware of who is actually driving the car.
The company’s new policy had a provision, which dropped the limit of liability on the policy to the state minimum requirements if the driver at the time of loss was a member of the household who had not been reported to the company.
We recommend to our producers that they sell policies with bodily injury liability limits of at least $250,000 per person. If they sold a policy with those limits and a loss occurred that involved a person driving the insured vehicle who was a member of the household, who had not be disclosed, the limit of liability would be $30,000 . . . instead of the $250,000 that had been purchased.
That would be a truly rude surprise for the insured.
Injured Driver

Property and Casualty owner/agents only make a profit if they keep customers for over four years. Part of their compensation is the value of the agency they’re building. Most good agents have a strong referral program going that generates the majority of their new business. All of this points to the distinct need for agents to treat their customers with a high degree of ethical consideration.

Successful ethics in the insurance industry need to include a healthy respect for the customer. Most people seem to think they’re entitled to reasonable assumptions when they buy insurance. I tend to agree with them; and in my five decades in the industry have found only a small percentage of people to be unreasonable at the time of loss.

When I heard about the new program I was dismayed because I thought it crossed an ethical line. I told our producers NOT to sell the new program. Over the next few years it became the fastest selling personal auto product for that company in our state. Our direction to our producers to avoid selling that product was challenged by that company’s personnel, at least monthly, but we never relented.

We were still their largest single source of personal business in Minnesota, but were not growing at the pace they knew we could have been had we embraced their HOT product.

After selling the program for nearly four years that company suddenly withdrew it from the market.  The program had incurred nearly twice the amount of losses that they had expected. The company was losing nearly twenty cents for every dollar of premium they sold. They found that the people buying their stripped-down contract generally had low credit and low net worth. It is almost universally held in our industry that people with low credit and low net worth are less responsible than those with good credit and higher net worth.

Responsible people embrace a lifestyle that results in better than average loss ratios. Selecting responsible people is the essence of underwriting. For example, responsible people tend to drink moderately, maintain their cars better, and drive without texting.

I do believe certain insurance products are better marketed through websites. That coverage would be for those that have low risk and low complexity. For example, if a person has a low net worth and low credit scores they probably consider their auto insurance to be a commodity to be purchased to satisfy a statutory requirement. Those customers who seemingly want the lowest limits that will fulfill their legal requirements for coverage might be best served buying their insurance online, when price comparisons are all that matter to them.

As net worth goes up and as credit scores become better, the propensity to have a more complex insurance situation also increases. Generally, those people want the advice of a professional and want an agent involved in the sale. It remains to be seen if people will consider state government employees “professionals”. It also remains to be seen how well actual insurance agents mesh with the various exchanges, if at all.

Health insurance does NOT seem to fit the matrix of low complexity. Also . . . the main problem for the exchange has been identified as avoiding adverse selection. From the beginning of the discussion of the health crisis much of the talk centered on how to convince “the young invincibles” that they need to purchase health insurance. Everyone seems to agree that a pool of customers that is populated by the elderly and infirmed will not generate low rates.

Young InvincablesMost of those who will purchase from the exchange will be doing so for access to the subsidies. Their income will be low. Although the maximum allowable income for subsidies for a household of four is $94,200, it’s probably safe to say the larger the subsidy, the more likely the person will purchase through the exchange.

I wonder if much consideration has been given to the adverse selection that will occur from having mostly those with low credit and low net worth  buying health insurance through the exchange. I’m assuming that these people will continue to have the irresponsible attributes noted by the property and casualty industry. I’m assuming they will make bad personal  choices regarding drugs, eating habits, exercise, etc. and will require much more in the way of health care.

No doubt the insurance companies are embolden by the “reinsurance” offered for three years by the federal government. What is called a transitional reinsurance fee is a method of charging those who buy insurance or self-fund insurance $63 each through insurance company pass-throughs to pay for the expected losses through the exchange programs. By law this will be at least $25 billion nationwide over the next three years. But what’s planned for when this “subsidy” runs dry. And, what happens when the power inevitably shifts in Washington and the money is shut off that supports this behemoth?

By spending $millions our government has created several insurance exchanges that will attract mostly those with health issues, credit problems, and low net worth. Because of whom it attracts, the cost per customer will logically be much higher than it was through the system that has been in place for decades.

I understand that we are a compassionate nation who wants everyone to have access to good health care. Having everyone “insured” seems to be a good goal. Yet, The Minnesota Department of Health stated that about 9% of the people of Minnesota have been classified as uninsured and of those 60% are eligible for Minnesota programs and have not enrolled. At what point do we quit throwing money at trying to reach the “hardcore” uninsured who will more than likely thumb their nose at this system as they have all other systems in the past?

I don’t get it.

Insurance exchanges will be popular if they can provide cheap insurance efficiently. How you feel about whether or not they will do that seems to be a function of your politics. Those who tend to be more liberal seem to think there is a Santa Claus somewhere who will defy every principle I’ve learned about insurance and make a silk purse out of what appears to be the definitive sow’s ear. Those who tend to be conservative point to Massachusetts where rates have gone up 30% since they put in their exchange.

Silk Purse out of a Sows Ear

During my career I’ve been a top national producer for many, many companies. I created one of the most successful self-insurance pools in the United States. That self-insurance pool has been in business for three decades and has nearly $50 million in assets. It has saved the political sub-divisions of North Dakota many, many millions. I also created one of the first insurance aggregation networks in the United States. Most of the new business placed in the United States is being placed through that model.

My experience has taught me that the insurance world is very competitive. Thousands of people are competing every day for limited and scarce commission dollars. Those agents use skill to make sure their clients are getting the best value for their dollar. The agents who do the best job providing satisfaction to their customers usually are the ones who have the most success.

The suggestion that a government agency can do that marketing job better and more efficiently than a private enterprise is laughable.

Progressive Insurance is a great company. They have been an innovator in our industry on many fronts. I’m not their biggest fan, in that I disagree with what appears to be their primary motive.

One of the representatives once told me, “If you want to understand Progressive, simply know that the entire company comes to work each day with one goal in mind . . . delivering the lowest premium to the customer.”

I have seen very little to dispute that statement. While on the surface you might think all companies have a devotion to low cost for their customer, Progressive seems to have taken this to the extreme.

Years ago I read a book by the founder of McDonald’s, Ray Kroc, called “Grinding It Out”. In that book Kroc spoke that one of his basic rules was to make sure his vendors were making money. That seemed to make good sense to me; and I’ve embraced that tenet since leaving the corporate world and opening my own business in 1985. Progressive doesn’t seem to respect the need for its agents to make a profit in that they pay commissions that are below the average in the industry.

I understand that Progressive sets its commission based on what they feel is equitable to all other distributions systems and, as such, has logic for paying what they do.

Progressive has two distribution channels. They sell direct to the public through their corporate phone banks/websites and they sell through independent agents.

Progressive currently (2013 Q2 Report) generates about 54% of their auto premium through agents and about 44% through direct sales. They write about 8% of the market, which is testimony to their abilities at achieving their goals. They had a much smaller percentage of the market just a few years ago. For years, Progressive broke down their expense ratio for their two distribution channels on their monthly reports. The expense ratio (cost of doing business other than loss and loss adjustment expense) was nearly identical, month after month, for the two distribution channels.

Progressive, who lives and breathes cost-efficiency, couldn’t deliver a product on a direct basis for less than what it cost to have that product delivered through the American Agency System. What chance does our government have in creating a system that is more cost efficient than selling through insurance agents?

I tend to be liberal on most non-fiscal issues, but I just can’t get myself to forget that insurance is a very unforgiving discipline. The loss ratio combined with the expense ratio dictates what will happen to your premiums. Since acquisition expenses have gone up by creating exchanges, and everything points to an adverse selection problem which almost always results in adverse loss ratio, It is extremely hard to imagine how premiums can do anything but increase.

The consultant that has been most influential in the architecture of Romney Care, ObamaCare, and MNsure has said that premiums will increase 26 to 40%.

I don’t get it. How did this happen?

I realize not every state acted the same way as Minnesota. I hope others were much smarter, because we’ve ended up with a bloated monstrosity that obviously won’t work.

I think it’s fair to say that only a very small number of people would have foreseen what we ended up getting five years ago, before the general election of 2008.

Most liberals wanted a single payer program and most conservatives wanted a mishmash of tort reform and tax credits.

Obamacare logoWhen the Democrats marshaled the votes to pass Obamacare by backing away from single payer and other key elements of their plan, the Republicans left the building and what resulted was a law seemingly written by inexperienced bureaucrats with little understanding of practical application. They have a law that nobody is proud enough to talk about on the Democratic side and a highly bashable punching bag for Republicans.

The same thing happened in a microcosm in Minnesota. The Democrats had the votes to decide to establish a state-owned exchange. They established a committee that seemed to be prejudiced against business and the insurance industry. They apparently naïvely turned themselves over to the IT specialist who must be almost drowning in the excessive prices they charged for their services.

This whole fiasco can’t be blamed on one party. When the Republicans in our state had an opportunity to create a reasonable exchange they turned it down because they were going to either

1.) Elect Michelle Bachmann and she would repeal Obamacare, or
2.) Their guy on the Supreme Court would rule it unconstitutional, or
3.) They were going to take over the majority of the U.S. Senate in 2012.

The Minnesota Republicans walked away from the process and allowed the Democrats to spend as they haven’t for years . . . obviously so the Republicans could criticize them for spending in the next election.

It was politics at its worst; and we have to live with it.

I get it!

(This blog was written in late 2013 . . . I’ve watched our state exchange attract 22% of their projected volume of business and declare a huge success. I still don’t get it!)

(Second update. The exchange in MN has enrolled just 50,000 people in private health plans . . . far below their goals. Given that through this coming fiscal year hey will have sent over $200 million the cost per enrolled person is obscene.)


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The Evolution of Health Insurance

How Do I Choose Health Insurance

Affordable Health Insurance

Average Health Insurance Cost

Health Insurance Rate Increase and You

Health Insurance for Low Income

What to Do If You Can’t Afford Health Insurance

PPO vs. HMO Health Insurance

Factors That Influence Health Insurance Premiums

Health Insurance Broker

How to Choose Health Insurance

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Why Didn’t the Federal Government Have a Bond on

The Differences Between Primary, Secondary, and Supplementary Health Insurance

Adding Your Baby to Your Health Insurance

Business Accident and Health Insurance

Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.

While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.

Jim operates an insurance agent network called Insurance Partners, aggregating agents in the Midwest for over 25 years. He was National Agent of the Year for Metropolitan in 1993 and Midwest Agent of the Year for Travelers in 2011. He served as a founding board member of the Surplus Lines Association of Minnesota.

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