Years ago a large global insurer, working to grow its book and establish a presence in a new market, underwrote a large deductible workers compensation account that, under normal circumstances, might have either been rejected or set at a very high premium with substantial collateral to reduce the insurer’s risk.
However, neither occurred because the carrier was anxious to establish its market presence. Although the account’s deductible was material (over $750,000) the carrier agreed to a cash loss fund account that would be periodically replenished rather than a fully collateralized program. It used a cash loss funding account and an LOC to “secure” the risk to ultimate value based upon actuarial projections.
Almost immediately after policy inception, the insured lapsed in cash funding the established loss fund within the deductible layer. Despite several cash infusions, the fund never reached the contractual level. Shortly thereafter, the insured, which was experiencing financial difficulties, ceased making payments while the number of reported claims and losses mounted. The carrier ultimately canceled the policy for non-payment of premium, but with the loss fund exhausted and no LOC collateral, the carrier became liable to pay all claims both within the deductible layer as well as the insured layer above the deductible. The carrier is probably still making payments today and will likely continue to do so for years, and the policy is a significant loss. Unfortunately this example is not uncommon.
This is a prime example of increased scrutiny on insurance carrier practices with respect to the treatment of large deductible accounts. Industry and regulators have extensively studied the financial risks of large deductible programs. In particular, the National Association of Insurance Commissioners (NAIC) and the International Association of Business Communicators (IABC) have formed a joint working group to study large deductible insurance and to assess the need to adjust accounting rules related to the use of large deductibles. Currently, a debate exists as to whether insurance carrier accounting treatment for deductibles should change to increase transparency surrounding the financial implications to the insurer of the credit risk associated with these large deductible programs.
We discuss below proposed revisions to the accounting rules and their associated pros and cons, and identify other regulatory changes under consideration. Before we address them, let’s visit what brought us to this point: Whatever changes they implement, companies will need to address root causes to solve underlying problems tied to assessing, reconciling, securing and reporting large deductible obligations.
For the full article, refer to page 6 in the Fall 2016 issue. https://www.airroc.org/assets/docs/matters/airroc%20fall%202016%20vol%2012%20no%203.pdf