California REG-2017-0001 Requirements and Impact

California REG-2017-0001 – Actuarial & Financial Implications Regarding Workers’ Compensation High-Deductible Policies

 

The New Requirements:

 REG-2017-0001 is an effort by the California Insurance Commissioner and Department of Insurance to protect California workers by decreasing the risk of insurer insolvency via new regulations concerning workers’ compensation high-deductible policies.

 

The proposed regulation will require the insurer to report uncollateralized Deductible Ultimate Receivables as a loss in its Financial Statements.  The assumption is that “loss” is defined in this case as an impact to the insurer’s income statement rather than specifically as underwriting loss and expense.  The American Academy of Actuaries Committee on Property and Liability Financial Reporting has two recommendations for how this “loss” would flow through the financial statement:

 

  • The Deductible Ultimate Receivables should be separated into the Deductible Recoverable and the Deductible Loss Reserve for reporting purposes
  • The “loss” should be recorded on the write-in line items on the financial statements. This maintains the underwriting loss and expenses in the financial statements on a net of deductible basis not dependent on collateralization

 

The two components recommended for reporting purposes include:

 

Deductible Recoverable

The Committee recommends that non-collateralized Deductible Recoverable be reported as a non-admitted asset.  This is assuming credit risk requirements are not satisfied. This follows the suggestions presented in the SSAP 65 section on high-deductible policies.  The Deductible Recoverable “shall be accrued and recorded as a reduction of paid losses simultaneously with the recording of the paid loss…”  SSAP 65 further defines that the accrual will be either partially or fully reflected as non-admitted to reflect the credit risk of potential non-payment.

 

Deductible Loss Reserves

The Committee recommends insurers report the uncollateralized Deductible Loss Reserves as a write-in liability on the balance sheet.  This is similar accounting treatment to the reinsurance credit risk of losses ceded to reinsurers.  The reported loss reserves are on a net basis while the Provision for Reinsurance Liability line item on the balance sheet is utilized to prevent surplus benefit from amounts ceded to certain reinsurers.  Keeping the credit risk from uncollateralized Deductible Loss Reserves separate from underwriting losses will result in greater transparency for the issue at hand.

 

These recommendations would result in the “loss” being recognized by the insurer.  There would be increased transparency in the financial statements because credit risk and underwriting risk are clearly separated.  It is consistent with SSAP 65, the Statement of Statutory Accounting Principles on high-deductible policies.

 

Impact of REG-2017-0001 and Next Steps

The implementation of this regulation could result in a potentially significant financial impact for certain insurers that would be difficult for them to offset.  These insurers may have more difficulty obtaining sufficient collateral for prior policies that may still have significant Deductible Loss Reserves.  On the other hand, insurers who write future high deductible polices  who in the past have not obtained the collateral requirements specified in the regulation may be able to adopt processes to rectify this situation.

 

Please contact the authors for more information:

James Chang, FCAS, MAAA Email: james.chang@hugginsactuarial.com Phone: 732-881-4663

Kim Piersol, FCAS, MAAA Email: kim.piersol@hugginsactuarial.com Phone: 610-892-1808

Ronald T. Kuehn FCAS, MAAA, CERA, CPCU, ARM, FCA Email: rusty.kuehn@hugginsactuarial.com Phone: 610-892-1823

 

 

 

Driverless Cars and Insurance

How Driverless Cars Affect the Auto Insurance Industry

by James Chang, FCAS, CPCU, ARe, MAAA and Kim E. Piersol, FCAS, MAAA

The American public has mixed feelings about giving up control of their cars’ steering wheels.  Despite the enthusiasm with which autonomous vehicles are being developed by auto manufacturers and technology companies, recent polls show that few drivers are interested in autonomous vehicle technology despite the potential safety and time-saving benefits.

 

Auto insurers are already thinking about how self-driving cars will affect them even though it might be a long time before we see them regularly on the road.  From the invention of the horseless carriage in 1890’s, car insurance has evolved from simple handwritten contracts to the high-tech global industry that it is today.

 

The transition to driverless cars will create the need for more personal coverage and to increase the need for more commercial insurance as car manufacturers will assume much of the risk for this new techology.  However, it is too soon to completely know what the insurance strategy will be now since it could be 25 to 30 years before we transition to driverless cars.

 

Currently, technology companies and auto manufacturers are capturing data, and that data can be used for actuarial models.  Insurers will also need to form partnerships with the winners in the autonomous vehicle space.  Insurers are having conversations with the autonomous vehicle providers to solve problems points and lot of benefits are to be gained through these partnerships.

 

We can speculate where the commercial liability responsibility lies for autonomous vehicle accidents.  The responsibility for liability becomes complicated when multiple parties are involved in an accident.  The fault can be divided between consumer, manufacturer, and software maker.  Manufacturers may be required to purchase insurance for their vehicles in the future.  There may be a battle between the manufacturer and insurance company to see who pays for the accident.  Other trends driverless cars can have on the insurance industry include dropping of insurance premium as accidents decline and more drivers could reduce or drop coverage.

 

There could be new lines of business created as a result from driverless cars.  Cybersecurity, such as protection against remote vehicle theft, ransomware, coverage for identity theft, and theft or misuse of personal data will emerge as well as product liability for software and sensors and public infrastructure insurance for cloud server systems that manage traffic and road network.

 

Industry experts conclude that insurers can take key steps in preparation of a driverless future.

 

  • Build expertise in big data and analytics; insurers must be able to harness the data generated by autonomous vehicles and systems that support them.
  • Develop the actuarial modeling framework by utilizing advanced actuarial modeling techniques as they adapt to the autonomous vehicle features.
  • Collaborate with automakers, software developers, governmental entities, manufacturers and the like to share data and expertise.

 

The business model will change as the auto insurance risks change followed by insurance policy changes.