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  • April 12, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    By Jeremy F. Heinnickel, Esq., Saul Ewing

    The insurance industry is no stranger to collecting and analyzing data.  Long before the internet (and even computers), underwriters routinely used historical data for risk selection and pricing.  What has changed in the past several years is the dramatic increase in the amount and types of data available to insurers.  Each day, massive stores of real-time data are being created from sources like social media, internet browsing histories, mobile devices, and cloud computing platforms.  This information boom is often referred to as “big data.”   

    This large influx of data is of little use if it cannot be effectively organized and analyzed.  Analytics is often used to achieve these goals.  Data analytics is the science of drawing insights from sources of raw information.  One subset of data analytics, predictive analytics, is particularly useful for insurers.  Predictive analytics uses data, algorithms, and machine learning techniques to identify the likelihood of future outcomes based on historical data. 

    Opportunities

    While underwriting is often cited as the main beneficiary of the big data revolution, it also has tremendous potential in claims handling and management.  Predictive analytics can be particularly helpful to claims handlers because it can assist them in identifying patterns in historical data that can be applied to current or future claims.  Identifying patterns in claims and losses can be useful in many different areas.  Below are just a few examples: 

    • Fraud Detection - Fraud detection is currently the most prevalent use of big data and analytics.  Using data analytics and artificial intelligence, an insurance carrier can more rapidly and consistently identify suspicious claims that may not have been identified by looking at a single claim file.  Potentially suspicious claims are often then referred to an insurer’s special investigations unit (SIU) for further analysis.   
    • Claims Triage / Claims Management – Resource allocation is a challenge for every claims department.  Many insurers utilize data analytics to assign scores and/or rank claims based on risk, allowing them to focus additional resources on high-risk claims.  This saves time and resources internally while increasing claim-processing efficiency to improve customer satisfaction. 
    • Setting Reserves / Settlement – Using predictive analytics, an insurer can compare factors associated with new and pending claims against those of past losses.  Analysis of the values of past claims fitting similar fact patterns can help an insurer assess the appropriate reserve and settlement values for current losses. 
    • Rapid Payment Situations - In emergency situations, insurance companies are faced with a much higher volume of claims, and often decisions on these claims need to be made quickly.  In these situations, claims are vulnerable to overpayment.  Using big data and analytics, claims handlers can more quickly evaluate claims, assess the appropriate value based on historical data, and identify potentially fraudulent claims in time-pressured situations.

    Challenges

    While the use of big data and data analytics in claims has great potential, there are several hurdles to overcome in implementing these tools.  One of the most significant barriers to adoption in the insurance industry is cost.  Establishing systems to collect, store, and protect data can come at a significant expense.  Larger carriers can spread the fixed costs of developing/purchasing these systems over thousands of claims.  Smaller carriers with a lower volume of claims may have more difficulty in justifying the costs. 

    The other factor that is most often cited as a barrier to innovation in the insurance industry is regulation and legal concerns.  Privacy issues are paramount any time data is being collected and used (especially from consumers).  Numerous federal laws that potentially apply to the collection, storage and use of data, including the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act, the Children’s Online Privacy Protection Act, and the Fair Credit Reporting Act.  Many states have also adopted laws to protect privacy, with California being a leader in this area. 

    Cybersecurity is also a significant consideration for any company storing and/or transferring data. Many states have laws that establish requirements in the event of a security breach.  For example, Pennsylvania’s Breach of Personal Information Notification Act applies to any “entity that maintains, stores or manages computerized data that includes personal information” on a Pennsylvania resident and requires the collecting entity to provide notification to those residents who are affected by a security breach of the computerized data.  Furthermore, while not yet adopted in many states, the National Association of Insurance Commissioners recently adopted the Insurance Data and Security Model Law, which establishes data security standards and standards for investigation of and notification to the insurance commissioner of cybersecurity events.  A similar cybersecurity law is already in effect in New York. 

    Finally, over-reliance on data analytics and other forecasting tools can be problematic.  For example, while an automated fraud screen process may be able to identify the indication of fraud in a claim, many companies refer the claim for review by the SIU before it is denied.  As with other forecasting tools, predictive analytics indicate probabilities, not certainties.  The safest approach is to use these tools to assist but not supplant a claim handler’s thought process.

    This article was previously published in the PAMIC Pulse

    Jeremy Heinnickel is an attorney from the Harrisburg office of Saul Ewing Arnstein & Lehr LLP.  He devotes his entire practice to advising insurance companies and producers.  He has extensive experience counseling insurance clients on regulatory, corporate, and transactional matters.  He also litigates insurance-related cases in state and federal courts, and before regulatory agencies.  Over the past several years, he has focused on the impact of technology on the insurance industry, and particularly InsurTech. 

  • April 12, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    Good news related to numerous pieces of legislation that PAMIC has been instrumental in driving to the finish line.  The PA House of Representatives dealt with numerous insurance-related Bills.

    HB 1851 Amends Insurance Dept. Act re financial exams Pickett, Tina Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018   This bill includes PAMIC’s transparency initiatives related to the PID’s use of outside consultants and a broader industry initiative to put procedures and requirements in place when the PID is conducting both financial and market conduct exams.  A companion bill in the Senate recently passed with a unanimous vote as well.  The two bills will go to a Conference Committee for final consideration before going to the Governor for signature. H-Final Passage by a vote of 194 YEAS 0 NAYS 

    The following two Bills work together to eliminate the long-standing prohibition on producers giving rebates and inducements to their clients. They allow up to $100 in value per customer.

    SB 877 Amends Insurance Department Act re rebates White, Donald Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018 -A companion bill in the Senate recently passed with a unanimous vote as well.  The bill will go to a Conference Committee for final consideration before going to the Governor signature. H-Final Passage by a vote of 195 YEAS 0 NAYS 

    SB 878 Amends Insurance Company Law re rebates White, Donald Apr 9, 2018 - H-Laid out for discussion Apr 9, 2018 - H-Third consideration Apr 9, 2018 -A companion bill in the Senate recently passed with a unanimous vote as well.  The bill will go to a Conference Committee for final consideration before going to the Governor for signature H-Final Passage by a vote of 191 YEAS 2 NAYS

    The following bills create new limited lines licenses allowing consumers to purchase self-service storage insurance and travel insurance at the business location.  Both these bills passed the Senate unanimously with a high likelihood of passing the House this week as well.

    HB 504 Amends The Insurance Dept. Act re storage Charlton, Alexan Apr 9, 2018 - H-First consideration Apr 9, 2018 - H-Laid on the table

    SB 630 Act re limited lines travel insurance Reschenthaler, G Apr 9, 2018 - H-First consideration Apr 9, 2018 - H-Laid on the table

    This article was previously published in the PAMIC 360

  • April 12, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The TCJA contains substantial changes to the international taxation principles currently in effect, bringing the US closer to a territorial-based regime and curtailing the ability to defer tax on foreign source income. Insurers need to pay particular attention to these provisions if they are part of a global organization having intercompany charges and ceded reinsurance transactions.

    Deemed Repatriation of Deferred Foreign Income

    The TCJA moves the United States from a worldwide tax system to a participation exemption system by providing corporations a 100% dividends received deduction for dividends distributed by a controlled foreign corporation (CFC). To accomplish this transition generally requires that, for the last taxable year of a foreign corporation beginning before January 1, 2018 all US shareholders of any CFC or other foreign corporation that is at least 10-percent US-owned but not controlled (other than a PFIC), must include in income their pro rata shares of the accumulated post-1986 deferred foreign income that was not previously taxed. Income inclusion is to be taxed (a Transition tax) at a 15.5% rate on accumulated post-1986 foreign earnings held in the form of cash or cash equivalents, and 8% rate on all other earnings. To accomplish this, the TCJA permits a deduction in an amount necessary to result in a 15.5% tax on foreign earnings held in cash or cash equivalents, and an 8% tax on foreign earnings held in illiquid assets.

    The TCJA allows a US shareholder to elect to pay the transition tax over eight years at 8% for the first five years, 15% in the sixth year, 20% in the seventh year and 25% in the eighth year.

    Mazars Insight: We strongly suggest the performance of earnings and profits studies related to any relevant specified foreign corporations to accurately determine accumulated post-1986 deferred foreign income that would be subject to the transition tax. Companies utilizing net operating loss carry forwards in 2017 should consider not electing the eight year spread of transition tax.

    Companies’ 2017 year-end tax provisions need to consider this as the tax is a 2017 event. Also, if a company has made the assertion that their investment in the applicable foreign subsidiary is not being permanently reinvested, the taxable income recognized under this provision would be an increase in its tax basis in the foreign subsidiary and as such would be treated as a temporary tax difference subject to deferred tax. Otherwise, the increase in taxable income is a permanent tax adjustment.

    Deduction for Foreign Source Portion of Dividends Received

    The TCJA provides a 100% dividends received deduction in relation to the foreign portion of dividends received by US C-Corporation shareholders from 10% owned foreign subsidiaries. Additional features of this provision include: 

    • No foreign tax credit is permitted with respect for qualifying dividends;
    • Hybrid dividends are not subject to the deduction;
    • Dividends from Passive Foreign Investment Companies will not be eligible for the deduction;
    • Dividends received by a domestic corporation from a specified foreign corporation via a partnership are eligible for the deduction provided certain requirements are met;
    • Dividends received by CFCs from specified foreign corporations that are treated as subpart F income may also qualify for the deduction; and
    • US shareholders must satisfy a holding period requirement of more than 365 days during the 731 day period that begins on the day that is 365 days before the ex-dividend date.

    Mazars Insight: While the participation exemption brings the US closer to a territorial tax system, at least with respect to the earnings of foreign corporations, it is worth noting that Subpart F is still very much alive, and further, the bill introduces additional current tax on certain types of foreign income, described in more detail below. The overall effect is to reduce tax deferral on foreign income while modestly expanding the base. 

    New Base Erosion and Anti-Abuse Tax

    The TCJA introduces a base erosion and anti-abuse tax (“BEAT”) which essentially operates as a minimum tax applicable to taxpayers that are subject to US net income tax, have average annual gross receipts equal to or exceeding $500 million (over a three year period ending with the preceding tax year), and have paid or accrued certain related party deductible amounts included in regular taxable income (i.e., base erosion payments). Note that the gross receipts test is based on controlled group rules which would require inclusion of foreign members of the controlled group, but only to the extent the foreign members’ gross receipts relate to effectively connected income (“ECI”). For insurance companies, premiums paid for gross premiums written on insurance contracts during the taxable year are also considered base erosion payments. These taxpayers will incur the BEAT tax if it exceeds their regular tax.

    This minimum tax equals the excess of 10% (25% for tax years beginning after December 31, 2025) of a taxpayer’s “modified taxable income” for a tax year over the taxpayer’s regular tax liability for the tax year, with an allowance for certain credits under Chapter 1 of the Code. Modified taxable income is calculated by adding back certain deductions attributable to payments to related foreign companies and related NOLs. There are certain exceptions to the BEAT tax for small tax paying groups (i.e., taxpayers with a base erosion percentage of less than 3% for the tax year, or 2% for certain banks and securities dealers), as well as, certain types of payments excluded from the definition of what constitutes base erosion payments. Unlike the repealed AMT regime, any BEAT in excess of regular tax will not be creditable in the future.

     Mazars Insight: Here is where we really see Subpart F remnants in the US taxation system, albeit at a reduced rate. However, there is still quite a bit undefined in this provision. For example, is the $500 million gross receipts test on gross of ceded reinsurance earned or written? Can ceded loss and claim reimbursements be netted from the ceded premium that’s treated as a base erosion payment? Insurers have already begun to evaluate and change their ceded reinsurance agreements in order to minimize the impacts of the BEAT. Taxpayers should begin to model projections on a regular tax and on a BEAT basis in order to determine where the breakeven point is. If taxpayers have any latitude on business income/expenses and/or timing of adjustments to taxable income (e.g., bonus depreciation), permanent tax savings may be available to them. We expect the Treasury Department to prescribe regulations as appropriate to define, with more granularity, the nature of how to calculate adjustments to modified taxable income, particularly with respect to certain industries like insurance. We also expect an explicit anti-abuse provision preventing planning to circumvent BEAT. 

    On January 10th the FASB in Staff Q&A TOPIC 740, NO. 4 ACCOUNTING FOR THE BASE EROSION ANTI-ABUSE TAX indicated that the BEAT is to be treated as a period cost and that deferred tax assets and deferred tax liabilities should be recorded at the regular rate. We would suspect that Statutory Accounting rules under SSAP No. 101 would follow the lead of the FASB on this issue.

    Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income

    The TCJA permits intangible income from Foreign-Derived Intangible Income (“FDII”) to be taxed at 13.125% (the effective tax rate of 13.125% is arrived at by computing a FDII deduction). The FDII deduction can only be made if the income derived is not from a low-taxed jurisdiction.

    US shareholders of CFCs are required to include in income their “global intangible low-taxed income” (“GILTI”). The mechanism for taxing such amounts would be similar to Subpart F. That is, a shareholder’s GILTI, generally equal to the excess of the shareholder’s CFC net income over a routine or ordinary return would be currently taxable and subsequently increase the shareholder’s basis in its CFC stock.

    Mazars Insight: As a result of the deduction available to corporate shareholders equal to 50% of the GILTI through 2025, US shareholders will be taxed at an effective rate of 10.5% on these amounts irrespective of whether any amounts are distributed. The GILTI provision effectively increases the type of earnings subject to immediate taxation under Subpart F, indicating potential concern that the move toward a territorial system could result in profits permanently shifted offshore.

    This article was featured in the PAMIC 360.

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at www.mazarsusa.com.

  • March 28, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    Congratulations to newly minted Insurance Commissioner, Jessica Altman. On March 20, the PA Senate confirmed Insurance Commissioner Jessica Altman by a 50-0 vote.

    In her confirmation hearing before the Senate Banking & Insurance Committee, Insurance Commissioner Altman touched on some topics, some of which included:

    • Drug Formularies for Workers’ Compensation as a means of reducing opioid abuse: Altman stated her support for formularies as a care management tool but also cautioned that some individuals face special situations which warrant processes to curb unnecessary opioid use but which don’t discourage necessary use.
    • Use of medical marijuana and insurance law: Altman said that much of the answer to that question lies outside of the purview of the Insurance Department now but that there needs to be a better understanding of its implications for liability insurance.
    • Private Flood Insurance: Altman pointed to Federal changes in the NFIP (re-mapping) which reclassified property locations into higher risk flood zones requiring the insurance and making the product unaffordable to many. This cost has provided an opening for private sector Flood Insurance which contains a surplus lines alternative to NFIP. She did say that the Department was not telling carriers to offer Flood Insurance.

    You can read Commissioner Altman’s testimony here:  Testimony

    You can see Commissioner Altman’s full presentation here:  Full Presentation

    This article was featured in the PAMIC 360

  • March 28, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Michael Dubin, Baker Tilly

    The history of professional employer organizations’ (PEO) involvement in workers compensation has been fraught with bad actor scams and insurance company insolvencies. Now, through the rise of technology and the prevalence of PEOs in the workers compensation market, companies may see truly useful transformation within traditional workers compensation models.

    PEOs and Workers Compensation Insurance Regulation

    Ever since the creation of workers compensation insurance more than 100 years ago, nearly every employee in the United States has been insured for workers compensation through a policy issued to the employer by a regulated insurance company; the amount charged for that coverage has also been regulated. Due to the perceived randomness and long-tail nature of workers compensation claims, as well as the small sample size of any individual employer, state mandated rates for each employer were based solely on the employer’s industry classification. The rigid assumption that the amount of claims incurred by an individual employer does not impact rates has become relaxed throughout the years due to the regulatory approval of experience rating, retrospective rating and large deductibles. Currently, there is much variation in regulated rates within employer classification codes, but the regulated rates still do not reflect all differences in expected losses. Through increased use of self-insurance (e.g., large deductibles), many employers are now able to retain more workers compensation risk than what was possible in the early years of workers compensation.

    History of PEOs

    PEOs are organizations that assist their clients with human resources and employee benefits, including workers compensation insurance. These institutions assist with workers compensation by taking responsibility for their clients’ obligations to provide this type of insurance, essentially becoming the statutory employer (see chart below). The term PEO, however, did not always exist. Initially, staffing agencies realized they could buy workers compensation insurance based on the staffing agency employer classification code, even if their employees were staffed in an industry with higher risks. These so-called temporary staffing, or employee leasing agencies, sold their services on the basis of being able to pass through a much reduced workers compensation cost to their clients. Despite the lower rates the staffing agencies were continuing to pay, their policies were covering the operations of their new higher risk clients. As a result, the mandatory rates were inadequate and a regulated workers compensation insurer was footing the bill.

    As these early PEOs flourished and grew, insurer insolvencies resulted. There were many loopholes in the rate regulation system, bad actors in the PEO industry and an overall resistance to being classified as something other than a standard temporary employment agency. All of these factors allowed this behavior to continue for many years before insurance regulation caught up.

    Initially there was no consensus on what to call agencies that took responsibility for their client’s workers compensation risks. However, the term PEO began being used in 1994 when the National Staff Leasing Association changed its name to the National Association of Professional Employer Organizations. In most jurisdictions today, there is a consensus about which companies are PEOs and what workers compensation regulations apply to them.

    Today’s PEOs Retain Workers Compensation Risk

    In this day and age, insurance carriers are more cognizant of the dangers presented by PEOs. In addition, the underlying exposure of PEOs’ employees are subject to much greater shifts than a typical employer and there is no way in the regulated system for rates to adjust appropriately and quickly. As a result, these organizations have been forced to retain a large portion of the workers compensation risk themselves. Since workers compensation risk can be very material for a PEO, they must also be vigilant about underwriting, pricing and loss control in order to thrive.

    Two Types of PEO Clients

    When it comes to workers compensation, there are two distinct types of PEO clients that are broadly characterized as “white collar” and “blue collar.”

    White collar clients are those with no risk of occupational accident other than office work. While large worker compensation claims can still occur (e.g., automobile, terrorism, ergonomics, natural catastrophes, vacation type activities, etc.), the costs of occupational accident risk is negligible compared to other employee benefits services provided by PEOs for these clients.

    Blue collar clients, on the other hand, include restaurant, nursing home, manufacturing, logistics, construction and other types of industries where employees are subject to the risk of accident due to their occupation. For blue collar clients, workers compensation costs are a significant portion of total employee benefits costs. When referencing workers compensation in the PEO environment, blue collar PEO clients are primarily being discussed since workers compensation costs are material for blue collar clients.

    InsurTech and PEOs

    New technologies have transformed industries (e.g., Uber with the taxi industry, Airbnb with the hospitality industry, etc.) and are altering the insurance industry. Insurers have lagged other industries in this technological progress due to complicated regulations. While many insurance companies are investing heavily in InsurTech, there is not as much investment in InsurTech for the workers compensation segment.

    There are three possible reasons why InsurTech is more prevalent in personal and other commercial lines than workers compensation: the long-tail, the variety of industries and prior experience.

    Long-tail: It may take years to settle all claims and know the financial results of pricing and underwriting decisions. Due to ambiguous results early on, there is increased difficulty in confirming with data that InsurTech is improving underwriting and pricing.

    Variety of industries: There are a wide variety of workers compensation risks – from a truck driver to a coal miner to a carpenter to an architect. Personal automobile insurance, on the other hand, covers millions of people with very similar driving risks. The law of large numbers that works well in automobile insurance is difficult to apply in workers compensation.

    Prior experience: The history of new entrants into the workers compensation market is fraught with situations where a lack of expertise is perceived to have led to poor results. For example, in the 1990s, life insurers looking for investment returns had poor results when insuring a “carved out” portion of workers compensation which led to nearly $2 billion in potential losses. For the last several years, life insurers have had low investment returns and have been looking for new investments to, once again, improve their investment returns. However, life insurance investment in PEOs currently seems to have the potential to offset low investment returns.

    By digging deeper, PEOs have the potential to transform workers compensation insurance and lead to improvements in three areas: risk control, underwriting and pricing. This transformation is possible because PEOs already have significant market share and the PEO companies already consider themselves technology companies. In addition to being technology companies, PEOs take on the workers compensation risks of their blue collar clients. While these organizations are not insurance companies, the risk they are taking is precisely workers compensation insurance risk. Since PEOs are technology companies which derive material revenue from taking insurance-type risk, they should be considered InsurTech.

    The future of PEOs and InsurTech

    The potential benefits InsurTech can bring to any line of insurance are lower expenses and increased profitability (e.g., risk control, underwriting and pricing). Since PEOs have more access to employer data and worksites than insurance companies, big data and technology could potentially be used more effectively by PEOs to develop InsurTech solutions. The path may be similar to technological transformations currently being seen in automobile insurance since driving exposure is a major portion of workers compensation exposure and the risks of operating heavy machinery have parallels with driving as well.

    Currently, workers compensation insurers are barely scratching the surface of InsurTech with technology to improve underwriting results. Since any changes to underwriting and pricing procedures of workers compensation need to be approved by a regulator, insurers have little incentive to implement advancements that are expected to meet regulatory scrutiny. Compared with the relationship between the workers compensation insurer and employer, the relationship between the PEO and its clients is relatively unregulated. In this instance, the PEO is free to charge its clients any amount for a bundle of services which include workers compensation coverage. Since the rate it charges its customers for workers compensation is unregulated, this opens the door for the PEO to review new sources of data, greatly increase the number of risk classifications and increase the frequency of rate changes. To blaze the trail leading technology into workers compensation while avoiding the pitfalls encountered by past new entrants into the workers compensation insurance space, PEOs must utilize top-notch underwriting, pricing and actuarial expertise.

    This article was featured in the PAMIC 360

    References: 

    1. The Wikipedia entry on professional employer organizations has a section on abuses.
    2. For example, in 2015, the Missouri Department of Insurance placed Lumberman’s Underwriting Alliance into receivership when its largest PEO client failed to fund its collateral after filing for Chapter 11.
    3. “Insurers, reinsurers investing in InsurTech”, Business Insurance, February 1, 2018
    4. According to Investopedia, InsurTech refers to the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model.
    5. “Life after Unicover”, Best’s Review, July 1, 2001

    Michael Dubin joined Baker Tilly in 2017 as a member of the financial services practice group and the firm’s director of actuarial services. Mike delivers forward-thinking solutions to help clients drive growth, generate revenue, ensure regulatory compliance and achieve significant financial savings.

  • March 28, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The TCJA contains some relatively substantial changes to the property and casualty tax provisions in effect as of December 31, 2017. These changes were necessary for simplification as well as the industry’s contribution to budget reconciliation for ultimate passage of the bill into law. Insurers need to pay particular attention to these provisions as they are an integral part of property and casualty insurers’ taxation going forward.

    Loss Reserve Discounting

    The TCJA modifies the computation of tax basis discounted unpaid loss reserves under section 846 in the following ways:

    The interest rate used to calculate the applicable accident year discount factors is modified from the 60-month rolling average of the applicable federal mid-term interest rate (AFR) to an interest rate based on the corporate bond yield curve for the preceding 60-month period on investment grade corporate bonds. The monthly interest rate used to set the pre-2018 law discount factors, as published in Revenue Procedure 2018-13, was 1.46% as compared to an estimated corporate bond yield of that could be approximately 3.5%.

    The applicable loss payment patterns for long tail lines of business are extended to a maximum of 24 years, rather than 15 years. However, the length of the payment pattern for short tail lines remains at 3 years.

    Repeal of the section 846(e) company pay pattern election which allowed an insurer to use its own historical payment patterns for discounting unpaid losses. Generally, this provision was beneficial for taxpayers that paid claims more quickly than the industry average.

    These provisions apply to taxable years beginning after December 31, 2017. For the first taxable year beginning after December 31, 2017, the difference in the amount of the tax basis discounted unpaid loss reserves at December 31, 2017 and the amount of such tax basis discounted unpaid loss reserves, determined as if the new tax law had applied for that year, is treated as a transition adjustment. This transition adjustment is brought into taxable income on a straight-line basis over eight years beginning in 2018.

    Mazars Insight: Generally, the modifications increase the effect of the time value of money applied to insurers’ loss reserve tax deduction by increasing the interest rate used to determine the loss reserve discount factors and extending the period over which to recover loss reserves. Insurers will need to wait for the IRS to issue new discount factor tables for all pre-2018 accident years in order for them to determine the transition adjustment.

    While the TCJA is silent on the discounting of accrued salvage and subrogation recoveries, given that the interest rate was identical to the rate used for unpaid loss reserves, it is likely that the Treasury will issue guidance modifying the determination of discounted salvage and subrogation on terms similar to unpaid loss reserves.

    In general, the provision is expected to lower the amount of tax basis discounted unpaid loss reserves; accordingly, current taxable income after 2017 and the existing deductible temporary difference (including the effect of the transition adjustment) at January 1, 2018 are expected to increase. As the enactment date of this provision was in 2017, insurers should report the impact in their 2017 financial statements, meaning their DTA should increase by their tax basis discounted unpaid loss reserves with a like increase in their DTL for the transition adjustment. From a practical point of view, until the IRS issues new discount factors under the TCJA, this computation cannot be performed as of the date of this article. However, note that under statutory accounting, entities have the option of recognizing the DTA and DTL within each grouping on a net or gross basis (see SSAP No.101, Q&A 2.9). Regardless of which method an entity elects (gross or net), it is crucial that consistency is maintained within each grouping from period to period. If this is done, companies will need to revisit their reversal patterns of the loss reserve discount for the SSAP No. 101 admissibility test and determine their ability to offset the DTL created for the transition adjustment beyond three years from the end of their financial statement year-ends. 

    Proration 

    Under pre-TCJA law, the calculation of the tax-deductible reserves for losses incurred for property and casualty insurance companies was reduced by 15% (proration percentage) of tax-exempt interest and the Dividends Received Deduction; which is treated as a reduction of a deduction (to losses incurred). The TCJA increases the proration percentage to 25%, which roughly estimates existing law after-tax impact. This provision applies to taxable years beginning after December 31, 2017. As such, it does not have an enactment date impact.

    Mazars Insight: The actual language does not specifically state the proration percentage as 25% but rather the “applicable percentage is 5.25% divided by the highest rate in effect under section 11(b). This has an effect of keeping the prior law net effective tax rates the same no matter what the statutory tax rate. The prior law’s net effective tax rate of proration is 5.25%. Thus, with the statutory corporate tax rate reduced to 21%, this then drove the proration percentage increase to 25% (5.25%/21% - the new highest corporate tax rate). Note that the statute is worded such that if the maximum corporate rate changes, the proration adjustment percentage will change accordingly, based on this formula. Insurance company investment managers will need to re-evaluate the after tax yield between taxable and tax-exempt investments as the after tax yield spread between taxable and tax-exempt investments has narrowed.

    Special Estimated Tax Payments (“SETP)

    Under pre-TCJA law, P&C insurers were allowed to offset the impact of loss reserve discounting by designating an additional special deduction and the related special estimated tax payments. The designation did not impact the cash paid to the IRS, only the calculation of taxable income. Generally, the SETPs were treated as current year tax payments. Due to the TCJA’s repeal of this special rule, any existing balance in the special deduction account at December 31, 2017 is included in taxable income with any remaining SETPs applied against the amount of additional tax attributable to the additional taxable income.

    Mazars Insight: Depending on the specific taxpayer situation, the additional tax due as a result of the reversing special deductions would be offset by application of the special estimated tax payments. Any excess tax payments will be treated as payments under section 6655. It should be noted that the application of such tax payments could result in a tax refund. As such, a current tax recoverable should be recognized for this amount.

    This article was featured in the PAMIC 360

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at www.mazarsusa.com.

  • March 14, 2018 4:30 PM | Vaughn Lawrence (Administrator)

    By Thomas Barber, Steven Greene, Jay Wang and Erin Schatzle of Mazars

    The passage of the Tax Cuts and Jobs Act, (“TCJA”) on December 22, 2017 had significant impacts on the insurance industry, both domestic insurers and multi-nationals. With this in mind we address how provisions will impact insurers today and in the future, and how it will impact insurers’ GAAP and Statutory financial statements for the December 31, 2017 year-end and going forward.  Many areas of the TCJA need further clarification, and we will monitor future guidance, rulings and regulations and advise appropriately. This article represents the first of a three part series which will eventually cover the impacts on P&C Companies and International Provisions.

    Corporate Provisions

    The TCJA contains several changes to general corporate taxation rules that will also the insurance industry companies. Insurers will need to pay attention to these changes as several long standing and commonly accepted provisions have been amended. 

    Reduced Corporate Tax Rate

    Under the old law, corporations were subject to graduated tax rates of 15%, 25%, 34% or 35% depending on their taxable income. For tax years beginning after December 31, 2017, the TCJA amended the corporate rate to a flat 21% across all taxable income levels. 

    Mazars Insight: Overall, this is seen as a beneficial change for corporations in the higher income brackets. More dollars in the business’s budget can lead to increased investment and job growth. 

    Due to the law’s enactment in 2017, insurers will need to take the tax rate change into account when preparing their 2017 Statutory and GAAP tax provisions as any deferred tax assets and liabilities will reverse at the lower tax rate. The reduced rate will significantly reduce the value of deferred tax assets (“DTA”) on the balance sheet (notably those with sizeable net operating loss carryforwards and insurance reserves) and cause an increase in the amount of deferred tax expense that must be reported for 2017. Conversely, the reduced rate will significantly reduce the future deferred tax liabilities (“DTL”) on the balance sheet (such as companies with unrealized portfolio gains) and cause a decrease in the amount of deferred tax expense that must be reported for 2017. 

    Under current GAAP guidance, the difference between the DTA and DTL previously measured at the 35/ 34% tax rate and the DTAs and DTLs re-valued at the 21% tax rate will have to be reflected through the current year income statement, even for deferred tax items reflected through Other Comprehensive income (“OCI”) items. However, February 14, 2018, the FASB issued ASU No. 2018-2 (the “ASU”) which allows companies the ability to reclassify to retained earnings of tax effects of items remaining within accumulated OCI resulting from the TCJA. This would alleviate the potential effects of previously established deferred taxes on unrealized gains/losses at the old 35/34% rate while reversals are occurring at the lower 21%, thus “stranding” deferred taxes in OCI. The update would be limited in scope specifically to the TCJA. The ASU is effective fir periods beginning after December 15, 2018, but early adoption is permitted, so companies can make this reclassification in their 2017 GAAP financial statements along with appropriate disclosures.

    Under current statutory accounting guidance (see SAPWG INT 18-01), the difference between the DTAs and DTLs previously measured at the 35/34% tax rate and the DTAs and DTLs re-valued at the 21% tax rate is recorded differently than GAAP treatment. This gross change in net deferred tax, excluding any change reflected in unrealized capital gains, and excluding any change in nonadmitted DTAs is to be reflected in the “Change in Deferred Income Tax” line in changes in capital and surplus. Tax effects previously reflected in unrealized capital gains (to present unrealized gains (losses) as “net of tax” shall be updated in the “Change in Net Unrealized Capital Gains (Losses) less Capital Gains Tax” line in changes in capital and surplus. Also, future tax rates in the second prong of the admissibility test will need to be revised accordingly.

    AMT Repealed and AMT Credit Refundable

    The TCJA repealed the Alternative Minimum Tax (“AMT”) for years beginning after December 31, 2017. For tax years beginning after 2017 and before 2022, any AMT credit carry forward balances at December 31, 2017 can offset regular tax, and any remaining unused AMT credits are refundable at 50% of the amount remaining each year to the extent they exceed regular tax through 2020, with any remaining AMT credit refunded in 2021. 

    Mazars Insight: Both the repeal of the AMT and the refund of the AMT credits cause cash back in the corporation’s budget, leading to greater investments. Generally, refundable credits would not create a carry forward scenario and thus not be subject to section 383 limitation. However, it should be noted that there is uncertainty as to whether AMT credit carry forwards that are now refundable by statute are subject to past section 383 limitations or future section 383 limitations based on post-2017 ownership changes and, if so, how a taxpayer should calculate the refunded amounts by year. 

    Because any available AMT credits are fully refundable, insurers will need to recognize this gross DTA in their STAT and GAAP provisions if previously it was subject to a full or partial valuation allowance as it is guaranteed to be utilized and/or refunded no later than 2021. As a dollar for dollar credit, the AMT credit is not impacted by the change in corporate tax rates. For insurers with AMT credits in their DTAs, even if they no longer need a valuation allowance for STAT purposes they will need to consider the favorable impact it will likely have in the admissibility test under SSAP 101 paragraph 11.b.in order to understand the true surplus impact.

    Net Operating Loss Changes

    Under previous law, corporations were allowed to carry back 100% of any net operating losses (“NOL”) for two years and carry them forward for 20 years. For tax years beginning after December 31, 2017, the TCJA repeals the two year carryback for regular corporations (which will now also apply to life insurers) and limits the NOL deduction each year to 80% of taxable income. Any remaining NOLs can be carried forward indefinitely. Losses that were generated before January 1, 2018 are grandfathered in under the old NOL regime and, as such, are not subject to the 80% restriction.

    It should be noted that for property and casualty (“P&C”) insurance companies, the old rules still apply (i.e., P&C companies are still allowed the two year carryback and a 20 year carry forward of NOLs, which can still be applied to 100% of taxable income, even for post 2017 NOLs). 

    Mazars Insight: The loss of the ability to carryback current year losses, starting in 2018, to recoup prior year taxes paid could be detrimental to some corporations. The ability to carry forward the losses indefinitely is a benefit as corporations no longer need to worry about expiring NOLs. Separate tracing of NOLs for pre and post 2017 TCJA changes as well as for consolidated tax groups with both life and non-life insurance companies will be necessary. Additionally, insurers in a consolidated group containing P&C Insurers and non-insurance companies will need to track their future NOLs separately due to the differing carryback/carryforward regimes along with limitations that apply to non-insurers could be absorbed by non-limited P&C insurance companies’ losses. Could there be bumping rules akin to the existing life/non-life rules that remain unchanged by the TCJA, only time will tell.

    The loss of carryback ability for future NOLs and indefinite carryforward of NOLs may require valuation allowances and DTAs to be revalued, but this should be determined on a case by case basis. For P&C insurance companies, the admissibility test pursuant to SSAP 101, paragraph 11 would remain unchanged; however, life insurance companies will have to immediately adjust the admissibility test to account for the loss of carryback ability (i.e. paragraph 11 a would no longer be applicable to life insurers) in their 2017 statutory admissibility test.

    Limitations on the Deductions of Business Interest

    For tax years beginning after December 31, 2017, the TCJA limits the deduction of net interest expense to 30% of adjusted taxable income. For tax years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is determined without the deductions for depreciation, amortization or depletion. Any business interest disallowed as a deduction can be carried forward indefinitely. There is an exemption from these rules for taxpayers with average annual gross receipts for the three year tax period ending with the prior tax year that do not exceed $25 million. 

    Mazars Insight: Because the TCJA limits how much interest a corporation can deduct in a given year, companies will need to account for this as a DTA similar to NOLs. As insurers typically have sizable investment portfolios, since the limitation is based off of net interest expense, we believe that this will not likely impact most insurers.

    Cost Recovery/Depreciation

    Section 179 - For tax year 2018, the TCJA increased the maximum amount a taxpayer may expense under Section 179 from $500,000 to $1 million. The phase-out threshold was also increased to $2.5 million. For years beginning after December 31, 2018, the maximum amount will be adjusted for inflation. As before, Section 179 expensing is limited to taxable income in a given tax year.

    Bonus Depreciation - For property placed in service after September 27, 2017 and before January 1, 2023, the TCJA increased the amount of first year depreciation to 100% from 50% as allowed under the prior law. Unlike the old bonus depreciation rules which limited first year expensing to only new assets, the TCJA allows additional first year depreciation for new and used assets (restrictions do apply). For tax years after December 31, 2022, the bonus depreciation deduction will phase down 20% each year until 2026 when it will be completely eliminated.

    Mazars Insight: The changes to depreciation expensing rules are very beneficial to corporations, as they will be able to get the deduction for capitalized fixed assets in the tax year they outlay the cash. This may lead to companies making a greater investment in capitalized assets in the years where full expensing is in place. Although insurers are typically not capital intensive, this could very well impact pass-through income related to partnership investments that have capital intensive aspects.

    The increased deduction for fixed assets could potentially put a corporation into a DTL position. As with any tax accounting adjustment for depreciation, careful tracking will need to be done for the STAT/GAAP/Tax differences to properly determine the correct DTA or DTL.

    Dividends Received Deductions

    In general, for corporate shareholders receiving a dividend from certain domestic corporations, the TCJA reduces the dividends received deduction (“DRD”) for the 70% and 80% brackets, to 50% and 65%, respectively. The 100% DRD remains intact for dividends from affiliated group members. The DRD provision is effective for tax years beginning after December 31, 2017. 

    Mazars Insight: Taking into account the drop in the corporate tax rate, the change in the proration provisions of the TCJA, and the drop in the DRD percentages, the effective tax rate for P&C insurers on greater than 20% owned stock drops from 11.2% to 10.7625% and less than 20% owned stock from 14.175% to 13.125%. 

    This article was previously published in the PAMIC 360.

    Mazars USA LLP provides insight and specialized skills in accounting, auditing, tax, consulting and advisory services. Since 1921, our dedicated professionals have leveraged technical industry expertise to develop customized solutions for clients, create value, and optimize their performance. As the independent U.S. member firm of Mazars Group, our global reach includes 20,000+ professionals across 86 countries. At local and global levels, we are proud of our value-added services in building lasting relationships with our clients and communities. For more information, visit us at www.mazarsusa.com.

  • March 14, 2018 4:00 PM | Vaughn Lawrence (Administrator)

    By Sue Quimby, MSO

    Small businesses are the mainstay of the United States economy. It is, therefore, no wonder that the Businessowners (BOP) Policy, specifically designed for small to midsized businesses, is growing in popularity. The BOP is, in fact, estimated to be the most common form of insurance for small businesses. It is the ideal vehicle for main street type businesses. Similar to the Homeowners in Personal Lines, the BOP was designed to cover classes of businesses that are similar in risk and loss exposures to each other. Agents like the BOP because it is quick and easy to rate. Companies like it for the same reasons.

    As of 2012, U.S. Census Bureau statistics indicate that there was a total of 28 million small businesses in the United States. A small business is considered one with less than 500 employees. “Nonemployer businesses” – those that have no paid employees but are subject to federal tax, such as sole proprietorships, make up the vast majority of businesses in the United States:  23 million in 2013.  “Employer businesses” are those with paid employees. There were 5.73 million employer businesses in 2012. 97.9% of all small businesses, including both “employer” and “nonemployer,” had less than 20 employees. Small businesses are estimated to account for $58 billion in premium, approximately 20% of the total commercial property/casualty insurance market premium written2.

    One advantage of the BOP, and a reason why the product is so popular, is its ease of use for the agent and the company. The Businessowners program is a package policy combining property and liability coverages, with one set of terms and conditions. In addition to potentially being easier to understand than multiple policies, the BOP can often be more cost-effective for the insured than purchasing separate policies. Not only are the coverage provisions combined in a package type policy, but a composite rating system for property and liability is often utilized.  Agents may have the ability to quote, bind and even issue a policy to eligible businesses electronically.

    Property coverage under the BOP is available for buildings and personal property owned by the business, as well as the property of others in the business’s care, custody, and control. Some programs offer specialized coverage for computer equipment and other inland marine exposures, as well as crime coverage.

    Coverage for loss of Business Income, including loss of rents and extra expense, is also available. Although “actual loss sustained for a twelve-month period” coverage is often offered for business income, some carriers use dollar limitations. These limitations may apply to a class of business, such as warehouses, or to the entire book of business.  Regardless of the coverage provisions, this is not “free money” nor is the amount unlimited. The insured is required to prove the loss of income that would have occurred.  Loss of income for up to twelve months after the loss is provided, and it is not limited by the expiration of the policy. In addition, there may be an extended period of indemnity, usually 30 days, available.

    Originally designed for small main street type operations such as retail stores and offices, the eligibility and coverages have expanded to encompass higher risk exposures, such as restaurants and pizzerias. The BOP is not intended for the unique or more hazardous risks, which are more properly handled under a commercial property and liability, or commercial package policy. Eligibility for a BOP is generally limited by class of business, property values, square footage of the business, and/or revenue. Coverage options are not as flexible under the BOP as they are under the traditional Commercial Package.

    Examples of BOP eligibility criteria include: revenues of less than $5 million in sales and no more than 100 employees, or building size less than 25,000 square feet. In addition, businesses whose operations are mainly off premises (such as contractors), are generally not insured under a BOP.

    Property coverage under a Businessowners policy is usually offered on either a Named Perils or Open Perils (formerly known as “All Risk”) basis. With Named Perils, only the listed perils are covered causes of loss. With Open Perils, all causes of loss are covered, other than those that are excluded. The essential difference is that with Named Perils, the burden is on the insured to prove that the loss was caused by a “named” peril. Under the Open Perils, the burden shifts to the insurer to prove that the cause of loss was not covered.  

    Due to the nature of the policy, the BOP offers less flexibility than a stand-alone Commercial Property or Liability policy or Commercial Package (CPP or CMP). The range of coverage options may be more restrictive under the BOP, with fewer options to customize the policy.  Insurers may offer niche BOP programs, including coverage enhancements targeted to a specific class of business, such as bed & breakfasts, breweries or self-storage operations. Many companies also offer endorsements with expanded coverage or increased limits of liability. 

    Coverages generally not available under the BOP include professional liability, liquor liability, Workers’; Compensation, and Employee Benefits Liability.  While automobile liability is generally not included, many BOP’s offer the option for Hired and Nonowned Auto Liability.

    The BOP is the ideal coverage vehicle for the small to midsized “main street” business. It’s combined package of coverages also suitable for specialty programs addressing the needs of niche markets, such as pet groomers, craft breweries and self-storage businesses. It is not the answer for all risks, as unique or high hazard exposures require more tailored policies.

    This article was featured in the PAMIC Pulse.  Parts of this article were originally published in the Insurance Advocate. 

    References:

    1. “10 Things to Know About Small Businesses,” Insurance Journal, January 26, 2015, https://www.insurancejournal.com/magazines/features/2015/01/26/354681.htm

    2. “Facts & Data on Small Business and Entrepreneurship,” Small Business & Entrepreneurship Council, http://sbecouncil.org/about-us/facts-and-data/

    Sue C. Quimby is assistant vice president, media editor, client services and training; senior product development analyst for MSO, Inc. (The Mutual Service Office, Inc.). You can reach Sue at 201.857.9128 or by email at squimby@msonet.com.

  • March 14, 2018 3:30 PM | Vaughn Lawrence (Administrator)

    By Abhijeet Jhaveri, ValueMomentum

    The world is changing rapidly for the property and casualty insurance industry. Tectonic shifts are occurring for the nature of risk, the complexity of exposures and evolution of insurance distribution. Accompanying these shifts are powerful digital forces, including mobile computing, the Internet of Things, data and analytics and social media. Insurers have a choice to make; they can embrace a growth strategy of digital innovation or strive to catch up to competitors that are already harnessing these forces.

    Digital innovators in sectors from retail to telecommunications are reshaping consumer behaviors. Agents, brokers and mutual insurance companies should take note: consumers are growing accustomed to digital offerings and are recalibrating their expectations of service providers. This phenomenon is not limited to personal consumption; commercial buyers also are increasingly seeking more responsiveness and better digital experiences. Such trends are driving growth opportunities for insurers and the entire distribution channel.

    Road Bends Ahead

    Navigating bends in the road requires drivers to anticipate where those are and adapt to the terrain. For insurers, the road ahead is bending in distinctive ways. The insurance industry is witnessing a change in the nature of risk, as new technologies develop; risk exposure, assessment, and pricing, as data allows usage-based policies and new revenue streams; and distribution.

    Changing Nature of Risk

    The nature of risk itself is shifting as ride sharing, home sharing, autonomous vehicles, connected homes and the on-demand economy continue to grow.

    Ride-sharing and home sharing, for example, are innovative ways that a property owner can use personal assets to earn income by providing a service. From an insurance perspective, ride sharing and home sharing blend personal and commercial lines risks. Cars and homes are suddenly no longer purely one or the other; now they can be both, at times of the owner’s choosing.

    Autonomous vehicle technology is still evolving, but it’s clear that automated driver assistance creates new product liability risks for manufacturers and may mitigate auto liability for the driver. Similarly, the on-demand economy and the ability of nearly anyone to deliver professional services from remote locations are creating new classes of professional liability risks.

    Changing nature of Risk Exposure, Assessment & Pricing

    Telematics is changing how insurers think about risk exposure and how they assess and price the risks presented by, for example, a personal automobile owner who drives occasionally versus one who drives extensively. Similarly, connected homes, or “smart” homes, add cyber exposure to the list of physical risks that can cause loss.

    New ways to distribute products and engage insureds and agents

    These digital trends are not merely manifesting as new forms of risks and risk exposures. They also manifest as new ways for insurers, agents and brokers to reach their customers. Over the past several years, digital agencies have emerged with regular frequency. These include CoverWallet, Insureon, BizInsure and many others. They see an opportunity to more seamlessly connect agents and insureds – individuals and small business owners alike – to digitally engage them throughout their buying journey. Which means offering up ways for insurers to:

    • Reach insureds and agents anytime from any device
    • Engage with them by personalizing their experiences
    • Provide seamless transactions – with minimal keystrokes using data and analytics widely available
    • Interact in ways that suit their preferences – voice, chat, video chat and other means

    InsurTechs capitalizing on the opportunity

    These shifts are being capitalized on, and digital forces are being harnessed by well-capitalized InsurTech companies that are entering the marketplace in growing numbers. According to Aon Benfield’s “Global Insurance Marketplace Opportunities, 2017 Insurance Risk Study,” $14 billion has been invested into more than 550 InsurTech startups since 2012. The pace of InsurTech investment has only been accelerating, with about $9 billion invested in 2016 and 2017. Notably, Aon Benfield’s report says more than 55% of startups are focused on improving customer interactions with insurance companies.

    Disruption of traditional insurance is occurring across different dimensions, such as:

    • Product innovation (Metromile, Trov, Slice, Bunker)
    • Distribution (The Zebra, Lemonade, Coverhound)
    • Underwriting and claims (the Internet of Things, ADT, Leakbot, drones, telematics and other “smart” assets)

    So what’s next?

    With change comes great opportunities. Insurers can harness the powerful digital forces to adapt to the bends in the road ahead. Opportunities abound, especially as the industry is still early in the journey. Change also means threats from disruptive and innovative forces.

    Trusted Advisors

    Insurers that distribute through independent agents can help their agents become more valuable trusted advisors while reducing clerical tasks. Insurers can embrace omni-channel distribution, which emphasizes cohesive experiences across touchpoints. In addition, insurers can infuse these experiences by enriching them with elements such as insights, alerts, and guidance. Such experiences, when delivered to agents – whether it be for quoting or service – can help agents focus on being trusted advisors, rather than efficient processors of applications.

    Partnering with Insureds

    By the same token, greater connectivity also offers insurers an opportunity to emphasize loss prevention.

    Consider this example: using technology such as Nest, a homeowner can connect various systems – appliances, lighting, perimeter security, heating and air conditioning, and more – to create a “smart” home that makes more efficient use of energy, can activate systems remotely from a mobile app, learns the homeowner’s preferences and can issue alerts about equipment maintenance and conditions in the home. The homeowner gains peace of mind, expense savings, convenience and information that makes homeownership easier. An insurer can ask itself, “Can we use these connected or “smart” devices and the data they capture, to add value to insureds in new ways?”

    The short answer is, insurers can. State Farm is among insurers that have partnered with providers of home automation and monitoring products, such as ADT, Canary, and Generac. This kind of program benefits the insurance company and its distribution channel in multiple ways. Customers receive personalized service, an enhanced experience and perceive their insurance provider as more than a collector of premium and a payer of claims.

    Advantages for insurers

    Increase loyalty

    In addition to instilling in customers a strong perception of value, digital innovation by insurers can grow engagement by increasing the number of touchpoints with customers. Most personal lines and many small-commercial lines policyholders typically interact with their insurers in two situations: claims and policy renewals.

    Insurers’ ability to be in touch with customers not just when a loss occurs or when it’s time to renew coverage but frequently during the policy period offers significant advantages. Insurers can shift from focusing on assisting with loss recovery to improving loss prevention. Greater connectivity offers insurers the opportunity to get closer to the assets they insure.

    Drive Product Innovation

    Product development is another area where insurers can derive advantages. Better insight and interaction with customers through apps and analytics enable insurers to customize and add value to existing products and to develop entirely new ones, in both personal and commercial lines, to meet evolving needs. Clearer insights into customer behavior also empower improved service and stronger distribution channel relationships.

    Improve Profitability

    Not least among the advantages is the opportunity for greater profitability in the current portfolio and growth in underserved and emerging market niches. Better data, when harnessed and applied to underwriting processes, can lead to more profitable accounts. The ability to identify emerging opportunities, such as offering time-element insurance for homeowners who rent out their properties or drivers who give rides, can open unexpected growth areas. With insights gleaned from data, segmentation of customers also can pave the way for significant cross-selling and upselling.

    Insurers are doing business in an era of digital innovation. Harnessing the digital forces that are shaping consumers’ actions and expectations are already paying off for innovators in other industries. What embracing digital means is applying new thinking, tools, and analytics to improve existing products and speed up processes, creating a richer experience and providing information to make customers’ lives easier. For insurers, implementing a robust digital strategy offers better customer engagement and profitable growth. What companies today can afford to forgo those advantages?

    This article was featured in the PAMIC Pulse

    References:

    1. “Global Insurance Marketplace Opportunities, 2017 Insurance Risk Study,”Aon Benfield, 2017, http://www.aon.com/2017-global-insurance-market-opportunities-report/index.html?utm_source=aonbenfield-TL&utm_medium=TL-content-page&utm_campaign=gimo2017
    Abhijeet Jhaveri is Chief Marketing Officer at ValueMomentum and leads ValueMomentum’s software-as-a-service business targeted at the Mutual markets. Abhijeet and his team works with Mutuals to deploy ValueMomentum’s iFoundry rating software with support for ISO, NCCI, AAIS and proprietary rate plans and extend these to agents, customers and employees with ValueMomentum’s BizDynamics Digital Experience Solution and App2Data ACORD forms processing Solution.

  • February 28, 2018 4:00 PM | Vaughn Lawrence (Administrator)
    By C. Scott Rybny, Esq., Rebar Bernstiel and Andrea Procton, Esq., Timoney Knox

    To recap, the ALI’s Restatement of the Law on Liability Insurance is a project six years in the making. Its stated objective is to “cover the law of contracts in the liability insurance context, liability insurance coverage and the management of insured liabilities.”   Critics of the Restatement point to statements by its authors that suggest an alternate purpose: to incentivize insurers to defend and settle more cases.

    Section 15 of the Restatement addresses an insurer’s reservation of rights to contest coverage, including timing the required content.  The authors identify four specific principles they believe to be necessary for an insurer to reserve its right to contest coverage. Those are as follows:

    1. An insurer that undertakes the defense of a legal action may later contest coverage for that action only if it provides timely notice to the insured, before undertaking the defense, of any ground for contesting coverage of which it knows or should know.
    2. If an insurer already defending a legal action learns of information that provides a ground for   contesting coverage for that action, the insurer must give notice of that ground to the insured within a reasonable to reserve the right to contest coverage for the action on that ground.
    3. Notice to the insured of ground for contesting coverage must include a written explanation of the ground, including the specific insurance policy terms and facts upon which the potential ground for contesting coverage is based, in language that is understandable by a reasonable person in the position of the insured.
    4. When an insurer reasonably cannot complete its investigation before undertaking the defense of a legal action, the insurer may temporarily reserve its right to contest coverage for the action by providing to the insured an initial, general notice of reservation of rights, in language that is understandable by a reasonable person in the position of the insured, but to preserve that reservation of rights the insurer must pursue that investigation with reasonable diligence and must provide the detailed notice stated in subsection three within a reasonable time.

    The Restatement’s proposed approach to reservations of rights differs in several significant aspects of existing Pennsylvania law. For decades, Pennsylvania’s courts provided clear and straightforward guidance concerning reservations of rights. To be effective, a reservation of rights must clearly communicate the insurance carrier’s coverage position to the insured, and be timely. Courts viewed this as an objective standard. The “reasonable person” standard only applied where an ambiguity existed in the writing. Even where Pennsylvania courts looked to the reasonable person, they considered that person to be of reasonable intelligence and a member of the general populace.

    The Restatement takes a different view. The authors believe that insurance carriers must write reservations of rights in accordance with a “reasonable person in the position of the insured” standard. There are several dangers with this approach. First, it is too general to serve as a guide for insurers. Second, it is highly subjective in comparison to Pennsylvania’s objective standard. The Restatement offers little insight into what renders a reservation of rights deficient. Must an insurance carrier explain the connection between the facts and the policy language, or is a recitation of the facts within the letter is sufficient?

    The consequences proposed by the Restatement on insurance carriers who fail to adhere to its standards are dire. Under the Restatement, an insurer that fails to follow its standards automatically waives its coverage defenses. This draconian approach is inconsistent with Pennsylvania law. Where insureds challenged an insurer’s Reservation of Rights, Pennsylvania law is equally clear. Courts’ required clear, precise and unequivocal evidence that an insurance carrier waived its right to rely on a particular coverage part. That analysis involved a three-step process:

    1. An inducement whether by act, representation or silence, that causes an insured to believe the existence of certain facts.
    2. Justifiable reliance on the inducement.
    3. Prejudice to the insured. Stated differently, Pennsylvania historically required more than an insured’s subjective interpretation of the insurer’s reservation of rights to find a waiver.

    The ALI is still slated to vote on the final draft of this Restatement during its May 2018 meeting. That vote aside, there are at least seven instances where courts looked to this Restatement as authoritative. In states like Pennsylvania where insurance law is well developed, insurers should continue to follow the law as it currently exists. Pennsylvania requires both liability and property insurers presently to provide clearly communicated coverage issues to the insured as soon as reasonable. That said, the Restatement is not something that insurers should ignore, particularly in those parts of the state that historically favor policyholders over insurance carriers.

    This article was featured in the PAMIC Pulse

    References

    1. https://www.ali.org/projects/show/liability-insurance/
    2. A. Hugh Scott, “ALI’s Proposed Insurance Law Restatement: A Trojan Horse?” Law360 (February 9, 2017) (available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2631123, at 1.

    Andrea Procton is an associate with Timoney Knox’s Insurance Industry Law Group. Her practice focuses on commercial and insurance litigation.  She routinely handles coverage disputes and analyses including homeowners, commercial property, general liability, builders’ risk, construction defect, motor vehicle and E&O's. 

    Mr. Rybny has substantial trial, arbitration and appellate experience in representing regional and national insurers.  He has particular experience handling first-part property insurance and special investigations.  His experience also covers commercial general liability, directors and officers, fiduciary liability, property, business interruption (including extra expense and contingent business interruption), commercial crimes and credit risk insurance, among others.  He has the practical and legal experience to assist clients in managing risks and solving problems, and is a frequent lecturer in the area of insurance litigation and coverage.

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