- Posted by Admin on June 30, 2011
It’s
been a while since I’ve posted a new blog, which in a way is a good thing since
it means I’ve been busy. However, I’m
beginning to feel a little guilty, so I’ll pause and write something new for
this post.
Actually,
I ran across something a month or so ago, but it really didn’t have anything to
do with any of the lines Quadrant touches.
I’ll just mention it here to get it out of my system. An article in Best’s Review highlighted a
workers’ comp writer that flourished while many of its competitors struggled
over the last couple of years, and guess what their niche was? Public service employees. What drives workers’ comp premiums? Payrolls!
The authors of the article either were very naïve politically or
mathematically (as in being unable to put one and one together to come up with
two). They unwittingly had written an
article that provided very timely commentary on the state of public vs. private
job markets that is playing out in real life all around us. This company’s success almost certainly had more
to do with its niche being the politically favored public sector than anything
they had done themselves. I don’t
begrudge them; I just found the article amusing in a depressing sort of way.
Anyway,
that’s out of my system, so on to the blog (the above comments, by the way, are
my own, and not those of Quadrant or of anyone else within Quadrant, as are all
comments in this blog). Over the last
few months there was quite a lot of publicity about the Insurance Research
Council’s January study, New York’s
No-Fault System: Preliminary Findings From Closed Auto Injury Claims
(sounds as if the actuaries have the upper hand over the marketers at the IRC,
at least in naming their studies). The
several articles referencing this study all basically have summarized the
findings, so that will not be my purpose.
Rather, as I have done in other blogs, I will comment on
cause-and-effect.
I
guess, however, that I can’t do a very good job of discussing cause-and-effect
relationships without first at least touching on the cause part of the
equation. That, in turn, requires me
briefly to discuss some of the study’s findings, or at least its focus. That focus is the huge disparity between
personal injury protection (PIP, New York’s no-fault coverage) costs between the
metropolitan New York area and the corresponding costs in the rest of NY
State.
While
inherent cost differentials are expected in such geographical comparisons, the
study shows that the difference in this case goes well beyond what is
expected. It does this by digging into
two aspects of claims inflation, “padding” (or buildup, as they call it), and
outright fraud. They discover that a
full 35% of PIP claims in metro New York involve either outright fraud, or at
least padding, as opposed to 8% in the rest of the state (and that this
percentage has been growing in NYC while staying flat to shrinking slightly
outstate).
Let’s
acknowledge that claims frequency is going to be higher to start with in the
Metro area. Let’s also assume that, all
things equal, general overhead costs would result in a higher Metro PIP
severity. This is the “natural” cause of
higher underlying costs that lead to higher premiums in that area – something
we intuitively expect. However, when we
start compounding these natural circumstances with additional man-made cost
inflators, things can get ugly.
We’ve
already been told that padding and fraud are much more rampant in the Metro
area, which will inflate severity. The
study goes on to mention that 44% of Metro claimants visited 4 or more
healthcare providers, vs. 14% in the rest of the state, and that these
providers were much more likely to include chiropractors, physical therapists
and acupuncturists than upstate. If
it’s anything like what we saw happen to Colorado PIP, you can probably throw
in aroma therapists and anyone else into the mix. Bottom line – more severity issues (big
time!). Just for good measure, Metro
claimants also were significantly more likely to have their healthcare
providers represented by attorneys.
Let’s be honest, how many of you readers feel the need to consult with
your attorney to optimize your medical care?
Once again, there goes the severity!
The
one quote I’ll include from the study is this:
“The preliminary findings from this study confirm that the New York City
area is a hotbed for auto insurance fraud and that the problem has grown worse
in recent years.” It goes on to point
out what I mention above – this isn’t a victimless development. It has a direct impact on costs. If it has a direct impact on costs, it
clearly has a resulting direct impact on the premiums companies need to charge
to cover those costs.
In
this case, the premium impact only affects our friends in New York. However, not just those in the Metro area are
affected. You might think that in a
perfect world the damage might at least be limited to where the fraud is most
rampant. In ratemaking, though, there’s
the pesky concept of credibility – no company has sufficient data volume to
limit territorial issues just to those territories most responsible for
them. Regulators tend to like to spread
out costs as well, in the name of affordability. The losses caused by the fraud and cheating
discussed above are part of the statewide pool of losses that determines how
high PIP rates in general need to be.
Because of limited credibility on the territorial level, those losses
end up getting spread out to all territories, some more than others. As a result, everyone in the state ends up
paying something for those inflated losses.
New
York PIP is not alone in its fraud issues.
Certain metro areas, and even some rural ones, are well-known for their
fraud and biased systems. I’ve
referenced the Judicial Hellholes identified by the American Tort Reform
Association, and how they add costs in their jurisdictions to benefit
prejudiced legal communities. Similarly,
certain cities are well-known for their staged accident rings, with drivers,
runners, lawyers, clinics, etc. all involved.
In short, accidents and/or fraud are a business for certain elements of
our society. The difference is that in
this case the business is not legal, but that makes it extremely lucrative for
those who pull it off successfully. They
get the big dollars, and the costs, as with any insurance, are spread among the
many.
The
good news is that there is a higher awareness of these costs and their impact
on society. Studies such as the IRC
study cited in this blog are aimed at increasing awareness among those who can
make a significant difference in stemming the bleeding. Those of us in the industry can point out
that the costs affect everyone through their insurance premiums. Public awareness is not good for the fraud
business – they thrive on ignorance.