Your Agent Can’t Sell You Insurance

By Ross Schriftman, RHU, LUTCF, ACBC, MSAA

“The bitterness of poor quality remains long after the sweetness of low price is forgotten” (Author unknown)

Ask yourself this question.  Do you want your agent to sell you health insurance with a company that is profitable or with an insurance company that is losing money?  As they say this should be a “no brainer.”

However, you don’t really need to ask your agent this question. Most likely your agent must sell you insurance from a profitable company.    That is because in order to be appointed to sell their products insurance companies require insurance agents contracting with them to be covered by a form of malpractice insurance called Errors and Omissions (E & O).  A provision of this insurance covers insolvency of insurance companies; but only if the company was in a strong financial condition when the client bought the insurance from their agent.  The standard used for this provision is usually an A- rating from A.M. Best; one of the financial rating services.  The malpractice insurance company will not issue coverage to an insurance agent that represents below par insurance carriers.  An agent must also have a high degree of integrity and competence in order to get E & O insurance.  If an agent can’t get the coverage they basically can’t sell insurance.  This is a strong consumer protection similar to the state licensing and training requirements for a person to be in our business.

Sadly there may come a day soon when your agent may not be able to sell you any of the health insurance you want and need. Why is that? Well along comes Obamacare containing provisions reflecting its wild theories.  The most recent thrust of the President and his Administration is that the rate increase for the insurance premiums we all pay must be reigned in by force of Federal government regulation.  The law contains a provision that sets an arbitrary percentage of how much companies can spend on administrative costs and maintain as profits. In theory this sounds like a good idea that will lower premiums.  In fact in practice it will actually increase premiums so that companies can cover all their necessary administrative functions and still show a profit.

To mitigate this bad provision from having the real life result I just mentioned our government has put forth another bad regulation. Now the Secretary of Health and Human Services has proposed a rule that will give the Federal government authority to cancel “unreasonable” rate increases.  With the health insurance industry working on a profit of $12 billion in 2009 for the top 13 companies and private health insurance paying out $800 billion in benefits that year it is obvious that they are still profitable even though the margins are small.  (Drug company profits were $64 billion in 2009.) However, it would take only one epidemic or terrorist attack to wipe out those profits.  Even a slight miscalculation by actuaries or government regulators could have a negative effect on the financial strength of a company. When liquidity and claim paying ability is diminished the rating services downgrade an insurance company.  What happens if the downgrade results in a rating of less than A- by A.M. Best?  Your agent can no longer sell you insurance from that company.

Two states; California and Massachusetts have already experienced regulatory attempts to stop rate increases.  Companies started losing money and the regulators have now backed off to some degree.  No one wants a significant rate increases.  However, delaying a legitimate increase will result in only two scenarios.  The first is an even bigger rate increase next time to make up for the loss.  The second is insolvency.  I would rather be unhappy with my rate increase than find out that my insurance company isn’t going to pay my claim or, more likely, have to wait for regulators to deem the company insolvent and hope that the State Guarantee Fund will step in and pay my claim.

Preventing health insurance rate increases to lower healthcare costs will be one of the biggest failures of Obamacare.  Sandy Prager, Kansas Insurance Commissioner and President of the National Association of Insurance Commissioners said it best, “I think we’re chasing the wrong tail here. It’s really about health care costs…In most cases, the companies have been able to justify them (rate increases), because of the economic situation. The book of business is probably getting sicker because healthier people are dropping out.

Now what happens if your agent can’t sell you a particular insurance company’s product anymore because their financial status forced a downgrade of their rating?  Not to worry. Under Obamacare starting in 2014 Americans will be buying health insurance coverage through State Exchanges. The employees of these new organizations will have no experience and little training.  They most likely will recommend that you purchase the lowest premium plan since the entire untested theory of the exchanges is to drive down premiums.  The lowest premium plans usually mean the least financially strong insurance carriers.  There are many examples from past experience of companies under pricing their insurance products.  The results are insolvencies, huge rate increases or termination of the block of business and the company leaving people with no insurance.  This is the future for America unless the so called Affordable Care Act is repealed and replaced with true market driven competitive reforms; ones that increase competition, attract young and healthy people to insure and not force everyone to buy insurance designed and dictated by Washington bureaucrats.




2 Responses

  1. Great Article Ross…’s one that I wrote and that was just published about a week before the Judges decision. This same article was originally published in the American Business Journal Magazine Aug/Sept issue. I hope you like it. It’s been recently published in Benefits Selling (Consumer Driven Online)
    Sponsored By Benefit Selling
    The consumer movement:

    Where we’ve been and where we’ll go What a ride it’s been. The uncertainty has never been greater for the quality and pricing of health care in America.
    By Livio L. Andreatta ACBC
    Published 1/26/2011 »

    What a ride it’s been. The uncertainty has never been greater for the quality and pricing of health care in America.

    What has remained the same is the foundation upon which quality care and cost reduction can be achieved. In the early 1990s HMOs became the plan that was going to save health insurance in America. Immediately following the 1992 elections, Hillary was going to sweep us all into a large government-run HMO model. Fortunately, this government take-over never saw the light of day.

    Now here we are, 18 years later, marching down the same old road that will do nothing to control health care costs. In the mid 1990s, legislation was passed introducing tax-advantaged medical savings accounts.Congress in their infinite wisdom chose to limit these plans to groups of under 50 employees, and as a result, they made little impact.

    In 1998, I attended a continuing education presentation of more than 300 participants at the DuPage County Health Underwriters and watched a presentation on MSAs by Ron Dobervich. I decided, along with five other members, to discuss this new concept further. Ron made so much sense that I really wanted to implement these plans for my clients because it was so much more efficient for both the employer and employee alike.

    You must remember that the old pre-paid medical plans that are purchased today, with prescription co-pays, and doctor office visits shield the employees from understanding what the real costs are for these services. What was also disheartening was that if a group was truly healthy, these plans never gave the group any money back for non-use and tended to still raise their costs the following policy year.

    In April of 1999, as a member of the Council for Affordable Health Insurance, Ron was asked to go to Washington and report what effect MSAs were having in the small group market. When he and two other council members Harvey Randecker and Stuart Slonin returned from Washington, they got together and decided there was a need for a trade association to provide educational services to agents and brokers about these new plans called consumer driven health plans or CDHPs. Stuart had ties to a trade publication and Harvey gave 110 percent of himself to launch the National Association of Alternative Benefit Consultants (NAABC).

    In the early days of CDHPs, most insurance companies refused to provide enough of a discount to make the plans effective. There was too much additional risk with the higher deductibles and insufficient premium savings to provide the funding for the CDHPs. One of the best actuaries in the world on the subject is Mark Litow, of Milliman USA, Milwaukee, Wisconsin office. He has testified before Congress on the initial set up of MSA plans and has overseen the setting-up of a whole country’s health plans, most notably South Africa’s MSA plans that worked wonderfully for more than 10 years until political upheaval destroyed the free market there.

    Then in 2002-2003, came two major CDHP breakthroughs. First the government gave clarity to medical reimbursement accounts, which they renamed health reimbursement arrangements and the second was the expansion of the medical savings accounts to all size groups into health savings accounts. This time the insurance companies got it right and started applying the proper discounts to their CDHP plans.

    As we all know, in real estate, it’s location, location, location; For consumer driven health plans, it’s education, education, education. What we are now giving the employee is a better benefit (less out of pocket with a hard dollar maximum for RX costs) and all at a lower cost. What we had to overcome by education was the understanding of why the underlying insurance plan had to be a “high deductible” catastrophic insurance policy and why it made sense to do it.

    Where do we stand today? At the heart are two drastically different health care delivery models. One, which was just passed into law, is predicated on utilizing top-down controls to manage cost and access. These designs always increase cost and limit supply. A short documentary on this can be viewed at . It’s called “DEAD MEAT,” a 24-minute documentary about the rationing of health care in Canada.

    The other is based on the premise that the employee, when properly educated, incentivized and given total price transparency, will manage costs much more effectively that any government bureaucrat. CDHPs give real dollars to employees to better manage their health care spending. A new price transparency system that has just been developed now allows employees to compare costs in any PPO with any insurance carrier in the United States. Most agents and brokers today are unaware that medical service costs for services such as lab tests, X-rays, MRIs and CT scans provided by the same physician within the same PPO can vary by as much as 500 percent, depending on where the tests are performed.If you have a small co-pay, who cares what the cost is – but if you have a stake in the cost savings you will be willing to go shopping. This new medical concierge system does the price comparisons for you and any dealings with a change in facility with the MD is done by the service. One call does it all. It is a total hands-off by the employee, other than that first phone call.

    CDHPs have been shown to save the employer between 12 percent and 20 percent conservatively in the first year and by adding the concierge service, it lowers claims cost by an additional $600 per employee per year. As an agent, I have no control over insurance premiums, but I can control the designs. With these programs, I have been able to save my small to medium-size clients from $1,000 to $3,000 per employee per year. Some of these companies are now spending less on their health insurance plans than they did five years ago – though you would never know it from the news media.

    And most importantly, these savings didn’t come at the expense of the employee. The total out-of-pocket costs for employees actually went down compared to their old plans. We started the NAABC to help educate agents and brokers on bringing the consumer movement to the marketplace and to do it from within our industry. Even with the passing of this recent legislation, our trade association is still in the forefront of bringing better ideas to our customers and giving them better choices.

    Since April 2002, NAABC has educated more than 2,300 agents nationally through its Chartered Benefit Consultants (CBC) designation course. For further information on our trade organization and/or continued agent education, you can contact Harvey Randecker at 1-800-627-0552

    Livio L. Andreatta is Midwest Public Relations Officer for the NAABC and President of L.L. Andreatta & Associates.

  2. Hi Livio,

    Thank you for your comments on my article. In the time I have been teaching the Chartered Benefit Consultant course I have helped more than 100 health insurance agents achieve this designation. They, in turn, have helped hundreds of employers and their workers acheive more affordable coverage and benefit designs that put the patient in control of their healthcare with the responsibility of decision making. Thank you for your efforts.

    Ross Schriftman

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