June 22, 2009

Risk Transfer without Risk

The Defense Base Act (DBA) was enacted in 1941, to cover the injuries to civilian employees - primarily a few hundred engineers - during the second world war. The act might have worked then, but it certainly is not working now, nearly 70 years later. As we have blogged in the past, the DBA is a boondoggle, generating huge profits for a small number of insurance carriers and routinely devastating both the civilian workers wounded or killed in war zones and their families. There are over 10,000 claims filed each year: the medical only claims are usually paid; the indemnity claims are dissected, inspected, detected, and ultimately, rejected. A handful of insurers (AIG, CNA among others) are making big bucks at the expense of the wounded and the dead.
NOTE: As bad as the situation is for U.S. citizens wounded and killed in Iraq, it is far worse for foreign nationals.

The Domestic Policy Subcommittee of the House Oversight and Government Reform Committee held a hearing last week on the DBA. The title of the hearing betrays an (understandable) prejudice: "After Injury, the Battle Begins: Evaluating Workers' Compensation for Civilian Contractors in War Zones." The hearing focused on the handling of workers' compensation insurance for federal contractors working overseas, specifically on the inordinate delays in compensation running parallel to the enormous profits for insurers. Among those testifying were Deputy Labor Secretary Seth Harris; Timothy Newman, Kevin Smith and John Woodson, former civilian contractors in Iraq; Kristian Moor, president of AIU Holdings, Inc., a division of AIG; George Fay, executive vice president for Worldwide P&C Claims, CNA Financial; and Gary Pitts of Pitts and Mills Attorneys at-Law.

Kristian Moore defended AIG's decisions and motives, pointing the finger at a lack of Labor Department oversight and a system overtaxed with cases. "We are doing everything we can do," suggested Charles Schader, senior vice president and chief claims officer for AIU Holdings. Yeah, everything you can do to make money.

At the conclusion of the hearing, Dennis Kucinich (D-Ohio) warned AIG executives that he plans to demand copies of internal memos and documents that will link claims denials to the company's profits. Most of us do not get terribly excited by the prospect of reading claim files, but these will undoubtedly provide some compelling reading. While I doubt that the subcommittee will find a direct, written link between denials and profits, the rationale for the individual claim denials - in the face of compelling evidence of compensability - should prove riveting. Was it incompetence or was it greed? Something cruel, heartless and cynical took place in the back rooms of carriers with responsibility for civilian claims. If you like Edgar Alan Poe, you'll love the claims files of AIG and CNA.

Risky Job, Risky Work
Seth Harris, the new deputy secretary at the U.S. Department of Labor, is in charge of this mess for the government. He's been on the job for 3½ weeks. Congratulations on the new job, Seth! (You might want to keep your resume circulating.) Seth has been working less than a month, but he has already figured out that the system is in need of fundamental change.

The work of insurers usually involves risk transfer. Under the perverse incentives of the DBA, the risk is absorbed by taxpayers, the pain falls on civilian workers and their families, and the profits - running from 37 to 50 percent of premiums - are pocketed by the carriers. Risk without transfer. It's amazing that AIG can generate this level of profit in one division and still only trade at $1.40 a share. I guess that they have been looking for risk in all the wrong places.



People who are ignorant about insurance ought to keep their rhetoric of outrage under control until they've learned a few basics. Here's the statement from the article in "Government Executive.com" that I suppose is the basis for the charge of "outrageous profits" for insurance companies.

"Subcommittee investigators found that since the wars began insurers have collected more than $1.5 billion in premiums under the Defense Base Act -- all paid by taxpayers -- but paid out only $900 million in benefits."

So it's $1.5 billion in premiums (which is all the carriers will ever get for the insurance already provided), and $0.9 billion in benefits already paid to date. Benefit payments will continue for decades on the injuries that happened during the covered years. How much more will the carriers have to pay before all the benefits under those claims are fully paid? Until you have that number, too, you have no basis to think there are any profits at all; it could be a huge loss instead.

I'm a retired insurance company underwriter, and I handled DBA for 5 years. I'm a long-time reader of this blog, but I'm disappointed in your shoddy reporting here. You quote a government study saying that insurance companies are "making big bucks" -- that study showed that companies have collected $1.5B in premium and paid out "only" $900M in benefits. That is a 60% loss ratio and doesn't even include loss development, which, for a line like workers' compensation, can be a lot. This figure also doesn't contemplate agent commission, underwriting expense, or loss adjustment expenses (legal fees, etc.). At a 60% undeveloped loss ratio, this equates to a combined ratio of 100% or more. Companies that write DBA are barely breaking even!!

Also, if you watched the testimony (the video link is still available), you'll see that two of the injured contractors who appeared at the hearing had their claim denial affirmed by administrative law judges. These were not reckless decisions by insurance companies. They were appropriate claim denials upheld by a judge.

I'm not surprised that the general media doesn't understand insurance, but someone calling themselves the work comp insider should do better.

What also is not figured into these numbers is the War Hazards Act Reimbursements to the insurance companies.
Under the War Hazards Act all war related claims (remember these are war zone workers we're talking about) will be reimbursed all expenses plus a 15% administrative fee.
As for the judges decisions I invite you to visit
www.americancontractorsiniraq.com/XFiles.html where you can see for yourself the blatant bias against claimants that is ongoing in the DoL OALJ system.


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This page contains a single entry by Jon Coppelman published on June 22, 2009 11:22 AM.

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