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Issue 10 -- May 11, 2004
The outcry over recent proposed HUD requirements for insurance, well-documented elsewhere on captive.com’s links, remind me of similar “crises” of the past. The reasons for those, the reaction to them, and the way the business community reacted are helpful to recall. When these crises first were recognized, they generated righteous indignation. Almost as much righteous indication as this one. The oldest and longest-running of the righteous indignations is the one called “Loss Reserve Deductibility”. In 1983 the Kaiser Steel company succeeded in having its loss reserves for unpaid WC claims allowable as a deduction for tax purposes, only to have the precedent overturned by congressional lawmakers soon thereafter. It seemed logical at the time (and still does) to allow self-insurers to deduct loss reserves for tax purposes, just the way insurance companies do. But no amount of speechmaking, handwringing, lobbying or efforts by CICA, RIMS and others convinced federal decision-makers to change their minds back again. The harsh reality of the reason why the arguments got nowhere is easy to understand, even if you don’t agree with it: Treasury (the IRS) doesn’t recognize self-insurance as a normal business expense, no matter what you call it or how well you document it. And the benefits of a Loss Reserve Deductibility allowance would benefit a few corporations, not very many voters. The business reaction, sensing the futility of further effort, died down, as captive owners discovered how to gain deductibility of the same loss reserves in a properly-recognized insurance company. The next crisis worth recalling was the “anti-fronting” attack by the NAIC in the 1990s, which was a surrogate for the insurance industry’s anti-captive insurance position. The righteous indignation machinery brought out champions from Vermont and other captive locations, and a lot of dire warnings that it would be the end of offshore group captives and all their advantages for participants (and service providers). The NAIC itself had its own reasons for this attack, not just an aversion to captive insurance companies. They said they were out to stop offshore insurers that were either bogus to begin with or offshore entities masquerading as captives but actually facades for the PIGS of the times (footnote: PIGS: “Perfectly Incredible Gouging Schemes”). Nothing stopped the NAIC from promulgating their model act, which states were supposed to adopt or lose their accreditation. Again, the protestations and remonstrances by the few affected didn’t carry enough weight to change the course of the NAIC decision-makers. The business reaction was to use existing provisions regulating MGAs and credit for reinsurance, and then to make sure that fronting was “done right”. Fronting continues, but in a more careful mode. In both of these crises the righteous indignation generated by the threat to captive insurance companies and their owners could not be translated into convincing arguments to the regulatory bodies in question to get them to withdraw their initiatives. The business interests were just not numerous or powerful enough. In the current “crisis” the same thing applies. According to the Risk Retention Reporter there have been 14 RRGs formed since 2003 to provide liability coverages for nursing homes, and none before that. There are probably fewer than 10 more unrated single or group captives writing direct nursing home liability risks. It is safe to assume that most or all receive some sort of HUD financing. That’s not a lot. There are, of course, some 50-100 unrated municipal pools covering nursing homes that might also be affected by the proposed section 232, according to Christopher Kramer of broker Neace Lukens (who have a lot of nursing home clients), who estimates that there are as many as 300 facilities covering up to 37,000 beds that are insured under the section 232 program. I still can’t estimate what proportion of old people that represents, but it doesn’t look like a big proportion to me. In the outcry over the section 232 proposed liability insurance regulations, I see similarities with the other two crises. Owners of and service providers to unrated captives and RRGs are protesting that this will add considerably to their costs, or even force them to shut down because A-rated, locally licensed liability insurance isn’t available at all. Of course it is outrageous that big government uses its blind authority in a way that harms a struggling few that have found a captive insurance solution to their liability insurance problems. But the new regulations won’t result in significant increased cost to all nursing homes which in run would result in increased cost to all old people in them. Unless, of course, the reaction against the new regulations brought with it a mandate to state insurance commissioners to require A-rated insurers to offer liability insurance, presumably at very high cost, to all HUD-financed nursing homes. Big government helping big business at the expense of struggling small entrepreneurs – and resulting in cost increases for all old people (or their government funding mechanisms). If that could be imagined, the trickle-down effects of misguided regulation might just increase the costs of care to a lot of older voters, not just to some businessmen. So to head off this possible adverse outcome for the few of the proposed section 232 guidelines– including the outcome imagined by those who warn that all government agencies could copy the HUD proposed regulations - the older-voter lobby would seem to me to be a better place from which to launch an effort against these proposed regulations. That would require a lot more care and handling – in an election year – by the folks at HUD than the usual process. The AARP has been known to change the course of adopted legislation and regulations. Would it work? Probably not entirely – but might gain the hoped-for exemptions for captives and RRGs regulated under states with recognized regulatory regimes. And the business reaction once again will bring positive reactions from the service providers to nursing homes, as it did in my other two examples. They will adapt to the situation if the regulation is passed, and go on about their business – both captive operation and aging care centers – with different ways of satisfying the financiers of their government-backed loans and bond issues.
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Hugh Rosenbaum, one of captive.com's friends and valued contributors, is a freelance consultant. Hugh can be reached by telephone at +4420 8883 6729 or by e-mail at hughro2@yahoo.com. Learn how you can spend a day with Hugh! Visit Hugh's Captive Consulting and Music Websites
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