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Impact of the 2010 Midterm Elections on Insurance Technology: An Innovation in Insurance Case Study

Introduction
In the campaign season leading up to the 2010 midterm elections, the Independent Insurance Agents and Brokers of America (IIABA) donated more than $1.7 million to selected candidates, 93% of whom were elected.1 More than 5000 independent insurance agents donated to the IIABA's political action committee.1 IIABA's actions reflected insurers' concerns about the impact of the November 2 midterms on their industry. The elections that day swept Republicans to a majority in the House of Representatives and numerous state governments, but Democrats retained their Senate majority. This Innovation in Insurance (i3) case study examines the impact of the 2010 midterm elections on insurance and insurance technology, in four areas: healthcare reform, financial regulation and taxes, workers' compensation, and flood insurance.

Healthcare Reform
In the aftermath of the November 2 midterm elections in Congress, the status of the Obama administration’s healthcare reform law is one of the most closely-watched issues in the insurance industry. Most health insurers opposed the Patient Protection and Affordable Care Act when it was passed and amended in March of this year. Current and incoming Republican lawmakers say they intend to repeal, defund, or change the law. Shortly after the midterm elections, Senate majority leader Harry Reid (D-Nevada) indicated that he is open to making some changes to the healthcare legislation.3 But many analysts believe that attempts to repeal or withhold funding for the law are unlikely to be successful. In both cases, Republicans would have to defeat a Democratic majority in the Senate and the President’s veto. Republicans may instead try to organize hearings to slow the law's implementation and gather public support to change it. Analysts expect such hearings to discuss access to insurance, dropped coverage, and policy pricing, among other topics.4 Currently, public opinion is more or less evenly divided on the law. 2 Twenty states are suing to overturn the law, but it is uncertain when or how those cases will be resolved.2 Even before the midterm elections, health insurers had had some success lobbying for tweaks to healthcare reform. In response to insurers' concerns, the U.S. Health and Human Services Department (HHS) temporarily exempted from the medical loss ratio (MLR) policies with low premiums and low annual dollar limits.5 The HHS also agreed to adjust the MLR for small insurers 1 January 2011

and allow new insurers to postpone reporting the MLR. 5 Currently, property and casualty trade groups are working to repeal a provision of the healthcare law that requires businesses that spend at least $600 with a vendor to submit a report to the IRS. 6 Although there is broad bipartisan support for a repeal, the Senate has failed twice to pass it, partly because the proposed legislation does not compensate for the government revenue that would be lost as a result of repeal.6 The post-election Republican comeback in Congress means that more provisions of the healthcare law will likely be revised or removed. These include the requirement that all Americans buy healthcare insurance (individual mandate), and that employers offer healthcare insurance. The GOP-controlled House may also pass measures eliminating insurance industry fees imposed by the healthcare law. Insurance agents and brokers are pushing for new legislation that will exempt their fees and commissions from the MLR formula included in healthcare reform. Currently, the law classifies such fees and commissions as non-claims costs, and HHS believes the healthcare law does not give it authority to make the desired exemptions. 7 The proposed legislation would grant commissions the same MLR-exempt status as federal, state, and local taxes.7 Insurers also want Congress to change the MLR formula to include the costs of establishing new billing coding systems and fighting billing fraud. 5 And they want the government to calculate spending ratios on a nationwide instead of state-by-state basis. 5 Insurance trade groups believe that the new Republican majority in the House will easily pass these measures. In the Senate, several Democrats up for re-election in 2012 may join Republicans in backing the changes.7 But there remain possibilities for bipartisanship between the two parties on healthcare reform. Analysts predict that Congress will preserve some provisions of the law that are popular with the public. These include barring insurers from turning down those with pre-existing conditions, and from canceling a policy when a person becomes sick.4 Congress could also aid states in funding high-risk pools.4 Additionally, insurance exchanges at the state level, which receive bipartisan support, will likely continue to operate.4

Financial Regulation and Taxes
Besides the healthcare law, insurers are trying to shape implementation of the federal government's financial reform law--the Dodd-Frank Act. The legislation created the Office of National Insurance, which has limited power to investigate insurance regulation. 8 But its most significant effect on insurers is the simplification of laws regarding surplus lines. 8 Under DoddFrank, the home state of the insured is solely responsible for enforcing surplus lines regulations. 8 2 January 2011

Although insurers have welcomed surplus reform, they have concerns about other aspects of Dodd-Frank. The American Insurance Association (AIA) has asked the government to provide insurers with a blanket exemption from the Volcker Rule. 9 The Rule is a provision of Dodd-Frank that expands oversight of financial services that are in ventures with private equity funds, or are involved with private trading.9 The AIA will be aided in its efforts by Republicans' return to leadership of powerful House committees such as the Financial Services Committee. Almost all Republicans oppose the financial reform law, and party leaders in both branches of Congress have called for reviews and changes to it. A GOP-controlled House could moderate the Volcker Rule and the power of the Consumer Financial Protection Bureau, which was created by DoddFrank. It will likely also overcome Democratic opposition to the use of credit scoring as an underwriting tool in property and casualty insurance. 10 But as with healthcare reform, Republican attempts to overturn Dodd-Frank will be restricted by continued Democratic control of the White House and Senate. The post-election congressional fight over taxes will also impact the insurance industry. Many agents and brokers work in partner or sole proprietorship organizations, and therefore pay taxes at individual rates.11 The Independent Insurance Agents and Brokers of America is asking House members to extend all of the Bush tax cuts, arguing that an extension would lessen insurers' uncertainty about the tax code.11 Meanwhile, Republicans in the House are set to dismiss a Democratic-proposed tax hike on offshore insurers. 10

Workers' Compensation
The midterm elections also impacted workers' comp policies in several states. In Washington state, businesses that were worried about rising rates proposed a measure to open the state's workers' comp market to private insurers.12 On November 2, voters rejected the measure, but state government formed a joint business-labor task force to study future workers' comp reform. 12 Like Washington, Ohio does not allow private insurers in the workers' comp market, but the state's newly-elected Republican governor may reverse that. 12 In California, even though the incoming Democratic governor is widely considered to be pro-labor, insurers are hopeful that he will build on past workers' comp reforms, to reduce rates for employers. 12 Florida's new governor will likely end the outgoing administration's legislative efforts to control rising workers' comp pharmaceutical costs.12 In New Jersey, voters approved a measure that protects the state's Second Injury workers' comp fund from budget cuts. 12 Oklahoma's incoming governor said she wants to further reform the state's workers' comp system to save businesses money. 12 Her efforts will easily receive support from a pro-business state legislature that passed a workers' comp 3 January 2011

reform package earlier this year.12

Flood Insurance
The most recent midterm election has also impacted the extension of the National Flood Insurance Program. Currently, the national government controls the majority of flood insurance policies, while wind is a covered peril under most multi-peril policies, offered by private insurance companies. After Hurricane Katrina, damages that were caused by either wind or flood were difficult to ascertain which peril caused the loss, and many private insurance companies were blamed for denying wind coverage. H.R. 1264 (Multiple Peril Insurance Act) proposes to expand the federal government’s role in the private insurance market by creating a new program that offers wind coverage as well as flood.13 This bill is sponsored by Democratic Representative Gene Taylor and has been referred to and reported by the Committee on April 27, 2010. Whether this bill will be passed by the Houses of Congress is questionable. Previous Democratic Representatives like Gene Taylor of Mississippi and Ron Klein of Florida were advocates for the passing of this bill. Rep. Gene Taylor stated, "I vigorously renew my call for the U.S. Senate…and pass my Multiple Peril Insurance Act. This act eliminates all opportunities for insurance companies to continue to betray Coastal American homeowners and taxpayers."14 He believes that insurance companies have an inherent conflict of interest when it comes to adjusting flood claims on properties that also sustained wind damages. 14 He blames companies like State Farm and Nationwide for releasing memos directing staff to resolve this conflict of interest in the company’s favor.14 He warns that if this bill is not passed then three things will result: private insurance companies will shift all wind losses to the federal government. Taxpayers will continue to pay billions of dollars to fund FEMA trailers or other housing assistance for displaced homeowners. Lastly, that homeowners throughout coastal America will not buy windstorm coverage with confidence that their hurricane losses will be fully covered. 14 In the Statement of Republican Policy, published on July 21, 2010, it argues against Rep. Gene Taylor's views on the subject. Even though Republicans of the House believe reform is necessary for the NFIP, they think fundamental reform is more beneficiary than a huge implementation of a new program. In the statement it reads, “H.R. 1264 would dramatically increase the scope of the NFIP at a time when the program is essentially insolvent, remains grossly underfunded, and owes the taxpayers more than $18 billion. For all these reasons, House Republicans oppose H.R. 1264 and urge its defeat.”15 Republicans are strongly opposed to the expansion of NFIP to include flood damages within multi peril policies because transferring liabilities from the private companies to the NFIP would be fiscally irresponsible.15 4 January 2011

On January 5, 2011, Democrats will no longer be in control of the House, and the Senate Democrat majority will be lessened considerably. It is unclear at this point if the House Republican majority will pass H.R. 1264 onto the Senate. It is also uncertain whether the Senate will be able to pass this bill overcoming a possible Republican filibuster.

Conclusion
The 2010 midterm elections will have a significant impact on insurance and insurance technology. The Republican majorities in the House of Representatives and in state governments, as well as continued Democratic control of the Senate, will determine the outcome of several key issues for insurers. In the area of healthcare reform, Republicans will attempt to revise or remove certain provisions of the Patient Protection and Affordable Care Act. Popular provisions in the law will likely remain, while changes may eliminate insurance industry fees and even the individual mandate. Regarding financial regulation, congressional efforts to moderate the Dodd-Frank Act and cut or extend taxes, will benefit insurers. With workers' compensation, many new state governments will decide whether to protect their state-run funds from budget cuts, and whether to let private insurers into workers' comp markets. In the area of flood insurance, the new Congress may block the government from expanding its role in that market. Overall, many insurers hope that Republican victories in the midterms will bring a deregulatory mindset to legislation that affects the industry. The new divided federal government is unlikely to impose new insurance oversight and regulation. But at the same time, it generates uncertainty in the insurance market about the future of existing laws. This is just one reason that, as the impact of the midterm elections is felt, insurers continue to try to shape government involvement in insurance.

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Sources 1. "Big 'I' Insurance Agents Gave $1.7 Million to Shape New Congress."Insurance Journal 3 Nov. 2010. InsuranceJournal.com. Web. 15 Nov. 2010. http://www.insurancejournal.com/news/national/2010/11/03/114588.htm 2. "Can Republicans Repeal U.S. Healthcare Overhaul?" Insurance Journal 2 Nov. 2010. InsuranceJournal.com. Web. 15 Nov. 2010. http://www.insurancejournal.com/news/national/2010/11/02/114523.htm 3. "Sen. Reid says willing to 'tweak' healthcare law." Reuters 3 Nov. 2010. Reuters.com. Web. 15 Nov. 2010. http://www.reuters.com/article/idUSN0328609620101103?cid=xrs_rss-nd 4. "Election Day Changes May Give Benefits Managers Pause." Risk and Insurance 25 Oct. 2010. RiskandInsurance.com. Web. 15 Nov. 2010. http://www.reuters.com/article/idUSN0328609620101103?cid=xrs_rss-nd 5. "Health Insurance Brokers May Ask Congress to Protect Commissions." Insurance Journal 22 Nov. 2010. InsuranceJournal.com. Web. 22 Nov. 2010. http://www.insurancejournal.com/news/national/2010/11/22/115105.htm 6. "Congress Fails in Effort to Repeal 1099 Provision in Healthcare Law." National Underwriter P&C 30 Nov. 2010. Property-Casualty.com. Web. 30 Nov. 2010. http://www.property-casualty.com/News/2010/11/Pages/Congress-Fails-In-Effort-To-Repeal-1099Provision-In-Health-Care-Law.aspx? utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: +NationalUnderwriterPropertyAndCasualtyBreakingNews+ (National+Underwriter+Property+and+Casualty+Breaking+News) 7. "Agent Groups Develop MLR Legislation to Introduce in Next Congress." National Underwriter P&C 30 Nov. 2010. Property-Casualty.com. Web. 30 Nov. 2010. http://www.property-casualty.com/News/2010/11/Pages/Agent-Groups-Develop-MLR-LegislationTo-Introduce-In-Next-Congress.aspx? utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: +NationalUnderwriterPropertyAndCasualtyBreakingNews+ (National+Underwriter+Property+and+Casualty+Breaking+News) 8. "Except for Surplus Lines, Dodd-Frank Barely Touches Insurance." National Underwriter P&C 8 Nov. 2010. Property-Casualty.com. Web. 15 Nov. 2010. http://www.property-casualty.com/Issues/2010/November-8-2010/Pages/Except-For-SurplusLines-DoddFrank-Barely-Touches-Insurance.aspx?page=1 9. "AIA Cites Financial Services Law Language in Call for Volcker Exemption." National Underwriter P&C 10 Nov. 2010. Property-Casualty.com. Web. 15 Nov. 2010. http://www.property-casualty.com/News/2010/11/Pages/AIA-Cites-Finl-Svcs-Law-Language-InCall-For-Volcker-Rule-Exemption.aspx?page=1 10. "Credit Scoring, Foreign Tax Among Fading Issues After Election Day." National Underwriter P&C 5 Nov. 2010. Property-Casualty.com. Web. 15 Nov. 2010. http://www.property-casualty.com/News/2010/11/Pages/Credit-Scoring-Foreign-Tax-AmongFading-Issues-After-Election-Day.aspx? utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: +NationalUnderwriterPropertyAndCasualtyBreakingNews+ (National+Underwriter+Property+and+Casualty+Breaking+News)&utm_content=Google+Reader 6 January 2011

11. "Extend All Current Tax Rates, IIABA Urges Congress." National Underwriter P&C 2 Dec. 2010. Property-Casualty.com. Web. 2 Dec. 2010. http://www.property-casualty.com/News/2010/12/Pages/Extend-All-Current-Tax-Rates-IIABAUrges-Congress.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: +NationalUnderwriterPropertyAndCasualtyBreakingNews+ (National+Underwriter+Property+and+Casualty+Breaking+News) 12. "Republican Reconquest and the Workers' Comp Reforms." National Underwriter P&C 15 Nov. 2010. Property-Casualty.com. Web. 15 Nov. 2010. http://www.property-casualty.com/News/2010/12/Pages/Extend-All-Current-Tax-Rates-IIABAUrges-Congress.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: +NationalUnderwriterPropertyAndCasualtyBreakingNews+ (National+Underwriter+Property+and+Casualty+Breaking+News) 13. “H.R. 1264, Multiple Peril Insurance Act.” Legislative Digest July 2010. GOP.gov. Web. 20 Nov 2010. http://www.gop.gov/bill/111/2/hr1264 14. “Rep. Gene Taylor: In Court, Insurance Companies Provided Evidence of Fraud.” Insurance Reform Press Releases and Statements. July 2009. http://www.taylor.house.gov/index.php? option=com_content&view=article&id=542&Itemid=95 15. “H.R. 1265- The Multiple Peril Insurance Act of 2009.” Statement of Republican Policy July 2010. Repcloackroom.house.gov. Web. 20 Nov 2010. http://repcloakroom.house.gov/news/DocumentSingle.aspx?DocumentID=199767

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About Innovation in Insurance
The Innovation in Insurance (i3) program is a unique student-run non-profit enterprise operating within the Moore School of Business at the University of South Carolina. The purpose of www.InnovationInInsurance.com is to foster innovation in the way insurance is practiced by providing a portal to all online resources helpful to insurance technology, services, and outsourcing. i3's mission is to develop the next generation of insurance and insurance technology leaders by exposing them to the insurance industry through major news and events. News and announcements from the insurance technology industry are published on the i3 website. Such news includes information on mergers, acquisitions, major investments, new products, new personnel, and major industry developments and events. The leading stories of the week are sent in a weekly newsletter to more than 1100 subscribers. Another valuable resource that i3 provides is a comprehensive directory of more than 650 insurance technology vendors, personnel, and major industry developments and events. The leading stories of the week are sent in a weekly newsletter to more than 1100 subscribers. Another valuable resource that i3 provides is a comprehensive directory of more than 650 insurance technology vendors.

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All material in this case study is, unless otherwise stated, the property of Innovation in Insurance (i3). Copyright and other intellectual property laws protect these materials. Contact information for requests for permission to reproduce or distribute materials available through this case study are listed below: I3 Managing Director I3uscadmin@gmail.com

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