Congress Rips AIG, Other Carriers Over Comp Costs In a War Zone

May 20, 2008

Rep. Henry Waxman lacerated the Pentagon’s workers’ compensation program for civilian workers in Iraq and Afghanistan, saying it was a “flagrant abuse” of taxpayer dollars. He directed his wrath toward AIG and three other carriers not named in this CNN report.

From a business perspective only, and not speaking as an American citizen, if I had been an AIG underwriter I would have priced this program high in the first couple of years. From an underwriting perspective, they were going into a high-risk work zone with a lot of unknowns and no historical data. But according to the report, the carriers had been achieving 40% profits on these civilian employees for over five years. This, in an industry whose revenues declined last year and whose profit margins at home are shaky at best.

It’s fine to rip the carriers for not adjusting their rates to reflect experience. But there number of other questions should be asked, too, like: Who was minding the store? Were these costs a straight pass-through from Blackwater, Halliburton, et al.? That removes the incentive from these companies to push back on pricing. After all, the more irresponsible their purchasing practices, the more money they make.

And what about the government’s own civilian employees? Where were the Procurement Officers who are supposed to act as risk managers in this sort of situation? It seems to me a lot of people dropped the ball on this one, since it went on year after year.

Sounds like this was a classic seller’s market, and yet another story of government mismanagement. The carriers may not have been admirable corporate citizens, to say the least. But, at least in economic terms, they were ‘acting rationally.’ Too bad we can’t say the same thing about the people who were paying them. Our troops in harm’s way deserve better than to have the military budget managed so irresponsibly.

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4 Responses to “Congress Rips AIG, Other Carriers Over Comp Costs In a War Zone”

  1. Michael Vekassy Says:

    As a Chartered Life Underwriter, I fail to see how this qualifies as insurance profiteering. What Mr. Waxman fails to take into account is the long-tailed nature of the workers compensation business. Perhaps profit margins are 40% today but what happens years from now — after premiums stop being paid — when illnesses get legitimately traced back to this period and claims are made? Case in point: how many 9/11 emergency responders are just now filing claims that date back to their service over 6 years ago. There is no relevant claim experience to judge Iraq service by; therefore the companies have a duty to protect themselves and their policy owners and shareholders by charging high premiums. In the end, what looks like profiteering now could be a financial loss to the insurers. We have no way of knowing, nor does the finger-pointing Congressman from California.

  2. Richard Eskow Says:

    Michael,

    This gets to an issue I wanted to raise and probably should have: the calculation of “profits” in the insurance industry. I would be very interested in seeing how Waxman and his committee calculated profit of 40% – did they use actuarial assumptions for the fully developed cost of current and future claims, or did they simply subtract claim and admin costs to date from premiums collected. If it’s the latter it’s an unfair number.

  3. Michael Vekassy Says:

    I don’t know who Congressman Waxman consulted in order to get that number, but not many members of the House have staff actuaries. The Representatives from CT (and these days NC, too) may be the exception! Even if the fully developed costs of current claims were taken into consideration, the lack of experience leaves too much of the future payout calculations to blind assumption. So I have to conclude that it IS an unfair number and probably a politically motivated accusation. What piece of legislation will Waxman ask the insurers to support in return for the withdrawal of his accusations?


  4. NO waxman was paid big by a insurance provider for his elections. So the real number is more than 40%


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