Insurance Asset Growth Lags
Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.
One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.
Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.
Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.
The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.
“The lower growth has likely contributed to the under-investment, not the other way around,” he said.
But clearly, this is an area that needs to be addressed, he said.
Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.
The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.
“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.
In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.
The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”
Insurers’ “exposure to high-growth specialties was similarly limited,” it said.
Regulatory and Organizational Inefficiencies
That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.
This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.
Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.
The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.
Insurers should move to a more global model to address those issues, said Schwetlick.
“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.
Third-Party Management Benefits
The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.
“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.
“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.
“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.
Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.
EPA Process Is Equivalent to a Lawsuit
In the 1960s, McGinnes Industrial Waste Corp. dumped pulp and paper mill waste sludge into disposal pits near the San Jacinto River in Pasadena, Texas.
In 2007, after a two-year investigation, the Environmental Protection Agency notified McGinnes’ parent company (and McGinnes itself in 2008) that it was a “potentially responsible party” (PRP) for cleaning up contamination at the site.
In 2009, the EPA demanded that McGinnes pay $378,864 to clean up the site, and required McGinnes to make a “good faith offer” to settle with the EPA within 60 days. It also warned of potential civil penalties and punitive damages for failure to comply.
McGinnes, which had commercial general liability policies from Phoenix Insurance Co. and Travelers Indemnity Co., requested a defense in the EPA proceedings. The insurers refused, claiming the proceedings were not a “suit” under the policy.
After McGinnes sued the insurers in federal district court seeking a declaration that the insurers were obligated to defend the company, the court granted a partial summary judgment to the insurers. The Supreme Court of Texas then received a certified question from the U.S. 5th Circuit Court of Appeals on whether the EPA’s demands constituted a “suit,” which would trigger a duty to defend.
In a 5-4 decision on June 26, the Texas high court majority ruled that the demands did constitute a suit. It ruled the EPA’s proceedings under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) mirrored the proceedings of a lawsuit. It noted the insurance policy was written before CERCLA became law.
The Texas high court also noted that 13 other states have sided with insureds in similar cases.
A blistering dissent written by Justice Jeffery Boyd and joined by three other justices, said the court’s ruling had rewritten the insurance policy and superimposed new definitions on its wording “because it seems like a good thing to do here (and on top of that, everyone else is doing it). My law professors (and my momma) taught me better.”
The ruling allows McGinnes to pursue the insurers for defense costs and fines.
Scorecard: The insurance companies may be responsible for more than $2 million in costs and fines related to the EPA proceedings.
Takeaway: Of the 16 times the definition of “suit” in regard to EPA proceedings has come to court, only California, Illinois and Maine have ruled in favor of the insurance companies.
Intervention Rejected for Insurers
In 2009, CE Design filed a class-action lawsuit in the U.S. District Court for the Northern District of Illinois, Eastern Division, alleging King Supply Co. sent unsolicited fax advertisements that violated the Telephone Consumer Protection Act (TCPA).
King had been issued commercial general liability and commercial umbrella policies by Valley Forge Insurance Co., National Fire Insurance Co. of Hartford and Continental Casualty Co., all of which declaimed any obligation to defend or indemnify King. The policies, they said, exempted liability under the TCPA.
At that point, the insurers filed a state court action in Texas, which was King’s principal place of business, disclaiming coverage. That suit was dismissed for lack of jurisdiction, but a similar suit was filed in Illinois, where a state court ruled the policies did not cover King’s liability. CE Design is appealing that decision.
In federal court, when the settlement agreement was presented for approval in January 2012, the insurers sought to intervene in the case. The district court denied the motion as untimely. On appeal by the insurers, the U.S. 7th Circuit Court of Appeals agreed with the district court.
The court ruled that while the insurers were correct to worry that King would “[sell] them down the river by failing to defend against class counsel’s $20 million money grab,” they said that the insurers “should have begun worrying when the suit was filed rather than almost three years later.”
“The insurers should have foreseen the danger of such a settlement from the outset,” according to the June 29 opinion, saying the move to intervene as the settlement was set for approval was “so gratuitous an extension of a multi-year litigation [that it] should not be encouraged.”
Scorecard: Pending the appeal of the state case that found in the insurers’ favor, this ruling requires insurers pay the $20 million settlement, minus the $200,000 from King.
Takeaway: The case does not resolve the issue of when insurance companies can intervene in such cases. The district court said it would have rejected a request for intervention even in 2009 after the insurers denied coverage.
Insurer Need Not Pay for Shooting Injury
On Jan. 3, 2013, Timothy Johnson was participating in a deer hunt on the property of the Northumberland Hunt Club in Richmond County, Va.
When he was about 75 yards away from a nearby highway, Johnson fired a shot at a deer, which struck Danny Ray Marks Jr. in the head as he was driving by. Marks sued the hunt club and Johnson, alleging negligence.
Scottsdale Insurance Co., which insured the club under a general liability policy, denied coverage to Johnson. The policy, it said, covered club members “only with respect to their liability of [the club’s] activities or activities they perform on your behalf.”
After a lower court agreed with the insurance company’s denial of coverage, Marks appealed to the U.S. 4th Circuit Court of Appeals, which affirmed the decision.
It ruled the policy did not cover members’ personal activities, such as deer hunting, in connection with the club but would be triggered only in “situations involving a member’s alleged vicarious liability for the activities of the club as an entity.”
Scorecard: Scottsdale was not responsible to defend or indemnify the hunting club in the litigation.
Takeaway: The policy only covered club members arising from official actions undertaken on behalf of the club, not for personal recreational activities.
Specialty Drugs Show No Signs of Slowing Down
A decade ago, high-cost specialty drugs were commonly referred to as “injectable drugs” and were used to treat conditions not typically covered in workers’ compensation, such as cancer, rheumatoid arthritis and multiple sclerosis.
“Today, however, new specialty drugs are emerging that will be used to treat other chronic and inflammatory conditions,” said Joe Boures, president and CEO of Healthcare Solutions, an Optum company providing specialized pharmacy benefit management services to the workers’ compensation market.
“Payers in the workers’ comp market are just beginning to feel the cost impact of greater utilization of these drugs, which come with expensive price tags.”
Specialty drugs are often manufactured using biologic rather than chemical methods, and they are no longer just administered by injections. New specialty drugs can also be inhaled or taken orally, likely contributing to the rise in their utilization.
“There isn’t a standard definition of specialty drugs, but they are generally defined as being complex to manufacture, costly, require specialty handling and distribution, and they difficult for patients to take without ongoing clinical support or may require administration by a health care provider,” said Boures.
In 2014, more than a quarter of all new therapies that the FDA approved were through its biologics division. Biologics, and similar therapies, are representative of a future trend in prescription drug spend.
“As the fastest growing costs in health care today, specialty drugs have the potential to change the way prescription benefits are provided in the future,” said Jim Andrews, executive vice president of pharmacy for Healthcare Solutions.
Workers’ Compensation payers may not recognize how specialty drugs are affecting their drug spend.
Specialty drugs like Enbrel®, Humira® and Synvisc® can be processed in conjunction with other medical procedures and, therefore, not recognized by payers as a pharmacy expense.
This leaves payers with little visibility into the costs of these medications within their book of business and a lack of tools to control these costs.
Due to the high costs of specialty medications, special due diligence should be utilized when claimants receive these medications, up to and including utilization review, said Andrews.
“Healthcare Solutions recommends that claimants using specialty drugs are monitored for proper medication handling and that the medication is administered appropriately, as well as monitoring the claimant to determine whether the medication is having its desired results and if there are any side effects,” he said.
“At $1,000 per pill for some of these specialty medications, making sure a claimant can tolerate the side effects becomes vital to making sure the claimant achieves the desired outcomes.”
Hepatitis C drugs have made their way to the workers’ compensation market, largely through coverage of healthcare workers, who have exposure to the disease.
“Traditional drug treatments that began in the 1990’s had a success rate of 6% and costs ranging from $1,800 to over $88,000,” said Andrews.
“The new Hepatitis C specialty medications have a treatment success rate of 94-100%, but cost between $90,000 and $226,000.”
Although the new treatments include higher drug costs, the payer’s overall medical costs may actually decrease if the Hep C patient would have required a liver transplant as part of the course of treatment without the drugs.
While the release of new Hepatitis C medications in 2014 demonstrated the potential impact specialty medications can have on workers’ compensation payers, there are some specialty medications under development that target more common conditions in workers’ compensation.
Pfizer Inc. and Eli Lilly and Company are currently developing tanezumab, a new, non-narcotic medication to treat chronic pain, which is common in workers’ compensation claims.
Tanezumab has demonstrated benefits of reducing pain in clinical trials and may provide non-addictive pain relief to claimants in the future. This may change how pain management is treated in the future.
Healthcare Solutions has a specialty medication program that provides payers discounted rates and management oversight of claimants receiving specialty medications.
Through the paper bill process, Healthcare Solutions aids payers in identifying specialty drugs and works with adjusters and physicians to move claimants into the specialty network.
A central feature of the program is that claimants are assigned to a clinical pharmacist or a registered nurse with specialty pharmacy training for consistent care with one-on-one consultations and ongoing case management.
The program provides patients with education and counseling, guidance on symptoms related to their medical conditions and drug side effects, proactive intervention for medication non-adherence, and prospective refill reminder and follow-up calls.
“The goal is to improve patient outcomes and reduce total costs of care,” said Boures.