Actuarial Notes

Government Insurers Study Note

By Wendy Germani, Jim Klann, George Levine, Sarah McNair-Grove and Patty Smolen · Casualty Actuarial Society · 2017

Study guides: Exam 6C, Exam 6U

A CAS study note (April 2017) on why U.S. federal and state governments act as insurers, and on how they take part in crop and workers compensation insurance. It summarizes the main reasons for government insurance, the levels at which government participates — as exclusive insurer, as partner of private insurers or as their competitor — and the questions for evaluating a program, then describes the federal crop insurance program, federal and state workers compensation programs, and the interaction of workers compensation with Medicare.

On the syllabus

  • Exam 6C — objectives B1–B3; pp. 1–5, excluding Crop Insurance.
  • Exam 6U — objectives B1–B3.

Introduction

  • Federal and state governments take part in insurance as regulators and as insurers, either as the sole insurer, in partnership with insurance companies or in competition with them (government insurance programs).
  • Filling Insurance Needs Unmet by Private Insurance
    • Under the residual market philosophy, government offers insurance in markets private insurance leaves unserved for unavailability or unaffordability, with insurability requirements that differ from private insurers'.
    • The Federal Crime Insurance Program, begun in 1968 for high-crime neighbourhoods, expired in 1995 once the private market offered the cover at lower rates; crop and flood insurance are available and affordable only because of federal subsidies.
  • Compulsory Purchase of Insurance
    • Because workers compensation or auto insurance may be compulsory, some legislatures felt obliged to offer it to those who could not find a private market — the state workers compensation funds and the Maryland Automobile Insurance Fund.
    • For compulsory auto insurance, government insurance is normally not the answer: assigned risk plans, reinsurance facilities and joint underwriting associations make coverage available, sometimes below its actuarial cost.
  • Convenience
    • A legislature can fund a program faster than the private market can, and government may already provide services a program needs, as with the Florida Hurricane Catastrophe Fund; convenience alone may not justify a program where the private market is willing and able.
  • Greater Efficiency
    • The cost savings claimed for government insurance may be overstated: record-keeping, policy issue and claims costs remain, and other government departments may perform services on the program's behalf.
  • Social Purposes
    • Social purposes may be the main reason for government insurance programs — rehabilitation of injured workers, or loss mitigation requirements in catastrophe plans (social insurance).
  • Level of Government
    • Government may be an exclusive insurer (Social Security; some state workers compensation programs), a partner of private insurers (the National Flood Insurance Program, the Terrorism Risk Insurance Program, federal crop insurance; FAIR, windstorm and residual auto plans), or a competitor (workers compensation in some states).
  • Evaluation of Government Insurance Programs
    • Greene's questions: is government provision necessary, or does it achieve a social purpose private insurance cannot; is it insurance or social welfare; is the program efficient and accepted by the public (program evaluation).

Crop Insurance

Workers Compensation Insurance

  • A) Federal Workers Compensation Programs
  • B) State Workers Compensation Programs
    • Partnership with Private Insurers
    • State Funds
    • Competitive State Funds
    • Exclusive State Funds
    • Residual Markets
  • C) Evaluation of Workers Compensation Insurance
  • D) Interaction of Workers Compensation Insurance with Medicare
    • Background
    • Medicare Set-Aside Allocations since 2001
    • New Reporting Requirements since 2007
    • Property/Casualty Actuarial Implications of the Recent Changes
    • Changes in the Future?

Notes

Sources