Taking the Temperature of the L-H Market

On the surface, it’s a tough time for the life-health cross-sell.

With the cyclical pricing nature of the property-casualty industry, it has long been suggested that independent agents broaden their offerings to include life and health insurance. But agencies that invested in providing health insurance-related services could have never anticipated the passage of the Affordable Care Act (ACA)—especially the Minimum Loss Ratio (MLR) provisions that have resulted in a limit or outright elimination of agent commissions. Aside from the myriad changes wrought by ACA, other factors have also affected the profitability of l-h products, such as a prolonged low-interest rate environment.

And competition for the l-h cross sell is on the rise. The major alphabet brokers have been acquiring independent agencies (and employee benefits firms) to focus on mid-sized employers. The larger brokers and agencies typically provide a broad product offering, including employee benefits, which enables them to open the door to sell p-c-products and services once they establish a relationship with an employer. Payroll service companies are also an emerging competitor. ADP and Paychex both offer health and retirement services, workers comp and other product lines and are encroaching on the traditional p-c agency space.

The Agent’s Role

Given the shifting marketplace, principals are trying to determine the “new normal” for their agency’s l-h product mix. Here are some questions to consider:

• Does the agency have a significant book of workers comp? Exiting or ceding the health insurance segment could open the door to a competitor that offers health insurance.
• What is the typical client size in the agency’s health insurance book of business—very small employers (less than 10 employees), small (less than 50), medium (more than 50 but less than 500) or large (more than 500)? The level of agency resources necessary varies by size of employer. Agencies providing services to larger employers are experiencing an increase in revenues as they help companies cope with ACA’s requirements.
• Does the agency offer other lines of group insurance—group life, STD, LTD, dental—that you need to protect?
• What is the health insurance exchange environment for agents in your state? What are the respective state rules pertaining to fees versus commissions and the roles of agents versus brokers?

To address many of these considerations, the Big “I” recently commissioned a new white paper on the ACA [check out an excerpt]. One of the white paper’s inescapable conclusions is that agencies should not “dabble” in offering health insurance. Many dimensions tangential to the ACA affect the agency’s sales process, such as tax subsidies, the 50-employee mandate threshold, various phased-in provisions and delayed implementation.

Potential Pitfalls

Another ACA consideration is that federally facilitated exchange (FFE) agreements require that information from applicants and employers must be “separately collected and stored” if used for a non-FFE purpose. “Separately collected and stored” is not defined in the agreements or regulations. This provision places what seems to be unreasonable burdens on an agency by, for example, requiring agents and brokers to re-collect and separately store information already on file for existing clients who now want to enroll in the FFE; and prohibiting agents and brokers from using information collected for an FFE purpose, even when the client consents to the use of the information for a non-FFE purpose. Given the concerns over hacking in the shadow of the Target data breach, agents should take every precaution to safeguard customer information and understand their responsibilities in executing FFE agreements.

Since the enactment of the ACA, many agents that haven’t traditionally ventured into “self-funding” are examining this avenue on behalf of clients. While this approach has long been a popular choice for larger-sized employers, smaller-sized organizations are also considering self-funding, using lower attachment points for specific and aggregate stop-loss insurance. But agents need to understand the nuances related to stop-loss contracts so they apprise their clients accordingly.

All this adds up to potential E&O risks for agencies that aren’t prepared. “We have consistently observed that agents who get involved in lines of coverage who don’t have the requisite expertise—or are unable to focus adequate resources on it—experience higher levels of E&O claims,” says David Hulcher, assistant vice president of Big “I” Agency E&O Risk Management.

Expanding Outside Health

Agents should not overlook other lines of coverage like STD, LTD, life and dental. For the agency’s workers comp clients, for example, providing group life, disability and dental will round out the account. And their popularity is increasing (see sidebar).

“One of the side effects of the ACA that it has accelerated the trend toward voluntary because of uncertainty of future health insurance cost increases,” says Barry Lundquist, president of the Council for Disability Awareness.

These products can provide level reoccurring revenue and the opportunity for guaranteed issue. Agents can provide executives with higher benefits with supplemental disability, also known as “carve-outs.” Lundquist notes the need for disability coverage is great—and it’s an underpenetrated market. “The ACA was driven by roughly 47 million Americans who have no health insurance,” he says. “But there are about 100 million workers that don’t have disability insurance. It’s a huge untapped market. And many of those people are in smaller businesses.”

Servicing group life and disability is not as labor-intensive because the frequency of claims is much lower. And Lundquist notes that carriers have streamlined the sign-up process, making it easier for agents. “A lot of brokers and agents shied away in the beginning because they had to get their hands dirty with sign-ups,” he says. “Now, with online enrollment, it’s easy. The voluntary approach is a really outstanding opportunity right now.”

If an independent agency doesn’t believe it has the capabilities to offer medical insurance, especially after the ACA, it should consider partnering with a specialist that will focus on medical and respect the agency’s position in providing the ancillary benefits. Partnering with a medical insurance specialist will help drive out the competition and demonstrate to the client that the agency is focused on providing the best approach to meet the client’s needs.

There is no doubt that the enactment of the ACA presented a sea level change for independent insurance agencies that provided health insurance—particularly medical insurance. Develop your agency’s l-h strategy based on your clientele, resources, state health insurance environment and other factors to make sure you leverage the opportunities that exist for agents in this evolving market.

Dave Evans is a certified financial planner and an IA contributor.

SIDEBAR: What About LTCi?

LTCi has been long projected as a key component of financial security in retirement for middle- and upper-income middle-aged Americans. The U.S. Department of Health and Human Services says at least 70% of people over 65 will need some form of long-term care services during their lifetime. Genworth’s 11th annual Cost of Care Survey found that for the average three-year long-term care stay, the price tag is $136,000 for in-home care and $262,000 for a private nursing home. Yet many independent agents find LTCi is still a difficult sale.

One reason is the significant premium rate increases from carriers that formerly underpriced their product or did not anticipate the current low interest rate environment. But experts say past pricing doesn’t predict the future.

“There are important differences today that minimize the risk that a long-term care policy purchased in 2014 will experience large future rate increases,” explains Jesse Slome, director of the American Association for Long Term Care Insurance. “Long-term care insurers today assume a conservative 3–5% long term investment return for new policies, unlike the 7% return they assumed from 2000–2008.”

Subtle nuances vary between LTCi policies, and agents should view that as an opportunity to demonstrate their value—most consumers will want to talk to an agent rather than taking a “do-it-yourself” approach. Many agencies with large personal lines books may find that the average age of their clients is 45–55—a great target for LTCi prospects. Married people are especially attractive since they can take advantage of the potentially significant spousal discount. —D.E.