Darshan: Hey, everyone. Welcome to another episode of DarshanTalks. We have our guest, Kenny White, Kenneth White. He is from Willis Towers Watson. However, I do want to make clear, he doesn't represent Willis Towers Watson right now. He's just talking. That just happens to be where he works.
We had a really interesting conversation with him previously about his entry into being in house. Now we wanted to get a little bit more into details to talk about just how does insurance payouts right now with COVID going on, there've been a lot of discussions around the idea of, "Well, will my insurance pay my claims? I've got a ton of business losses that I need to offset or at least offload. Is that really possible in this world?" Then there's a whole discussion around payers. We'll see how far we get.
But Kenny, do you want to do a quick introduction for yourself?
Kenneth White: Sure. I'm Kenneth White. I'm the national managed care practice leader for Willis Towers Watson, which means I oversee the group of people who provide corporate risk and broking services to the managed care industry.
I'm a healthcare lawyer. I practiced as a trial attorney for 28 years before I took this job six years ago. As Darshan said, I am not speaking on behalf of Willis Towers Watson.
Darshan: Very cool. Let's ask the big question of the day. How are insurers dealing with the idea that, "You know what? I bought business insurance. I, in some cases, even have that it'll cover cases like SARS," which happened to be... I think SARS was a coronavirus. Are my COVID losses going to be covered?
Again, we're not talking to Willis Towers Watson in this specific instance. We're talking about just generally, how is the insurance industry dealing with this?
Kenneth White: Well, so Willis Towers Watson primarily is an insurance brokerage entity. We don't actually provide the insurance. We work with entities for... They will have the right insurance and the right amounts from the right companies.
But people who run insurance companies traditionally are not dumb. So when communicable disease outbreaks happen and they are left holding large claims that they have to pay out for which their premiums were not actuarily determined to include that risk, they are now in what they refer to as an upside-down, or we could think about it you do your lease.
I only got in $100, I've got to pay up $200. This was not a good deal for me.
They will use language, terms, and conditions to exclude certain claims from coverage. So that when the mold and mildew claims came about a number of years ago, you saw significant numbers of exclusionary terms and conditions coming into property claims, especially GL claims, general liability, or umbrella policies to eliminate a claim being payable for mold and mildew.
Same thing when the SARS, swine flu, bird flu, whatever we called it before. When that happened, you saw another crop of coverage terms coming out in insurance policies to limit the insurance carriers' exposure to that type of a claim.
You see the same thing in cyber where your traditional professional liability or E&O, errors and omissions, coverage would provide you breach coverage. They have eliminated that almost entirely now as the network security and privacy, most of us call it cyber, insurance industry has become mature. You can still get the coverage, it's just not going to be under that policy. It will be under your cyber policy.
With COVID, obviously the first things that people think about are either health claims or they think about property claims. My company had to get rid of everybody, clean our offices 19 times. We lost use of all of our facilities. We may have lost income as a result. We may have had a number of people who got sick, et cetera. So if your employees got sick, particularly if you were either in a state that has expanded the definition of workplace injury recently to take care of this, or it was actually acquired at work, then your workers' comp coverage would provide the cover for the employee that got sick.
If you had to vacate your premises because of a lockdown or other words. If you had that type of coverage in your poverty policy, you may be able to recover amounts associated with business loss, loss of income, cleaning expenses, having to set up half of your workforce or most of your workforce at home versus in the office. Those kind of things. But many property policies excluded biologic agents because of what I said before, mold, mildew, and SARS, that you may not have that type of a claim. Same thing with GL policies and umbrella policies that would sit over the top of it.
Then you have your health and benefits policy that might protect your employees for their health. Obviously if they needed medical care and treatment, then those claims or losses would fall under the health insurance.
So there's lots of little buckets out there. The question for most industries, for instance, if you... We have clients that have thousands of employees and 10 or 12 buildings on a campus. I'm not talking about hospital companies, I'm talking about managed care entities that had to send 90% of their workforce home. Well, do they have coverage for the cleaning expenses of all of the campus so that when the people come back, they don't get infected? What happens if they lost income?
One of the nice things, I guess it's nice for the managed care industry, is that in most cases, people still have to pay premiums to get insurance and managed care companies are still obligated to pay claims. So there isn't a lot of business interruption loss for a managed care company versus, say, an entity that runs ambulatory surgery centers that had to close completely for three months because they weren't providing essential services. Now, that's a business interruption loss.
So it really kind of depends on the industry, but there were lots of different options out there. Getting that coverage in the future is going to be very difficult.
Darshan: Interesting. Sorry. As an industry, this is now going to be something that has to be considered and will actively show up in future policies and may actually get actively excluded or you have to buy special coverage for it is potentially the directions it would go.
Kenneth White: Correct.
Darshan: Now, what-
Kenneth White: The problem is is that in many cases, there are often options. But the cyber option that I brought up, ransomware, those kind of things where you may have had a coverage under a property. They call it silent cyber coverage, because it wasn't specifically excluded. There were arguments that it was included.
And then people, obviously they got wise to that and they started making specific exclusions for those kind of things. But you could go buy network security and privacy cover, which covers all of those things. So the insurance was available. It just had to be available in a different package.
With COVID cover, there may not be an alternative unless the federal government passes legislation as they had... It's called TRIA, the terrorist backstop policy. FEMA for flood insurance, the National Flood Insurance Program. If they pass one, and there is legislation in Congress at the moment that would do just that, create a backstop insurance pool, whereby people could make claims against that pool because they couldn't get insurance commercially for it.
Darshan: That makes sense going forward. But here's my question, what happens to those who are upside-down right now? Because you're upside-down right now for hundreds of thousands of people and huge businesses. Do you still pay out? Because that might just shut you down now. Even if you've learned from the situation, it may be too late. Or how have you seen that being handled?
Kenneth White: Well, the biggest bulk of the claims so far have been in the property arena. The property insurance fund pool globally is backstopped by commercial reinsurance. While it may hurt some of the larger companies that have significant exposure to this, it's not going to cause a downfall of the insurance industry.
Darshan: Interesting. Okay.
Kenneth White: I mean, the insurance industry handled all of the hurricanes we had a couple of years ago. They handled all the fires out in California. There's not going to be a major disaster in the insurance industry because of the claims associated with COVID.
Darshan: See, I didn't know if COVID was hurricane times global, and if-
Kenneth White: No.
Darshan: It's not. It's not seen like that. Okay.
Kenneth White: No. No.
Kenneth White: I'm a lawyer, so people say I don't have a heart, but I mean, we've had a couple of 100,000, 150,000 people die in the US, but there's 350 million people that live here. Is it bad? Yeah, it's bad. Particularly if one of those 150,000 people was in your family or one of your loved ones. But for most of us, we don't know people who have died, because there's 350 million of us and there was only 150,000 that have died.
Globally, well, whether you believe the numbers or not, I mean, there's 7.5, 7.8 billion people on this planet, and they claim that only a couple of hundred thousand, 300,000 have died. If you made that number five million or 10 million.
I mean, the Spanish flu pandemic in the 1918s, 19s killed up to 60 million people, which was a large percentage of populations of certain areas. This is not that. Does anybody want to die from it? No. It caused a great deal of financial angst as well as emotional and physical angst. Yes, it has. But it's not going to bring the insurance industry to its knees.
Darshan: That's really interesting to me, because again, that was one of the questions we always ask. You mentioned reinsurance-
Kenneth White: Wait, Darshan, real quick. Just one thing real quick.
Kenneth White: Look at the payer industry, the Aetnas, the Cignas, the UnitedHealth Groups, all the Blue Cross Blue Shield plans, all of those people. They're financially sound. They were financially sound before this, they will be financially sound after this. Because one, the pressure on their claims payouts wasn't as bad as anybody projected to start with, even with all of the addition of what they're paying for, that they weren't originally obligated to pay for. No copayments, no co-insurance that kind of thing for COVID care.
But all of the care that wasn't being provided in the last three months, they would have paid for. So those claims didn't come in. So their numbers in the first quarter plus of 2020 are almost identical to what they were in 2019.
Darshan: I actually heard they were better.
Kenneth White: They may be better. So-
Darshan: I was going to ask you about that. That was one of the questions I was going to get to, but please continue.
Kenneth White: No. I mean, everybody's kind of that whole rubber band snapping concept that people think when you wrap a rubber band up and it pops. Let go of it and it pops. I mean, people are considering what happens when everybody floods in to get the care.
Well, I think one, that's going to be somewhat of a trickle effect. I don't think it's people rushing in to do it at all, because some people are still afraid to go to the doctor's office, to a hospital because they're fearful of contracting an illness because that's where the sick people are.
They've also been told for months now that our hospital and health system has been overrun by COVID, which is not true because they've laid off thousands and thousands of idle workers. Emergency department encounters for the first four months of 2020 are 50% lower than they were last year. Not higher, lower.
The hospitals and the doctors, they're hurting. They're hurting because they don't have anybody coming for care. If they don't have anybody coming for care, they've got all these fixed costs and labor costs. They don't have any revenue coming in. They're begging people to come in and get healthcare. When that happens, it will of course equalize on the payer side, but it won't be a major problem for them.
Darshan: Which really raises the question that you raised, right? I have two different questions. One's a short one. One's a longer one. The short one, you talked about reinsurance. Could you explain what that is?
Kenneth White: Reinsurance is a insurance contract where an insurance company goes out and buys insurance against its losses. So if I am Allstate and I insure something, my obligation for that is $10 million or $100 million. I can go out to a reinsurance company and buy insurance on whether or not I have to pay out the money or not. It's legalized gambling. I mean, I'm making a scientific-
Darshan: It's like going to an insurance company and saying, "If I gamble and I lose, I want you to pay me out."
Kenneth White: Yeah. But you pay a premium-
Darshan: Isn't that what Lloyd's of London does anyways? Because [crosstalk 00:16:55]-
Kenneth White: That's exactly what Lloyd's does. Lloyd's started, I believe, as a shipping insurance industry, because people kept losing the ships and the cargo on... So Lloyd's started out that way, and you had a syndicate. People bought into it. I'll take 10% of that loss and I'll take 20%.
So what happens was is that if I'm AIG and I'm laying out all of this money everywhere, I have to be able to pay it. It's a regulated industry. So I have to have reserves somewhere to make sure that I can pay out. But if everybody made a limits claim on AIG all at once, it would go under in a heartbeat to the tune of a million times, because they don't have that kind of money lying around. They don't have the assets to do that. What they have is reinsurance treaties.
They have agreements that say, "I'm exposed over here to X number of dollars. If I have to pay that out, I want you, reinsurance company, to pay me back. I will pay you a premium for that." So you're basically taking... I'm taking a risk on whether there will be a loss from the insured, and you're taking a risk, reinsurance company, on whether or not I, in first insurance company, have to pay insured.
Darshan: But then wouldn't every loss directly go to the reinsurance company? Because every time there is a payment to be due, you just go to the reinsurance company and say, "Pay out." Then why don't I just go to the reinsurance company?
Kenneth White: Well, two reasons for that. One, a thing called a retention or deductible. You have an auto insurance policy. You could have a deductible of $250, or a $1,000, or $5,000. That's your money.
On these other things for property claims or in my world, in the managed care world, for E&O claims directly against a managed care company. The retentions. There's a slight difference between a retention and a deductible, but we don't need to talk about it right now. That part can be anywhere from $500,000 to 50 million. So the first 500,000 to 50 million isn't the insurance company's money, it's the insureds' money. Same process works in reinsurance.
Darshan: Got it. Got it.
Kenneth White: They have what's called attachment points. I'm not reinsured to dollar one, although you could have that type of arrangement. Most people do not, because your premium would match what your payout would be. You'd have a $10 million policy and the premium was $10 million. So people will have attachment points. So not every claim would find its way to a reinsurance company.
Darshan: Fascinating. Thank you. Let's pivot a little bit and very shortly talk a little bit about the concept you raised, which is right now, a lot of insurance... Everyone talks about how insurance companies are going to come to their knees because there were so many more payouts. You explained that's not always the case, and that may not be applicable even in this situation, even though the entire world shut down.
But then there was this other piece you discussed, which was some insurance may have actually come out ahead. You hear about Geico saying, "You know what? You guys haven't been driving. Here's 15% of your premiums back." And you see people who are in the healthcare industry going, "I'm not doing any elective procedures." Do you see payers of healthcare premiums going, "You know what? Let me give you some of the money back."?
Kenneth White: Yes.
Darshan: Interesting. Why? Why do that? Why not just lower premiums next year?
Kenneth White: There's several reasons for that. One, you may not have the same insurance next year. If an employer swaps to a different company, or you have individual coverage through the ACA, or you're on a Medicare plan-
Darshan: Why not just keep the profits?
Kenneth White: Couple of reasons for that. One, it doesn't make good business to keep the profits. You're in a highly regulated industry that is very, very visible, both to politicians and to the public. So anything that you can do that does not adversely impact you in a large way in order to raise your standing in the community and be a good corporate citizen, most businesses will do that, including insurance companies. Insurance companies are not the world's most treasured of industries to begin with, and so they always like to do something that they can raise the public's perception of them.
Two, in network building. If I'm an insurance carrier for health insurance, I have to have an adequate network to provide the care that I'm obligated to provide to my members. So I go out and contract with or I employ physicians, hospitals, diagnostic centers, et cetera to provide the care, so that I get a better price on what I'm paying for.
A lot of those entities are hurting financially now. But it doesn't help an Aetna, or a Cigna, or an Anthem for their network to go belly up. They need those people. So they are doing similar things like what CMS is doing on the Medicare and Medicaid side, providing advanced payments to their providers to make sure that they're able to pay their bills.
Darshan: That's really interesting. We never talked about that before.
Kenneth White: Yeah. Blue Shield of California was even guaranteeing loans for some of them-
Kenneth White: ... to make sure that they were going to still be in business when this ends and that people come back to get healthcare. Because remember, Blue Shield of California is still obligated to provide the care and treatment that its members seek. It has to be able to provide that. So having hospitals, or doctor groups, or diagnostic centers, pharmacies go belly up is not helpful to them. They need those people. So they're doing what they can to help, within reason, to provide-
Darshan: Are these no interest loans or are these... Is that market interest? Or how does that work right now? Right now market interest is no interest, but still.
Kenneth White: On the Blue Shield side, I'm not sure how that's being done. On the advanced payments, it's just advances against future payments. If I-
Darshan: It's interest free though.
Kenneth White: It's a cash flow. It's interest free. I mean, so if I anticipate that I'm going to pay you out $2 million over the next six months, I'll give it to you $200,000 a month, even though you haven't earned it right now. Because when you start earning it later, I can take the money off of what I would pay you. It's a cashflow thing.
Darshan: You wouldn't do it though in bulk. You would actually still string it along and go [crosstalk 00:24:30].
Kenneth White: No, no, it's a cashflow maneuver. So they're doing it month to month.
Darshan: Got it. Got it.
Kenneth White: Some of the insurance carriers have offered or are giving discounts which are like the auto companies. They are reducing their premiums X percentage per month on their vision coverage, on their dental coverage. Not as much on the major medical, but some on that as well. But mainly on the dental and vision. One of the reasons for that is people aren't going to the dentist.
Darshan: Well, here's the question, are they giving that to pharma as well and drug distributors?
Kenneth White: Pharma isn't your most loved industry.
Kenneth White: It's one of your most needed. Anybody that's paid any attention to the mad dash to create a vaccine or treatments for COVID-19, that's all pharma. Now, unfortunately, we've gone through multiple years of huge price increases in pharma, a lot of business structures that were designed to maintain patents, to prevent generic drugs from coming to market. And then 300, 400, 500, 1000% increases on medications. So the public's not really all enamored with helping pharma out.
The good thing about that is pharma... I mean, the major companies really don't need it. It's not like CVS is going under tomorrow. The problem is is that what had been going on for years, the loss of the mom-and-pop pharmacy. That has accelerated significantly.
Darshan: What about your manufacturers? I have clients who have said that, "I've had to shut down," or, "I've had..." Because the smaller companies are working with cashflow, basically, and obviously this dampens the cashflow.
Kenneth White: Yeah, the smaller generic manufacturers are probably having trouble, mainly because of-
Darshan: They aren't paying upfront or anything, for the most part.
Kenneth White: No, I haven't seen that at all.
Darshan: Interesting. Fascinating. Kenny, we can keep talking, but obviously, we should schedule one more of these, because this was super fun. Any parting words?
Kenneth White: No, just everybody wash your hands, keep your mask on. It's to protect others, not necessarily you. Social distance. I can't stand it either. I would love to go protest being locked in my house, but there are people out there that are susceptible. There are people out there that will get sick and there are people out there that will die. Anything that you can do that's not terribly inconvenient or a hardship to you, staying out of large groups, washing your hands, which we should all do anyway, wearing a mask in public, that is a small hardship on you to help protect others. That's my parting words.
Darshan: Awesome. Thank you again, Kenny. This was awesome.
Kenneth White: All right. Take care.
Darshan: Take care.
Kenneth White: Bye.