Anyone know about ‘run out liability’ in Group Insurance?

There is a scam that an insurance brokerage firm pulled on a bunch of clueless politicians and, by extension, 500,000 taxpayers, including me.

I’ve got 90% of it worked out and, if you’re interested, here is the story so far but I can’t pinpoint what ‘run out liability’ means in a group insurance context so I’m turning to you people being as erudite a group, pound for pound, as any blogger is likely to be blessed with.  Any ideas?

And while you’re at it, what is a ‘premium lag’?  By way of explanation the broker used that as his excuse:

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12 responses to this post.

  1. Posted by Tough Love on February 24, 2013 at 8:53 pm

    My understanding …. Certain types of insurance are sold on EITHER a “Claims Made” or a “Claims Incurred” basis.

    Under “Claims Made”, the insurance company is on the hook (i.e., the insurance is in effect) if the policy is inforce (premiums having been paid for THAT YEAR) at the time the claim is “made”, even if the occurrence of the event happened BEFORE the insurance was in effect.

    Under “Claims Incurred”, insurance company is on the hook only if the insurance was in effect at the time the event (resulting in the claim) took place, even if the claim is presented at a much later date, even after the insurance with that insurer is no longer inforce.

    Here is an example of a “run out liability”. A Obstetrician has “Claims Incurred” form of insurance for a number of years with company ABC. He retires, closes his practice, and drops the policy, paying no more premiums. But because he had a “Claims Incurred” form of insurance with Company ABC, Company ABC’s liability does not end, because any of the doctor’s patients during the years he was covered could claim that in one of these years the patient was injured by the doctor…. i.e., the “event” occurred while the policy was inforce, even though the claim is being presented after it ended.

    From an accounting standpoint, Company ABC will carry a liability on its books in an amount and for a period consistent with the amount of and lag in the reporting of such claims as shown from the historical tracking of such claims.

    Reply

    • Posted by David R. Schwertfeger on May 15, 2017 at 1:34 am

      Made is the improper term. It is incurred & paid Health insurers are provided with 90 day incurred claims lag provisions to protect solvency. All claims are not actually paid until 90 days after they are incurred. The 3 month “slush” fund is actually the reserve that dictates whether or not the trending of incurred claims is more or less than premium being paid monthly. New self funded group plans will start with an incurred & paid contract year one paying no claims in the first 3 mos. (building reserve cash or the “insurance” factor. In year 2 they will convert to a paid only contract as all claims are considered incurred, but claims will be paid every month from that point forward. Run out liability means that when an insurer purchases, assumes or incurs a risk such as autism for example, they have responsibility for paying the cost of that risk, for the life of the risk, as long as premiums are paid. This is the run-out period. It is also an accrued liability, as well as a pre-existing condition, having a somewhat predictable cost structure that can be projected out over time, much in the same manner as a pension benefit. Health insurance is way different from other forms of insurance.

      Reply

  2. Posted by Tough Love on February 24, 2013 at 9:18 pm

    Another possibility …. Under certain forms of insurance, Life Insurance being the clearest example, once a claim is paid, there is no lingering possibility of future payments associated with the event that led to that claim.

    Under other forms, particularly Medical care and disability Insurance policies, the payment of one set of bills associated with a single disabling event or a single illness does not mean other bills associated with continuing medical care or disability payments will not follow … and in fact they often do.

    From an accounting standpoint (say in closing it’s financial books for the calendar year) the insurance company must make an estimate of such lingering claims and establish a liability, again, based on the history of the run-out of claims from each such category of insurance. If the company does not have sufficient historical experience of it’s own to do so, it will use the wider experience if the entire insurance industry of a subset of industry experience that best mirrors the characteristics if it’s business.

    Reply

  3. On an insured policy, the insurance carrier retains the claim run-out liability (claims incurred prior to the policy end date but paid after that date). Under a self-insured plan, this liability shifts to the employer. per Google

    Reply

    • Posted by Tough Love on February 25, 2013 at 1:16 am

      Stop Loss is something completely different than a “run out liability”. Stop loss coverage essentially put a cap on your exposure, with any claims above a pre-established limit paid under the stop-loss coverage.

      Reply

  4. Posted by Anonymous on February 25, 2013 at 2:23 am

    you can put lipstick on a pig, but it is still a pig

    Reply

  5. Posted by muni-man on February 25, 2013 at 11:02 am

    In healthcare, Medicare and ‘the chargemaster’ rule. This article, albeit lengthy, explains the games and why prices are what they are. Sobering stuff, especially the hospital, drug and equipment markups which are simply mind-boggling. Best article I’ve ever read on the subject.
    http://healthland.time.com/2013/02/20/bitter-pill-why-medical-bills-are-killing-us/

    Reply

  6. Posted by gthhju on February 26, 2013 at 3:53 pm

    page 3 terminal liability obligation.. The different plans probably offer different benefits so they cannot be compared directly, some insurers may assume the obligation.

    Self-Funded Health Benefit Plans – NH.gov

    http://www.google.com/url?q=http://www.nh.gov/insurance/consumers/documents/selffunding.pdf&sa=U&ei=IegsUc65Asi10QGgooHIAQ&ved=0CC4QFjAD&usg=AFQjCNEnZlHHKe5apYHbH3hz9STo9I6nUw

    Reply

    • Seems like a logical explanation except in this case:

      1) The run-out was applied to the SHBP but not to any of the other options, including Horizon. If CIGNA was still going to be charging for incurred claims prior to 6/30/12 if the county went with SHBP then why wouldn’t they be charging for those claims if it went with Horizon?

      2) The Brown & Brown representative didn’t make that point. He said something about $7.2 million as ‘premium lag’ without explaining how those numbers were figured (7.2 and $7.7) or defining ‘premium lag.’

      Reply

  7. Posted by gthhju on February 26, 2013 at 6:53 pm

    Report – State of New Jersey
    http://www.nj.gov/comptroller/news/docs/shbp_audit_report.pdf
    Feb 28, 2012 … to provide health insurance coverage to State employees, retirees and ….. premiums for each year plus half of cost from the 2003 premium lag.

    I did not look at this google result as I am working off a tablet.

    Reply

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