Iowa Bankers Association Continuing
Education 2008: In-Class Seminar
 Instructor: Mark L. Power





University Professor
Principal Financial Group Finance Professor
Department of Finance
Iowa State University
(mpower@iastate.edu)
 6 Continuing Education Credits: 4 Basic
CECs and 2 Ethic CECs
Iowa Bankers Association Continuing
Education 2008: In-Class Seminar
 Topic I: Ethical Issues and The Mitigation of Risk Induced
Information Asymmetries: A Qualitative and Quantitative
Analysis.
 Part A: A qualitative approach
 Part B: Financial analysis
 Topic II: The Condition of Health Care in the United States



Part A: Health Care Systems in Developed Countries
Part B: Systemic Health Care Goals and Reform
Proposals
Findings of Iowa Commision on Affordable Health Care
 Topic III: An Analysis of State of the Bond Insurance Market
during the Sub-Prime Lending Crisis in the United States.
Topic I: Ethical Issues and The Mitigation of Risk Induced
Information Asymmetries
 Topic Objectives:





Review business ethics: concepts & theory
Discuss the concept of ethics as it pertains to
the procurement of insurance
Simulate insurance market ethical dilemmas
Understand the importance of transparent
information exchange to the insurance device
Show economic consequences of information
asymmetry
Insurance Ethics
Insurance Ethics is the study of how
personal and corporate “morality”
influence the behavior of the
participants in the process for
procurement of insurance.
Ethics Models and Insurance Markets
 Self Interest/ Egoism
 If it furthers my interest it is right!
 Stakeholder Management
 Capital Market Stakeholders
 Shareholders, suppliers of capital, banks
 Highest return
 Product Market Stakeholders
 Customers, suppliers, host communities, unions
 Lowest price and full coverage
 Organizational Stakeholders
 Employees, managers, non-managers
 High total compensation and job security
Ethical Problems in Insurance Markets
Ethical problems tend to occur when three
factors come together:
 Pressure
 Perceived opportunity
 A way to rationalize the act as appropriate
Ethics in Insurance
Focus Areas:
 Insurance markets
 Insurance regulation
 Insurance intermediaries
 Insurance agent compensation
 Insurance buyers: individual and corporate
Example of ethical dilemmas in insurance due to
Interaction of:
 Pressure
 Perceived opportunity
 Behavior rationalization
Topic I: Qualitative and Financial
Implications of Information Asymmetry in
Insurance Markets
 Our focus:



Qualitative analysis of information disclosure
Impact of information disclosure (lack of
disclosure) on market participants
Ethical dilemmas created when information is
needed to make financial decisions
Dynamic Insurance Market: A
Simulation Approach
 Market participants:



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Insurance companies (underwriters)
Prospective insureds
Capital providers
Regulators
 Type of insurance: incentive to procure is
very high – auto liability (mandatory or
homeowners coverage (lender required)
Insurance Market Simulation
 Groups are formed and facts provided for:

Handouts:




Insurance companies (underwriters)
Prospective insureds
Capital providers
Regulators (market observers)
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 How the market works:







Multiple rounds of buying and selling
Each insurer can accept or reject, but only sell a maximum
of two policies during each round
Insureds are not required to buy insurance, but have only
one buying opportunity
Insurers must raise capital after each round of buying and
selling
Regulators observe and make corrections to the market, ex
post
Insurance company profit is equal to the price of the policy
sold minus the risk appropriate ex post policyholder loss
In later rounds, assumptions will be relaxed and actual
losses will be randomly determined
Market Simulation Information
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Insurer Revenue and Expense Forecasts:
High
Risk
Medium
Risk
Low
Risk
Expected
Loss
$1,200
$1,000
$800
Premium
$1,368
$1,149
$929
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Forecasted Net Profit
High Premium
Medium Premium
Low Premium
High Risk
$168
-$51
-$272
Medium Risk
$368
$149
-$72
Low Risk
$568
$349
$128
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Return on Capital
High Risk
ReqCap(3:1)
$456
High
Premium
37
Medium
Premium
-13
Low
Premium
-88
Medium
Risk
$383
81
39
-23
Low Risk
$309
124
91
41
High Risk
ReqCap(2:1)
$684
High
Premium
25
Medium
Premium
-9
Low
Premium
-59
Medium
Risk
$575
54
30
-16
Low Risk
$464
83
61
28
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Prospective policyholder information:
 All prospective insured have the same level of
wealth (W), which equals $20,000
 All prospective insured have the same level utility
function where:
U(W) = √W
 Each risk type faces the same potential loss of
$10,000.
 Probability of loss is unique: where the probability
of loss for high, medium, and low risks is 0.12,
0.10, and 0.08 respectively.
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Prospective policyholder information:
Utility associate with risk management:
No
Insurance
136.5
High
Premium
136.5
Medium
Risk
137.3
Low Risk
138.1
High Risk
Reservation Price:
High Risk
Premium
$1,367.75
Medium
Risk
$1,148.71
Low Risk
$928.39
Medium
Premium
137.8
Low
Premium
138.6
136.5
137.8
138.6
136.5
137.8
138.6
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.

Capital Provider information: Invest in mutual fund like account where expected return is 9%
or provide capital to the insurance market where the expected % return is as follows:
High Risk
ReqCap(3:1)
$456
High
Premium
37
Medium
Premium
-13
Low
Premium
-88
Medium
Risk
$383
81
39
-23
Low Risk
$309
124
91
41
High Risk
ReqCap(2:1)
$684
High
Premium
25
Medium
Premium
-9
Low
Premium
-59
Medium
Risk
$575
54
30
-16
Low Risk
$464
83
61
28
Topic I: Part A – Financial Implications of
Information Asymmetry in Insurance
Determinants of Fair Premiums 4 Determinants
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Expected Claim Costs
Administrative Costs
Investment Income
Fair Profit Loading
Examine each factor separately
Assume independent and identical exposures
Expected Claim Costs
 The premium that just covers expected claim
costs is called the pure premium

Example:

Large number of homogeneous buyers, i.e. each
has the same loss distribution:
Possible Loss
$0
$10,000

Pure Premium = $500
Probability
0.95
0.05
Premium Must Cover Expected Claim Costs

To cover claim costs, on average, premiums must
equal $500.

if premium = $480, the insurer will lose money, on
average

if premium = $640, the insurer will make profits, on
average (competition would prevent this)

Conclusion:
Fair Premium must cover expected claim costs
Investment Income

Key Point:

Fair premium is reduced to reflect investment
income on premiums

Equivalently,
 Fair Premium = Present Value of Expected Costs
Example to Illustrate Effect of Investment Income

Assume
 no administrative costs
 one year policies, premium received at beginning
 certain claim costs = $100 paid according to table below
Fair Premium
Expected Claim Payments
Interest Rate
year 1
year 2
year 3
0.1
0.05
$100
$50
$50
$0
$50
$25
$0
$0
$25
$90.91
$86.78
$84.90
$95.24
$92.97
$91.89
Effect of Investment Income Varies
Across Lines of Business
Administrative Expenses
 Fair Premium must cover administrative
costs, such as






marketing
underwriting
loss adjustment
premium taxes
underwriting income taxes
etc.
Expense Loadings as a Percentage of
Premium
Effect of Uncertainty: Profit Loading

Uncertainty ==> claim costs could exceed
premiums


We know that Insurers hold capital to reduce the
likelihood of insolvency


insolvency is possible
Capital providers ultimately bear the risk associated
with insurance operations (insolvency risk)
Capital providers require compensation for risk
Conclusion

Fair Premium
=
+
+

PV of Expected Claim Costs
PV of Expected Administrative Costs
Fair Profit Loading
Note fair premiums depend on


Expected losses
Unpredictability of losses
Numerical Example: Insurer
Perspective
Loss =
$100,000
with prob. 0.02
$20,000
0
with prob. 0.08
with prob. 0.90
Find Fair Premium if


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

policy provides full coverage
underwriting costs = 20% of pure premium
claims are paid at end of year
interest rate = 8%
claim processing costs = $5,000
fair profit = 5% of pure premium
Numerical Example: Insurer
Perspective

Solution:

pure premium = $3,600

PV of expected claims = $3600/1.08

underwriting costs + fair profit = (0.20 + 0.05) x $3,600 = $900

expected claim processing costs = $5,000 x 0.10 = $500

PV of expected claim processing costs = 500/1.08

Fair premium = 900 + 4,100/1.08 = 900 + 3,796 = $4,696
Implications of Heterogeneous Buyers

What if there are two groups of buyers?
 No longer identical exposures, adverse selection

becomes a problem, and parameter uncertainty
exists, underwriting may become necessary
One Group (Preferred Risk)
Possible Loss
$0
$10,000

Probability
0.95
0.05
Another Group (Substandard Risk)
Possible Loss
$0
$10,000
Probability
0.90
0.10
Implications of Heterogeneous Buyers

Assume initially that

Equal number of each type

Losses are Independent

Full Insurance is mandatory

Costless to distinguish among risks
Implications of Heterogeneous Buyers

Initial Scenario:

Equal Treatment Insurance Company is only
insurer

Premium for everyone = $750

Does Equal Treatment cover its costs?
 _____, the SS Risks pay less than their expected cost,
but the P Risks pay more
Implications of Heterogeneous Buyers

New Scenario: allow competition

Competition from Selective Insurance Company
 If Selective assumes Equal Treatment will continue to charge
$750, how does Selective set price to maximize profits,
 Premium to Preferreds =
 Premium to Sub standards =
 Profitable?
Implications of Heterogeneous Buyers

What happens to Equal Treatment?

It would experience adverse selection

Thus, Equal Treatment will have to classify or
lose money
Implications of Heterogeneous Buyers
Key Points:
Profit Maximization
+
Competition
==>
Risk Classification
Lack of Classification
+
Competition
==>
Adverse Selection
Implications of Heterogeneous Buyers

What if full insurance is not mandatory?

Recall, Initial Scenario:
 Equal Treatment is only insurer
 Equal Treatment charges $750 to everyone

What do Preferred Risks do?
 may purchase less insurance from Equal Treatment,
 S Risks still buy full insurance from Equal Treatment
 Equal Treatment experiences adverse selection
Remember Pricing Example 1
Loss =
$100,000
with prob. 0.02
$20,000
0
with prob. 0.08
with prob. 0.90
Find Fair Premium if






policy provides full coverage
underwriting costs = 20% of pure premium
claims are paid at end of year
interest rate = 8%
claim processing costs = $5,000
fair profit = 5% of pure premium
Pricing Example 1

Solution:

pure premium = $3,600

PV of expected claims = $3600/1.08

underwriting costs + fair profit = (0.20 + 0.05) x $3,600 = $900

expected claim processing costs = $5,000 x 0.10 = $500

PV of expected claim processing costs = 500/1.08

Fair premium = 900 + 4,100/1.08 = 900 + 3,796 = $4,696
Pricing Example 2 – Insurer requires a
Deductible
(actual discrete probability distribution)
Loss =
$100,000
with prob. 0.02
$20,000
with prob. 0.08
with prob. 0.90
0
(Insurer Perspective of distribution)
$80,000 with prob. 0.02
Loss =
$0
with prob. 0.98
Find Fair Premium if






policy has a $20,000 deductible
underwriting costs = 20% of pure premium
claims are paid at end of year
interest rate = 8%
claim processing costs = $5,000
fair profit = 5% of pure premium
Pricing Example 2

Solution:

pure premium = 0.02 x $80,000 = $1,600

PV of expected claims = $1600/1.08

underwriting costs + fair profit = (0.20 + 0.05) x $1,600 = $400

expected claim processing costs = 0.02 x $5,000 = $100

PV of expected claim processing costs =$100/1.08

Fair premium = $400 + $1,700/1.08 = $400 + $1574 = $1,974
Comparison of the Two Examples

Note difference in loading on the two policies
Premium
Expected claim cost
Dollar loading
Percentage loading
(relative to exp. claim cost)
Full coverage
$4,696
$3,600
$1,096
30.4%
Deductible
$1,974
$1,600
$374
23.4%
Difference is due to the deductible policy eliminating small predictable claims
and the high processing costs on that claim type
Also allows the Preferred Risks to identify themselves because they would be
more likely to buy partial insurance
Implications of Heterogeneous Buyers
Key Points:
Profit Maximization
+
==>
Risk
Classification*
Risk Management Alternatives
to Insurance
*(assume marginal benefit > marginal cost of underwriting)
Lack of Classification
+
Risk Management Alternatives
to Insurance
==>
Adverse Selection
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Round One Observations:




Insurance companies (underwriters)
Prospective insureds
Capital providers
Regulators
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Round Two Observations:




Insurance companies (underwriters)
Prospective insureds
Capital providers
Regulators
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 Round Three Observations:




Insurance companies (underwriters)
Prospective insureds
Capital providers
Regulators
Insurance Market Simulation
Based on Eckles and Halek (2007), RMIR, V.10,1,93-105.
 What did we learn?
Comments
 It is in the best interest of all parties in the
insurance mechanism to have a full and good
faith disclosure of information and as much
transparency in the process as possible with
out undue regulatory intervention and control.
 Yours?
Topic II: The Condition of Health Care in
the United States
 Topic objectives:



Part A: Determine objectives and understand
the Health Care System (HCS)
Part B: Become familiar with HCS reform
proposals
Part C: Summarize the findings of the Iowa
Legislative Commission on Affordable Health
Care Plans
Part A: Determine objectives and
understand the Health Care System
 All health care systems must have the
following components in common:



Delivery
Financing
Consumption
HEALTH CARE SYSTEM
FINANCING
DELIVERY
Many networks with in the
SYSTEM!
CONSUMPTION
Systemic Goals and Concerns
 Perspective:

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

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
Individual, self-employed, small business
Large employer
Unions (collective bargained groups)
Retirees
Government/Political
Insurance company (private market)
Care givers: Doctors, hospitals, nurses, etc.
Have I missed any groups?
Systemic Goals and Concerns
 Perspective:______________________

Delivery Goals/Concerns:

Financing Goals/Concerns :

Consumption Goals/Concerns :
“Ideal” HCS Paradigm
 Our “Best Fit:” or “What do we want?”

Delivery

Financing

Consumption
HCS: Financing Facts
 The healthcare system is not fully-publicly
funded but is a mix of public and private
funding.
 In 2004,



private insurance paid for 36% of personal
health expenditures,
private out-of-pocket payments were 15%,
federal, state, local governments paid 44%.
Health Insurance Coverage Facts
 Most Americans (59.7%), receive their health insurance
coverage through an employer, although this percentage is
declining.
 Costs for employer-paid health insurance are rising rapidly:
 since 2001, premiums for family coverage have increased
78%, while
 wages have risen 19% and
 inflation has risen 17%,
 Workers with employer-sponsored insurance also contribute; in
2007, the average percentage of premium paid by covered
workers is 16% for single coverage and 28% for family
coverage.
 In addition to their premium contributions, most covered workers
face additional payments when they use health care services, in
the form of deductibles and copayments.
Facts about the Uninsured
 In 2006, 47 million people in the U.S. (15.8% of the population) were
without health insurance for at least part of the year.
 Among the uninsured population, nearly 38 million were employment-
age adults (ages 18 to 64), and more than 27 million worked at least
part time.
 About 37% of the uninsured live in households with incomes over
$50,000.
 According to the Census Bureau,


36.7 million of the uninsured are legal U.S citizens
Another 10.2 million are non-citizens
 It has been estimated that nearly



one fifth of the uninsured population is able to afford insurance,
almost one quarter is eligible for public coverage, and
the remaining 56% need financial assistance
HCS Paradoxes
World Health Organization (2000) ranked the U.S.
health care system



first in both responsiveness and expenditure,
37th in overall performance and
72nd by overall level of health (among 191 member
nations included in the study
 CIA World Factbook
 ranked the United States 41st in the world for lowest
infant mortality rate
 45th for highest total life expectancy
 However, a 2006 CDC study reported that
approximately 66% of survey respondents said they
were in "excellent" or "very good" health
National Health Expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp#TopOfPage
Historical NHE, including Sponsor Analysis, 2006:

NHE grew 6.7% to $2.1 trillion in 2006, or $7,026 per person, and accounted for 16% of
Gross Domestic Product.

Medicare spending grew 18.7% to $401 billion in 2006, 19 percent of total NHE.

Medicaid spending fell 0.9% to $309 billion in 2006, or 15 percent of total NHE.

Private spending grew 5.4% to $1.1 trillion in 2006, or 54 percent of total NHE.

Hospital expenditures grew 7.0% in 2006, a slower rate than the 7.3% in 2005.

Physician/clinical services growth slowed to 5.9% in 2006, from 7.4% in 2005.

Prescription drug spending growth increased 8.5% in 2006, from 5.8% in 2005.

At the aggregate level in 2006, businesses (25 percent), households (31 percent), other
private sponsors (3 percent), and governments (40 percent) paid for about the same share
of health services and supplies as they did in 2005.
National Health Expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp#TopOfPage
 Projected NHE, 2007-2017:
 Growth in NHE is expected to remain steady at 6.7 percent in 2007 and






average 6.7 percent per year over the projection period (2006-2017).
The health share of GDP is projected to reach 16.3 percent in 2007 and
19.5 percent by 2017.
Medicare spending is projected to grow 6.5% in 2007 and average
7.4% per year over the projection period.
Medicaid spending is projected to grow 8.9% in 2007 and average
7.9% per year over the projection period.
Private spending is projected to grow 6.3% in 2007 and average 6.2%
per year over the projection period.
Spending on hospital services is projected to grow 7.5% in 2007 to
$697 billion. Average growth of 6.9% per year is expected for the entire
projection period.
Spending on prescription drugs is projected to grow 6.7% in 2007 to
$231 billion. Average growth of 8.2% per year is expected for the entire
projection period.
National Health Expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp#TopOfPage
 NHE by Age Group, Selected Years 1987, 1996,
1999, 2002, and 2004:






Per person personal health care spending for the 65 and older population was
$14,797 in 2004, 5.6 times higher than spending per child ($2,650) and 3.3
times spending per working-age person ($4,511).
In 2004, children accounted for 26 percent of the population and 13 percent of
PHC spending.
The working-age group comprised the majority of spending and population in
2004, at 52 percent and 62 percent respectively.
The elderly were the smallest population group at 12 percent of the population,
and accounted for the remaining 34 percent of spending in 2004.
Spending for those 85 years and older relative to spending for all other age
groups, decreased from 1987 to 2004, mainly due to a slowdown in nursing
home spending.
Medicare enrollment growth is anticipated to be a stronger influence on future
spending growth than the changing age-mix of the Medicare population.
National Health Expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp#TopOfPage
 NHE by State of Residence, 1991-2004:
 In 2004, per capita personal health care spending ranged from a




high of $6,683 in Massachusetts to $3,972 in Utah, where
spending was the lowest.
In 2004, the highest per capita spending occurred in
Massachusetts, Maine, New York, Alaska and Connecticut, with
spending 20 percent or more above the U.S. average.
In 2004, the states with the lowest spending per capita were
Utah, Arizona, Idaho, New Mexico and Nevada, with spending
14 percent or more below the U.S. average.
Medicare expenditures per beneficiary were highest in Louisiana
($8,659) and lowest in South Dakota ($5,640) in 2004.
Medicaid expenditures per enrollee were highest in Alaska
($10,417) and lowest in California ($3,664) in 2004.
National Health Expenditure data:
http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp#TopOfPage
 NHE by State of Provider, 1980-2004:
 California's aggregate personal health care spending was the
highest in the nation, representing 10.8 percent of total U.S.
personal health care spending in 2004.
 Wyoming's aggregate personal health care spending was the
lowest in the nation, representing just 0.1 percent of total U.S.
personal health care spending in 2004.
 All states except Delaware and Wyoming spent 10 percent or
more of their Gross State Product on health care in 2004.
 On average, between 2000 and 2004, aggregate personal
health care spending grew the fastest in Nevada (12.2 percent)
and the slowest in Louisiana (6.0 percent).
How US HCS Compares
HCS Paradigms in the U.S.
 Open Choice
 HMO: IPA or Group
 National or Staff HMO
 Expanded Choice
 Third-party Payer
OPEN CHOICE MODEL
DELIVERY
FINANCING
CONSUMPTION
HMO: IPA/GROUP MODEL
FINANCING
DELIVERY
Network
CONSUMPTION
Single Payer, National, or STAFF
HMO MODEL
DELIVERY
FINANCING
CONSUMPTION
EXPANDED CHOICE MODELS
FINANCING
DELIVERY
DELIVERY
In-Network
O-of-Net
CONSUMPTION
THIRD-PARTY PAYER MODEL
DELIVERY
Networks A, B,…
CONSUMPTION
TPA
Financing:
Plan Sponsor
“Goodness of Fit” Evaluation of HCS
 Points:
 Lack of standardization
 Regulatory issues
 Number of uninsured persons is increasing
 HC Costs are increasing
 Quality and Access is problematic
 Shortages exist: supply/demand issues
 Consumption is inevitable
 Timing is “some what” within our control
 Incentives are misaligned
 Premiums are correlated to the freedom to choose
 Ability to “pay?”
Part B: HCS Reform Proposals
 Health Care for America
 Heritage Foundation
 Obama
 McCain
 Ours?
Health Care for America
Economic Policy Institute
 Three central elements:
 open to any legal U.S. resident without good workplace
coverage;
 employers (and the self-employed) must either
purchase coverage comparable to Health Care for
America for all their workers or pay a relatively modest
payroll contribution (6% of payroll) to fund Health Care
for America coverage for all their employees;
 Americans who remain without insurance must
purchase private coverage or buying into the Health
Care for America Plan.
Heritage Foundation
 Personal ownership and portability – barriers:



The federal tax treatment of health care subsidizes
employer-sponsored insurance (ESI), but not health
insurance policies purchased by individuals and
families in the non-group market.
In many states, the state policies and regulations that
shape and direct health insurance markets do not
facilitate the purchase of affordable health plans or
allow for the portability of health plans.
The large public programs, including Medicaid and the
State Children's Health Insurance Program (SCHIP),
are not designed to enable individuals and families to
move easily from public assistance to private health
insurance. In other words, getting off public assistance
is difficult, regardless of the person's desire to do so.
Heritage Foundation
 Policymaker fix for Churning and
Uninsured
 Congress should change federal tax law to
provide direct tax relief to individuals and families
for the purchase of health insurance coverage.
 Until Congress makes these changes, state
policymakers should redesign state health
insurance markets to promote personal
ownership of health plans.
 State and federal policymakers should reform
public health programs.
McCain’s Proposal
 Problems:




Cost and cost increases
Medicare
Lack of personal responsibility
Lack of systemic accountability
 Vision: a system that offers high quality care,
that respects individual dignity and is
available at reasonable cost
McCain’s Proposal
 Reform goals:
 pay only for quality medical care,
 having insurance choices that are diverse
and responsive to individual needs, and
 restoring our sense of personal responsibility
Obama’s Proposal
Obama plan will:
(1)establish a new public insurance program, available to
Americans who neither qualify for Medicaid or SCHIP nor have
access to insurance through their employers, as well as to small
businesses that want to offer insurance to their employees;
(2) create a National Health Insurance Exchange to help Americans
and businesses that want to purchase private health insurance
directly;
(3) require all employers to contribute owards health coverage for
their employees or towards the cost of the public plan;
(4) mandate all children have health care coverage;
(5) expand eligibility for the Medicaid and SCHIP programs; and
(6) allow flexibility for state health reform plans.
Obama’s Proposal
Obama plan features:
(1) OBAMA’S PLAN TO COVER THE UNINSURED.
􀂾 Guaranteed eligibility. (note: this is not a mandate)
􀂾 Comprehensive benefits. Federal Employees
Health Benefits Program (FEHBP) like
􀂾 Affordable premiums, co-pays and deductibles.
􀂾 Subsidies.
􀂾 Simplifying paperwork and reining in health
costs.
􀂾 Easy enrollment.
􀂾 Portability and choice.
􀂾 Quality and efficiency.
Obama’s Proposal
(2) NATIONAL HEALTH INSURANCE EXCHANGE.
(3) EMPLOYER CONTRIBUTION.
(4) MANDATORY COVERAGE OF CHILDREN.
(5) EXPANSION OF MEDICAID AND SCHIP.
(6) FLEXIBILITY FOR STATE PLANS.
Our: Key Items in any Proposal
Part C: Iowa Legislative Commission
on Affordable Health Care Plans
 Created by 2007 Iowa Acts, HF909, Section 127
(http://www.legis.state.ia.us/aspx/Committees/Committee.aspx?id=208)
 Charge:
 Review
 Analyze, and
 Make recommendations on health care issues
 Goal: develop a plan to make health insurance
coverage more available and affordable for Iowa’s
small business and families
Part C: Iowa Legislative Commission
on Affordable Health Care Plans
 The commission was comprised of
 five state senators and five state representatives;
 nine public members representing various
organizations as designated in the legislation and
appointed by the Legislative Council;
 five consumers appointed by the Governor;
 and four nonvoting, ex officio members who are the
Commissioner of Insurance, Director of the
Department of Human Services, and the Director of
Public Health, or their designees; and a representative
of the Iowa Dental Association.
Iowa Legislative Commission on
Affordable Health Care Plans
Themes from Public Forums:
• Health Care Reform. Reform should be based on the following principles: do no harm; affordable access; avoid
nationwide models, one size does not fit all; act in concert with neighboring states; emphasize the value of the system
to the public; and provide listening posts to get public input.
• Dental Care. Reimbursement to dentists under the Medicaid program is insufficient. The problem will become more
severe as more dentists are retiring than are entering the profession. Dental services are essential to prevent a variety
of health problems. The I-Smile Program should be expanded and reimbursed similar to the hawk-i Program.
• Medicaid Reimbursement. A consistent theme among service providers is that Medicaid reimbursement is insufficient.
• Home Care. One presenter emphasized that home care is the solution, providing cost-effective service and delaying or
avoiding nursing home care. Home care service providers are carefully screened and provide excellent service. Low
pay and the lack of insurance result in a rapid turnover of these service providers. Only about 25 percent have health
insurance.
• Physician Care. Low reimbursement rates discourage physicians from locating in Iowa. Often new physicians have
over $150,000 in loans; this burden discourages them from going into primary health care, when they can make more
money in a specialized area. Tort reform would help by capping noneconomic damages.
• Child Health Care. A child's healthy development requires adequate health care. Such care can prevent future, more
serious problems. A model must be developed to ensure coverage for all children.
• Lifestyle Choices. A recurring theme was the impact of lifestyle choices on health costs. To reduce tobacco use the
tax should be raised and the prohibition against local control should be eliminated.
• Pharmacy. The pharmacist is a health care professional who can provide great assistance to patients in the area of
medication management and consultation. The drug industry discourages and actually interferes with the marketing of
lower-cost generic medications.
• Chronic Disease. Addressing chronic disease is important in improving the health care system.
• Prosthetic Devices. Reimbursement for prosthetic devices is capped at a low level, imposing a large out-of-pocket
expense on the amputee. Senate File 508, if passed, would eliminate this cap.
Iowa Legislative Commission on
Affordable Health Care Plans
Themes from Public Forums:
• Home Care/Respite Care/Direct Care Workers. Home care is preferred by consumers, is readily accessible, is cost
effective, and is being delivered to an increasing number of Iowans as the population ages. However, an increasing
number of these services are uncompensated due to a new Medicaid reimbursement formula and funding shortfalls.
Home care provides persons with disabilities with the opportunity to live independently and accomplish life goals. There
is sufficient funding in the health care system, but it should be realigned to provide more cost-effective care and allow
individuals to remain in their homes. The rules for hospice could be rewritten to allow for a period of one year rather
than six months as a basis to determine if a person is terminally ill. Respite care is critical for families caring for family
members with chronic and terminal illnesses, such as ALS. Direct care workers often do not have health care
coverage. Direct care workers and all other Iowans should have access to coverage.
• Preexisting Conditions and Debt. The issue of preexisting conditions should be reviewed, as they often make
coverage unavailable or unaffordable. Those with health care debt are sometimes denied care due to the debt.
• Medical Home/Primary Care. The medical home should be used to provide access to affordable and timely health
care. Primary care should be emphasized and should be used as the gatekeeper instead of the emergency room. High
debt loads and lower reimbursement often deter new practitioners from practicing primary care, so incentives are
needed.
• Medically Fragile Children. Premature babies, babies born with birth defects, and children injured in accidents are
being saved today with advances in technology. This presents life-long medical challenges. Hospitals are concerned
that they may become the care facility for these children and lose needed acute care beds. Both the public and private
portions of the health care system need to be reformed.
• Christian Science. Medical care is only one form of available health care. Another form is religious nonmedical health
care. Successful health care reform should take into account the needs and preferred choices of the entire community.
Religious nonmedical care is frequently included as a covered benefit under public and private health insurance
arrangements.
• Public Health Structure. An infrastructure exists as a basis for providing a health wellness system. The public health
system provides health care throughout the life spectrum. Health care is provided at the local level through funding that
is passed down from the federal and state governments. However, funding has been reduced in recent years. This
structure can be instrumental in shifting to a health care wellness system.
• Worksite Wellness. Worksite wellness programs reduce health care costs, reduce short-term sick leave, and increase
productivity. Lighten Up Iowa began through the efforts of former Governors Robert Ray and Terry Branstad to address
the obesity problem and encourage healthy lifestyles through competition, using the Iowa Games model. The program
provides website tracking for businesses and also provides community grants to support programs. Providing
incentives works well. School programs are also important in encouraging youth to increase their physical activity and
make better food choices. School children need to be active to learn—canceling recess and PE classes to meet No
Child Left Behind requirements is not beneficial to children.
• Catholic Church Priorities. Access to affordable health care has long been a priority of the Catholic Church. The
Catholic Church will use five criteria to evaluate any health care reform: respect for life, priority concern for the poor,
universal access, comprehensive benefits, and pluralism. Also, reform should promote quality in the system, control of
costs, and equitable financing based on ability to pay. The system should promote preventive care and utilize face-toface
interaction in managing chronic conditions and include mental health services.
Iowa Legislative Commission on
Affordable Health Care Plans
Themes from Public Forums:
• Transparency. Wellness and health promotion are important, quality costs less, and health care transparency will help
create needed change. Transparency consists of comparative public reporting of health care provider performance on
quality, patient safety, and price/cost. Many efforts include the Leapfrog Group measures. Specific action items should
be included in the Commission's final report to address improving quality and eliminating waste to sustain current
coverage and to expand coverage in Iowa. Additionally, reform should include transparency and public reporting,
including the measures endorsed by the National Quality Forum—the Leapfrog Group Patient Safety Measures and
their policy on Never Events.
• Affordability. In order for health care to be accessible to all, the issue of affordability must be addressed. Iowa has one
of the lowest percentages of uninsured, and also has some of the lowest insurance rates. Much of health care reform
must be addressed at the national level, but the state can address areas such as wellness by providing incentives to
engage the unhealthy and by providing for the exchange of personal health information. The state should also look into
reinsurance.
• Existing Program Improvement. The rules for HIPIOWA should be changed to remove the sixth-month waiting period
for eligibility. Eligibility for adults, including income guidelines under Medicaid, should be revisited. Costs for health care
services are more expensive for those who have the least ability to pay and are self-pay. There is inefficiency in the
Medicaid system that should be addressed.
• Dental Services. The provision of dental services is a major step in prevention of disease and would reduce the state's
financial outlay for dental care and health care in the long term. The I-Smile Program would provide dental services to
170,000 children under the Medicaid program and also provide counseling to parents in taking care of their children's
teeth. One of the biggest problems for adults is also dental health because poor dental health can result in infection
and other health issues. A dental health voucher program for adults could be implemented.
• IowaCare and Broadlawns. The IowaCare Program at Broadlawns Medical Center in Des Moines provides a model
for the medical home concept. Broadlawns is already providing for transparency regarding quality of care. Broadlawns
recently added a pediatrician and immunization rates of children are now 99.5 percent. Broadlawns provides dental
sealants to one-year-olds and provides vouchers for food purchases at the farmers market. Broadlawns is also a WIC
provider. Broadlawns is concerned about the workforce shortage, the pending federal legislation to reduce graduate
medical education funding, and the imminent lapse of the National Service Corps if federal legislation is not proposed
to reinstate the program. There is also the issue of inadequate reimbursement under the Medicare and Medicaid
programs. A major workforce shortage exists in the area of psychiatry.
• Restructuring of Priorities. Many consumers are lucky to pay very little out of pocket for health care services. Yet, if
billions of dollars can be spent for the war in Iraq, assistance should be provided to help a mother who cannot afford
medicine for her child.
Iowa Legislative Commission on
Affordable Health Care Plans
Themes from Public Forums:
• Continuing Medical Education (CME). CME should be structured for the specialty and should focus on what is new
and necessary for a specialty in a manner similar to elder/child abuse training. Practitioners should be tested on what
they have learned before they can be relicensed. In Wisconsin the practitioners have to demonstrate that they are
implementing the newest practices into their own practice.
• Recommendations from AFSCME. Health care plans should be more flexible to cover medically necessary
procedures that are often viewed as elective, such as gastric bypass surgery. Changing formularies should be limited.
Workers should be allowed to select their own doctor in determining workers’ compensation claims. Any single payor
plan should be similar to Medicare.
• Pharmacists. Pharmacists provide a valuable service. Some examples include diabetes education, collaboration with
physicians, insulin pump training, smoking cessation, medication therapy management which is only currently
reimbursed under Medicaid and Medicare Part D, and vaccination programs. Pharmacists often do rounds with doctors
in hospitals to provide the collaborative approach.
• Wellness and Chronic Care Management. The health care system should be reoriented to support wellness and
preventive measures. Individuals need to take responsibility for their own health; employers can help employees by
providing education, screenings, and by working to ensure that benefit plans encourage proper health management
and recognize the importance of prevention and wellness; and government, through public policy, should provide
incentives, such as tax credits, for employers to implement wellness programs.
• Racial Disparity. Health reform should take into consideration the racial disparities in health outcomes.
• Telemedicine. Telemedicine should be expanded and reimbursed.
Iowa Legislative Commission on Affordable Health Care
Plans: Health Insurance in Iowa

Iowa Insurance Division (IID) of the Department of Commerce. (Ms. Susan Voss,
Commissioner of Insurance)










Regulatory power of IID affects 25 percent of health care insurance dollars spent in Iowa.
IID regulates health insurance in the individual, small employer (2-50 employees), and large
employer (over 50 employees) markets.
Small employer group health insurance market has 28 insurance carriers, but that six of
those carriers sell over 90 percent of the insurance.
currently 28 insurance mandates in Iowa which compose an estimated 10-15 percent of the
insurance premium rate
IID does not pre-approve rates but each insurance carrier certifies that its rates meet certain
statistical guidelines.
Approximately 85-86 percent of each health insurance premium dollar is spent directly on
health care costs with the remainder paying for administrative costs and profits of the insurer.
Individual insurance market is similar to the small group market in terms of coverage and
mandates.
Approximately 9.1 percent of the population uninsured, Iowa is among the states for the
lowest number of uninsured.
About 5 percent of children under 18 are uninsured in the state and about 11 percent of adult
Iowans are uninsured.
In 2007 in House File 790 established parameters for allowing health insurance carriers to
create new classes of business for associations or groups of associations and to provide
incentives to employers who encourage healthy living efforts such as smoking cessation,
weight loss, and chronic disease management.
Iowa Legislative Commission on Affordable Health Care
Plans: Charity Care in Iowa
 Summary (HDRAC):
 2001-2006 uninsured patients accounted for:
 4 percent of all hospital admissions,
 13 percent of ER visits, and
 2 percent of ambulatory surgeries in Iowa;
 Costs associated with uninsured patients represented
 3 percent of acute hospitalization costs,
 11 percent of ER costs, and
 2 percent of ambulatory surgery costs in Iowa; and
 in aggregate Iowa hospitals charity care amounted to
$111 million in 2005 and $125 million in 2006.
Iowa Legislative Commission on Affordable Health Care
Plans: Hospital Finance
 Summary (IHA):

While all hospitals are required to charge everyone the
same rates,
 no two payers pay the same rates;
 government payers pay below cost;
 commercial payers negotiate rates; and
 charity care and underpayment impact costs for
everyone else.
 Charity care includes care that is delivered to an
uninsured as well as an underinsured patient.
 Underpayment by government programs impacts



quality of care,
hospitals' abilities to attract and keep providers, and
results in a cost shift to other payers.
Iowa Legislative Commission on Affordable Health Care
Plans: Rural Health Findings
 Iowa Rural Health Association Health Survey –
Summary:






vast majority of Iowans report they are in good health,
more say their health is improving rather than
declining,
most feel good even if they have a serious health
problem or condition,
most who are insured are satisfied with their current
insurance coverage, and
most agree on the importance of wellness and
prevention
most agree on taking individual responsibility for health
behaviors in reducing health care costs.
Iowa Legislative Commission on Affordable
Health Care Plans: Final Recommendations
Commission recommends the following action steps in
2008:
1. Develop and implement a plan for covering all
children and fully funding Medicaid and hawk-i.
2. Establish the structure necessary to implement health
care coverage for all Iowans through creation of the
Health Care Exchange, a quasi-public, private
agency that will develop, oversee, and implement
universal coverage for all Iowans; lead health care
quality, safety, and cost reduction initiatives; and
create a transition plan until universal coverage is
fully executed, to ensure that all Iowans have access
to private insurance at a predetermined rate ceiling
and without preexisting conditions exclusions.
Iowa Legislative Commission on Affordable
Health Care Plans: Final Recommendations
3. Define what constitutes health care coverage:
• Define minimum specifications for health care coverage plans that balance flexibility,
affordability, and comprehensiveness by covering wellness, prevention, and diagnosis;
covering catastrophic expenses; providing a reasonable level of basic care; and including
prescription drugs and dental care.
• Define parameters for affordability and levels of subsidization of private insurance premiums by
utilizing a progressive scale of subsidization based on income. In defining what constitutes
"affordable," the following recommendations should be considered:
• Any affordability schedule should be a conservative measure, and should utilize a
progressive scale as incomes increase. Using a conservative schedule will prevent harming
people who are struggling financially.
• People with very low incomes can pay only small amounts toward health care and no
financial penalties should be imposed upon them. Research shows that many low-income
people struggle to pay for basic necessities and are likely to have negative cash flow. In
Massachusetts, studies indicate that families below 300 percent of the FPL may not have
enough earnings to cover even basic needs.
• The upper-bound of affordability should be set at about 8.5 percent of income. Data shows
that people with higher incomes can reasonably afford health insurance at 8.5 percent of
income. People with unsubsidized, nongroup premiums currently pay an average of 8.5
percent of their income on health insurance.
• Determine costs and funding sources for universal coverage.
Iowa Legislative Commission on Affordable
Health Care Plans: Final Recommendations
4. Continue defining and planning how medical
homes can be established for all Iowans, but
in 2008 commit to a program of securing
medical homes for a defined population.
5. Create a statewide telehealth system using
the Iowa Communications Network and
private dedicated health care systems to
deliver a mechanism for transmitting digital
data on patient care and to develop the
standards necessary for use of that
mechanism by all health care professionals.
Iowa Legislative Commission on Affordable
Health Care Plans: Final Recommendations
6. Implement consumer-driven, medical provider quality improvement, and cost
containment strategies that will have more of an immediate impact on health
care costs.
• Continue overall planning around wellness, prevention, and diagnosis, but in
2008 commit to a focused, concentrated effort on a defined population.
• Begin to create a system for all medical providers to disclose prices and
performance quality.
• Undertake a project in 2008 to develop and implement consensus guidelines to
address one or two of the most significant chronic diseases.
• Strengthen the certificate of need process.
• Create an Office of Health Care Insurance Consumer Advocate.
• Direct and support efforts that help consumers take more responsibility in the
prevention or management of health problems. This includes improving health
literacy to increase the communication and interaction between health care
providers and patients and programs that encourage consumers to be
responsible for their own wellness.
• Begin an effort in 2008 to catalogue, communicate, and insure statewide
compliance with key medical best practices.
• Move forward with implementing educational workforce incentive programs.
Iowa Legislative Commission on Affordable
Health Care Plans: Final Recommendations
7. Contract with The Lewin Group to create an economic model of
the Commission's health care proposal. This will provide the
Legislature and the Governor with the closest estimate of the
costs necessary to implement the Commission's action steps.
After the estimates have been determined and the scope of the
reform is decided by legislative action, it is the Commission’s
belief that the state should initially fund the legislative reforms by
the best mix of recommendations determined in the report of
The Lewin Group.
8. The Commission knows that sustainability is absolutely essential
for an improved health care system to last. The Commission
wants to move slowly but deliberately toward permanent and
sustainable sources of revenue. The Commission believes that
this has to be a shared responsibility between the patient, payer,
provider, and federal and state government.
Iowa Legislative Activity on Health
Care Reform: Legislative Updates
Sen. Hatch:
1. Universal Health Care Coverage, including
provisions for medical home, telemedicine
and cost containment.
2. Wellness
3. Establishment of a Health Care Insurance
Consumer Advocate Office
4. Initiatives to reduce the health care workforce
shortage
5. Whistleblower protections
Iowa Legislative Activity on Health
Care Reform: House File 2539
 Bipartisan effort that passed 97-0 in Iowa House
 First, it sets a goal that every Iowa child will have health




insurance by the end of 2010, but did not mandate coverage.
Second, every Iowan will have a patient centered medical home,
where one medical provider will focus on prevention and chronic
care management to reduce costs and know all the medications,
treatments, and history to avoid medical errors.
Third, young adults will be able to stay on their parent’s
insurance policy until they are 25 years old or they graduate
from college, whichever is later.
Iowans with pre-existing conditions will also continue to receive
insurance coverage if they leave group insurance and enter the
individual insurance market.
In an effort to reduce costs and improve quality, the bill also
creates a Health Information Technology System to create realtime access to medical records.
DMR Opinion
March 25, 2006




Ensure all kids have access to coverage
Adopt proven tactics for boosting enrollment
Limit costs to ensure affordability for families
Require reporting of errors, other measures
of quality
 Be bold: Make history with meaningful reform
 What do you think?
Topic III: The Bond Insurance Market’s
Reaction to the Sub-Prime Lending Crisis.
 Topic objectives:



Review the issues behind the sub-prime
lending problem
Examine the scope, scale, purpose of the
bond insurance market from a historical and
emerging perspective
Identify major bond insurers and their financial
vulnerability to subprime loans and related
issues
Rising Foreclosures – A Perfect Storm
(Edmiston and Salneraitis, 2007, 4th, Economic Review, Kansas City Federal Reserve)
 Foreclosure Rate (FR) Observations:
 Economic conditions and foreclosure rate in general,
move in opposite (good/bad) directions
 Increase in FR during the 1980’s is generally attributed
to:
 High interest rates
 Weak real estate markets
 Regional energy issues
 Data suggest a leveling FR until 1995, followed by an
increase peaking in 2002 due to the recession in 2001
 2002 – 2006 was similar in trend to the mid-1990s
 Current surge began in early 2006
Foreclosure Chart
Foreclosures by State
U.S. Foreclosure Market Statistics by State – 2007 Totals
Rate
Rank
State
Name
Total
Foreclosure
Filings
%Change
from
2006
%Change
from
2005
148.83
Total
Properties
with
Filings
%Households
(foreclosure
rate)
--
United
States
2,203,295
74.99
37
Alabama
7,903
81.76
83.07
5,572
0.268
28
Alaska
1,650
54.64
17.69
1,332
0.486
8
Arizona
69,970
150.91
160.70
38,568
1.516
26
Arkansas
14,310
26.44
23.58
6,406
0.513
4
California
481,392
237.99
681.95
249,513
1.921
5
Colorado
71,149
29.96
140.12
39,403
1.919
16
Connecticut 23,470
100.05*
111.38*
11,860
0.833
38
Delaware
1,430
225.00*
342.72*
999
0.266
District of
Columbia
800
607.96*
393.83*
777
0.280
2
Florida
279,325
123.96
129.25
165,291
2.002
7
Georgia
99,578
31.07
118.43
59,057
1.566
43
Hawaii
1,270
88.71
-60.39
966
0.197
20
Idaho
6,032
140.51*
119.83*
3,640
0.611
9
Illinois
90,782
25.29
94.30
64,310
1.250
10
Indiana
52,930
11.31
73.57
27,980
1.027
33
Iowa
7,404
114.92*
251.90*
4,103
0.314
42
Kansas
4,978
20.85
161.31*
2,434
0.203
35
Kentucky
8,793
23.45
76.96
5,105
0.274
41
Louisiana
7,331
151.58*
90.61
3,968
0.204
48
Maine
N/A
N/A
N/A
286
0.042
1,285,873
1.033
Foreclosures by State
17
Maryland
25,109
455.26
388.41
18,879
0.830
19
Mass.
41,487
161.14
751.36
17,737
0.660
3
Michigan
136,205
68.32
282.22
87,210
1.947
25
Minnesota
13,615
127.11*
506.73*
11,557
0.513
45
Mississippi
1,997
91.65
4.55
1,409
0.114
13
Missouri
32,022
80.93
176.74
23,492
0.906
36
Montana
1,378
29.27
52.60
1,150
0.268
30
Nebraska
3,971
30.88
91.84
3,636
0.474
1
Nevada
66,316
215.12
758.68
34,417
3.376
40
New Hampshire
N/A
N/A
N/A
1,238
0.212
14
New Jersey
53,652
34.06
52.75
31,071
0.902
32
New Mexico
3,893
-26.04
-46.55
2,994
0.357
27
New York
57,350
10.19
54.72
38,688
0.493
18
North Carolina
37,426
66.52
135.07
29,101
0.739
46
North Dakota
308
74.01
86.67
250
0.082
6
Ohio
153,196
87.93
207.35
89,979
1.797
23
Oklahoma
13,594
-12.78
0.71
8,256
0.520
22
Oregon
10,746
12.25
56.76
8,461
0.543
34
Pennsylvania
34,089
-11.07
18.98
16,379
0.302
31
Rhode Island
3,241
153.80*
7804.88* 1,838
0.410
39
South Carolina
5,038
-27.56
-33.76
4,247
0.220
50
South Dakota
N/A
N/A
N/A
24
0.007
11
Tennessee
45,834
24.56
65.66
25,914
0.983
12
Texas
149,703
-4.57
9.22
84,469
0.936
15
Utah
9,668
-25.87
-16.19
7,438
0.852
49
Vermont
61
35.56
1.67
29
0.009
24
Virginia
24,199
456.30
728.73
16,307
0.514
21
Washington
23,705
27.95
59.47
15,184
0.573
47
West Virginia
1,135
30.31
10.95
460
0.053
29
Wisconsin
17,503
131.15*
241.79*
12,133
0.486
44
Wyoming
497
21.52
99.60
356
0.151
*Actual increase may not be as high due to expanded data coverage in this state.
About RealtyTrac Inc.
Historical Causes and Types of
Defaults and Foreclosure
 Two-step process:
 Missed payment, delinquency, default
 Then step two – foreclosure
 Ruthless (profitable) defaults:
 Pure wealth-maximization play – mortgagor exercises
the option to put the property on the lender and
receives value because the property is worth less than
the outstanding balance on the mortgage
 Prevalent when LTV is high and property value is
declining (Ambrose/Capone, 1998)
 Negative equity value explains 90% of variation in
foreclosures over time (Foster/VanOrder, 1984)
Historical Causes and Types of
Defaults and Foreclosure
 Positive equity defaults:
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Balance of the mortgage exceeds value of
property less transaction costs (positive equity
value is less than selling costs)
Liquidity constrained households effected
 Interest rate jumps:
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ARMs
Loans with a “teaser rate”
General Observation on Recent
Interest Rates and Originations
 Falling interest rates on FRM drove mortgage
originations (primarily refinancing)
 Mortgage industry and capacity expanded
 Interest rates started to go up and refinancing
declined and mortgage brokers looked to
subprime market
 Booming demand for real estate and
investors chasing high yields significantly
expanded subprime mortgage market
 Questionable Risk Management?
Interest Rates and Originations
Recent Foreclosures
 Edmiston and Salneraitis, 2007 state that
spike in foreclosures in the period since 2006
is unusual due to:
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Solid income growth
Historically low unemployment rates
 They present evidence that the “surge” is due
to three conditions that have created a
“perfect storm” in the mortgage market
The“Perfect Storm”
 Ingredients for the perfect storm
 Significant increase in Subprime loans, which
typically have a higher foreclosure rate
(2003:$335 billion vs. 2006:$600 billion)
 Significant increase in nontraditional
mortgages, such as ARMs, 2/28 or 3/27 hybrid
ARMs, 3/1option ARMs, interest-only ARMS…
 Equity value conundrum due to:
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High LTV ratios at origination (90 to 125%)
Equity extraction
Stagnant or falling home prices
Growth in Nonprime Originations
Foreclosures by Loan Type
Mortgage Reset Costs
Impact of the Confluence of
Conditions
 The simultaneous interaction of declining
home prices and rising LTVs, payment resets,
and increased market share of subprime
mortgages left many HOs with only a default
option
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Problem is acute in:
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Markets where housing was very expensive
(irrational exuberance)
Low-and moderate-income communities
(marginal home buyers)
Financial Risk Mitigation and Bonds
 Bonds are rated by rating agencies regarding
credit risk (default);
 Bond ratings also may be “enhanced” by
purchasing “bond insurance.”
 We will address bond ratings first, then credit
enhancement through insurance, and
conclude with market implications.
Risk Mitigation: Role of Bond Rating Agencies
Vicky Tillman (S&P) testimony to HSC on CM (09.26.07)
 Reputation is key
 Analytics must be sound
 Analytics must be dynamic
 Transparency must be ensured
Role of Bond Rating Agencies
Vicky Tillman (S&P) testimony to HSC on CM (09.26.07)
 Credit ratings are “…not a promise of
performance but an evaluation of the risk of
default …
 When we rate securities, we are not saying
that they are ‘guaranteed’ to repay but the
opposite: that some of them will likely
default.”
 S&P has been rating RBMS for 30 plus years
Role of Bond Rating Agencies
Vicky Tillman (S&P) testimony to HSC on CM (09.26.07)
 S&P track record for RBMS – 30 year period:
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percentage of defaults of transactions rated
‘AAA’ is four one-hundredths of one percent
lowest investment grade rating, ‘BBB’, has a
historical default rate of slightly over one
percent
Role of Bond Rating Agencies
Vicky Tillman (S&P) testimony to HSC on CM (09.26.07)

Ratings clearly do not address:
 Whether investors should “buy”, “sell” or “hold” rated
securities;
 Whether any particular rated securities are suitable
investments for a particular investor or group of
investors;
 Whether the expected return of a particular investment
is adequate compensation for the risk;
 Whether a rated security is in line with the investor’s
risk appetite;
 Whether the price of the security is appropriate or
even commensurate with its credit risk; or
 Whether factors other than credit risk should influence
that market price, and to what extent.
Risk Mitigation: Who Are The Bond
Insurers?
W. M. Financial Stratigies
Bond Insurance (Facts)
W. M. Financial Stratigies
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Issuers that meet certain credit criteria can purchase municipal bond insurance
policies from private companies.
The insurance guarantees the payment of principal and interest on a bond issue
if the issuer defaults.
Bond ratings are based on the credit of the insurer rather than the underlying
credit of the issuer (credit enhancement).
A municipal bond insurance policy may result in significant interest cost savings,
depending upon the issuer's underlying credit and market conditions at the time
of the bond sale.
Interest cost savings are attributable to the higher bond rating as well as
enhanced liquidity for insured bonds.
Triple-A municipal bond insurance emerged in 1971. Since that time, the number
of insured issues has grown astronomically.
In 1980, only 3% of bond issues were insured compared to approximately 60%
in 2007.
With growing popularity of insurance, the number of insurers also increased.
AMBAC, the first insurer, was latter joined by other triple-A rated insures.
In addition, insurance companies with claims paying ability lower than triple-A
entered the market to provide opportunities for insuring bond issues that were
too small, unusual or had credit conditions that did not meet AAA insurers'
criteria.
In 2007 there were seven insurers rated triple-A by the three major rating
agencies.
Today only three insurers are triple-A rated by Moody's, Standard & Poor's and
Fitch.
Bond Insurance (Facts)
Parkenson, P. Statistics provided to U.S. House of Representatives, 02.14.08.
 Nine U.S. companies whose business focuses on providing insurance
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against credit defaults together insure about $2-1/2 trillion of domestic
and international securities.
Historically, they focused on insuring the timely payment of principal
and interest on U.S. municipal bonds.
As of September 30, 2007, the guarantors insured about $1-1/2 trillion
of such bonds, more than half of all U.S. municipal bonds outstanding.
In recent years the financial guarantors expanded rapidly into insuring
asset-backed securities (ABS), especially collateralized debt
obligations (CDOs).
By September 30, 2007, they had guaranteed more than $1 trillion of
ABS, including over $700 billion of U.S. ABS.
The U.S. ABS included about $200 billion of U.S. residential mortgagebacked securities (RMBS) and securities backed by home-equity loans
and about $125 billion of CDOs collateralized by ABS (CDOs of ABS)
that contained U.S. subprime RMBS.
In addition, they have guaranteed more than $300 billion of U.S. and
international corporate CDOs.
Bond Insurance: Financial Stability Implications
Parkenson, P. Statistics provided to U.S. House of Representatives, 02.14.08.
 The growing possibility of credit losses on these
securities has caused some of the guarantors to
report financial losses and the rating agencies to
require those guarantors to raise capital to maintain
or regain their AAA ratings.
 Downgrades of some guarantors' credit ratings might
affect overall financial stability as follows.
(1) the potential for disruptions to municipal bond
markets,
(2) potential losses and liquidity pressures on banks
and securities firms that have exposures to the
guarantors, and
(3) the potential for further erosion of investor
confidence in financial markets generally.
Recent Bond Insurer Rating Actions
W. M. Financial Stratigies
Bond Insurance Company Analysis: MBIA
Corporate Overview
Bond Insurance Company Analysis: MBIA
Corporate Overview: S&P – 03.08.08
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MBIA Inc. (MBI), as of year-end 2007, was the leading municipal bond insurer, and has a
significant presence in the structured finance market.
It is also engaged in asset management operations.
MBI offers insurance for new issues of municipal bonds, and for bonds traded in the
secondary market, including bonds held in unit investment trusts and mutual funds.
At December 31, 2007, the net par value of the company's insured debt obligations was
$678.7 billion, of which:
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MBI in recent years has expanded its presence in the structured finance (or asset-backed)
markets.
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general obligation municipal bonds accounted for 25%,
utility bonds 11%,
tax-backed bonds 7%,
transportation bonds 5%,
health care bonds 4%,
other U.S. municipal bonds 8%,
non-U.S. municipal obligations 5%,
U.S. structured finance obligations (asset/mortgage backed) 23%,
and international structured finance 12%.
Adjusted direct premiums (which include upfront and installment premiums) in the global
public finance segment advanced 3% in 2007, to $597.1 million, from $578.9 million in 2006.
Global structured finance adjusted direct premiums (including upfront and installment
premiums) surged 99% in 2007, to $899.8 million, from $451.9 million in 2006.
Bond Insurance Company Analysis: MBIA
Corporate Overview: S&P – 03.08.08
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COMPETITIVE LANDSCAPE.
Unlike the general insurance industry, in which literally hundreds
of companies scramble for market share,
the mono line insurance industry is fairly concentrated, with
fewer than 10 companies accounting for most of the industry's
business.
Historically, MBIA, along with rival insurer Ambac Financial
Group, Inc., were the leading two bond insurers.
Other participants include Assured Guaranty, Security Capital
Assurance, Financial Guaranty Insurance and Financial Security
Assurance.
Perhaps the newest entrant into the field is Berkshire Hathaway
Assurance(formed in 2007 by Berkshire Hathaway Inc.)
Bond Insurance Company Analysis: MBIA
Corporate Overview: S&P – 03.08.08
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IMPACT OF MAJOR DEVELOPMENTS.
An erosion in the housing market in 2007 sparked a rise in
delinquencies in many subprime and nontraditional mortgages (e.g.,
interest-only, option-ARM and no documentation loans).
As a result of the spiraling credit erosion, many mono line insurers
posted losses (as promulgated under mark to market accounting
standards) as the value of structured products backed by these
mortgages plummeted.
Prior to 2007, no bond insurer had ever lost its top-tier financial
strength rating.
A number of bond insurers lost their top-tier ratings, or were in danger
of losing them if they did not raise additional capital.
Because the financial guarantee industry is ratings-sensitive (i.e., the
loss of a top tier rating makes it difficult for an insurer to attract new
business),
We believe the loss of a top tier financial strength rating imperils mono
line insurers' ability to continue to operate effectively.
Bond Insurance Company Analysis: MBIA
Corporate Overview: S&P – 03.08.08
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FINANCIAL TRENDS.
MBIA reported a net loss per share of $15.77 for 2007, versus EPS of $5.95 in 2006.
These results (which included realized investment gains of $0.26 a share in 2007, versus
$0.07 in 2006) reflected the impact of higher loss and loss adjustment expenses and the
writedown of the value of the structured credit derivatives portfolio per "mark to market"
accounting rules.
To help shore up its capital base, MBIA on January 30, 2008, sold 16.1 million common
shares to Warburg Pincus (WP), a private equity firm, at $31 a share, plus warrants to
purchase up to another 16.1 million shares.
On February 13, 2008, MBI sold another 94.65 million shares publicly at $12.15 a share.
Pursuant to certain anti-dilution provisions, terms of the warrants issued to WP were
revised, such that WP now holds warrants to purchase another 21.3 million common shares
of MBIA.
In February 2008, MBIA also undertook a number of other steps aimed at restructuring its
business. Gary Dunton was replaced as chairman, president & CEO by Joseph "Jay"
Brown, MBIA's former chairman, who returned from retirement.
MBIA also announced that it would seek to separate the company into three separate legal
entities (public finance, asset management, and structured finance) within the next five
years.
MBIA also announced that it would suspend writing new structured finance business for at
least six months, cease writing insurance policies for most new credit derivative
transactions, and eliminate the quarterly dividend on its common stock and instead declare
dividends on an annual basis.
Bond Insurance Company Analysis: MBIA Stock
Price 1 year Focus
Bond Insurance Company Analysis: MBIA Stock
Price 5 year Focus
Contagion to the Insurance Industry?
 Is there a possibility that problems in the
bond insurance industry will have implications
on the insurance industry in general?
 Implications:
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“Flight to quality:” insurance buyers “switch”
from lower to higher rated insurers.
RBC implications:
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Riskiness of assets
Correlation between assets and liabilities
Capital shortages and increased insolvency risk
Property-Casualty Municipal Bond
Facts – Insurance Research Council
 PC 2005 MB investments totaled $320 B
Principal Financial Outlines Exposure to Bond, Mortgage Insurers
(Tuesday March 4, 5:29 pm ET (AP))
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Retirement fund, insurance and financial services company Principal Financial
Group Inc. said Tuesday its life insurance company had nearly $997 million of
exposure to bond and mortgage insurance companies.
It said it filed the document with the Securities and Exchange Commission to
explain the exposure in response to inquiries by investors. (transparency)
The document said Principal Life Insurance Co. had guarantees on $774 million
of underlying municipal bonds, corporate credit or asset backed securities.
Of the $774 million,
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The company had direct exposure from securities issued by bond and mortgage
insurers totaling $222.4 million.
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44 percent was in municipal bonds,
40 percent was in investment grade bank notes,
9 percent was in securities backed by subprime first lien mortgages and
7 percent was in investment-grade corporate bonds.
MBIA Inc. was nearly $376 million,
Ambac Financial Group Inc. was $234 million,
FGIC was $193 million.
The company said its exposure decreased in February on an amortized basis
Principal shares closed 41 cents per share lower at $54.18.
Summary and Implications?
Thanks and Have a Nice Day!!
 Mark