The latest figures from the Department of Labor show that 247,000 more jobs disappeared last month. And right about now, many of the people who had those jobs probably wish they had something more coming to them than some severance pay and a small check from the state unemployment department.
I’m talking about private unemployment insurance. The problem is, if they had wanted to buy themselves that insurance a few months ago — in the same way they can buy life or disability coverage — it would have been nearly impossible to find at any price.
Sure, Hyundai will let you return your car if you lose your job. And companies in a host of other industries are offering add-on coverage that can help you keep paying your bill if you end up unemployed. (I’ve noted several options, including an intriguing new one in student loans, below.)
But paycheck replacement coverage — a product that seems perfect for this economic moment — is scarce, if it exists at all.
How can that be?
John Hartline, an insurance industry veteran, asked himself that question several years ago. Products like this had come and gone, and Mr. Hartline wanted to create a new one that agents could sell to individuals. In the spring of 2008, he started PayCheck Guardian, and the product came with several restrictions that speak to why it is so hard to make money with this type of offering.
The pricing was simple enough at first glance. Pay $69.95 a month, and if you lost your job through no fault of your own, you would get $1,500 a month for six months.
There were a few catches. First, you could not collect on the policy unless you had had coverage for at least four months. Why?
“If we offered immediate coverage, people would get laid off at noon and call us at 1, or find out at 8:30 that they were getting fired at noon and call us at 9,” he said.
Customers who had cleared the four-month hurdle, then lost their jobs still had to be unemployed for 30 days before they got their first checks. Mr. Hartline worried that people out on two-week furloughs, say, would try to collect.
Even those restrictions were not enough to keep his underwriters happy, though. Mr. Hartline said his reinsurance provider, Munich American Reassurance, forced him to stop writing new policies in April of this year.
Why? It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.
“The potential set of policyholders are selecting against the insurance company, because they know their situation better than an insurance company might,” said Michael Schmitz, a principal and consulting actuary for the Milwaukee office of the consulting firm Milliman.
As a result, there is not the sort of risk sharing that occurs when insurance is mandatory, as it generally is with auto insurance, according to Steve Rulis, a vice president and actuary with Munich American. (He was talking about a hypothetical private unemployment insurance offering. The company would not comment specifically on PayCheck Guardian.)
Another entrepreneur has decided to try a slightly different idea. Bill Graham, a lawyer in North Carolina and former candidate for governor, wants to solve a problem that begins when the unemployed finally find another job: they are often making much less than they were in their last position. His solution: salary gap insurance. Individuals pay a premium, and then get a percentage of the difference between their old pay and their new compensation for up to two years, as long they left their old job involuntarily.
For several years, Mr. Graham has been shopping this idea to American insurance companies, all of which seemed to like it, though none would ultimately partner with him.
“It was just one thing after another,” he recalled. “I don’t want to speak ill of anyone’s company or corporate culture, but the bottom line is that these people are committed to death. They’re encumbered by their own bureaucracy. It’s almost as if you went to the C.D.C. and said, ‘I have a cure for the common cold,’ and they said, ‘Oh, no thanks.’ ”
Mr. Graham said American insurance companies did not have problems with the risk he asked them to assume. In fact, he said, he asked Towers Perrin, a management consulting firm, to bless the concept and crunch the numbers before he shopped it around. He ultimately found a partner in Europe. His service is now available in the Netherlands and will soon be offered in Britain.
Still, it is possible that there is a business model problem here. Mr. Graham says he believes that he can offer his service for about the cost of life or home insurance, maybe even less. But much will depend on what the policyholder does for a living. A prudent underwriter might not cover me at any price, for instance, given the carnage in the newspaper industry at the moment. At the very least, workers in fields that are most vulnerable may find themselves paying much more than they do to insure their house.
For Americans, however, it is an academic discussion until an insurance company steps up to underwrite salary gap insurance.
Meanwhile, it is possible to cobble together coverage for most of your major monthly bills if you are lucky enough to live in the right place or work with the right companies. Here are some examples:
MORTGAGE A nonprofit group called the Rainy Day Foundation allows companies like home builders that partner with it to cover up to $1,800 in borrowers’ monthly payments for up to six months in the first 24 months of the loan.
If you are shopping for a new home and the builder does not offer this, ask why. And if it is available, make sure it is not only for people who use the builder’s own mortgage company or preferred lenders.
RENT Some large property owners will now let you break your lease if you lose your job, without owing rent for the rest of the year. Again, if you are working with such a company and it does not offer this, ask why and point to companies like Western National Property Management that do.
STUDENT LOAN A new company called BridgeSpan Financial will introduce a product called SafeStart sometime next week. In exchange for a one-time payment of $40 to $70 for every $1,000 you borrow, SafeStart will offer a five-year interest-free loan during the five years after you finish your degree. You can use this loan to make student loan payments if you experience economic hardship. Coverage will be available only for federal student loans, though BridgeSpan hopes to cover other loans eventually.
CAR Hyundai, through its Assurance program, continues to allow car buyers who take out loans when buying its cars to return the cars within a year if they lose their jobs, though there are some restrictions.
For any of these programs, you should ask: Is there a vesting period before I can collect? What about a separate waiting period after I become unemployed (as there was with PayCheck Guardian)? Can I keep the coverage forever, or only for a year or two? What sort of proof do you need of my unemployment? Am I ineligible if I am self-employed? Is it free, or must I pay a premium?
In many cases it will be free, since the property owner or car manufacturer will shoulder any risk or pay a third party to do so. After all, they want you to sign a lease or buy their vehicle.
For true paycheck replacement insurance to succeed, however, customers would probably have to pay for it out of their own pockets.
“The attention that the economic crisis has received probably raises the interest level and could raise the demand” for a product like this, Mr. Schmitz of Milliman said. “After a hurricane, people understand the value of insurance all the better.”
That’s for sure. But until insurance companies or others are willing to let you pay for an umbrella that shields you from the violent storms in the job market, you are stuck with insuring yourself with a plain old savings account.
Artical from google.com.