The Push for Deregulation.
For once, risk managers, insurers, agents and brokers seem to be, if not on the same page, at least in the same book. All agree that loosening constricting policy and rate approval requirements can benefit all of the parties to an insurance contract.
Currently, it can take as long as 18 months to get an insurance product approved on a nationwide basis, says Lee Covington, director of the Ohio Department of Insurance and chairman of a National Association of Insurance Commissioners committee working to develop improvements to state-based insurance regulations "That's not good for consumers. That's not good for insurers--it's not good for anybody," he says.
With less regulation on the front end, insurance companies can introduce policies more quickly, respond more effectively to the market and decrease compliance costs, Covington says. As a result, policyholders will benefit from increased insurer innovation, service and coverage options, he says. Finally, insurance regulators can reallocate resources to core responsibilities, Covington says.
"Today we need to take more resources from front-end review and spend them on activities that are core to the insurance contract," Covington says. "We want to use our limited resources for actions that provide the most value to consumers." Instead of spending the money and man-hours reviewing policy forms and rates up front, those resources would be better spent monitoring such activities as market conduct and sales practices, he says.
Another argument for reducing regulatory requirements is the sheer cost. Complying with rate and form filing requirements adds an estimated $40 million to $55 million to state budgets and $1 billion to insurance industry budgets, according to a 1997 NAIC white paper.
As insurer costs go down, so should the cost to policyholders. "I think it's logical to conclude that if there is a downward pressure on costs, that could translate to lower costs for policyholders as well," says Brenda O'Connor, director of public affairs for the American Insurance Association's Mid-Atlantic region.
Academic studies support that conclusion, Covington says. He pointed to a recent study that found lower rates in states that had a system of regulation leaning toward a competitive marketplace than in states that regulate rates on the front end.
Twenty-six jurisdictions have statutes that deregulate some aspect of commercial insurance. These jurisdictions include Arizona, Arkansas, Colorado, the District of Columbia, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia and Washington. (See chart on page 40.)
Some states--including Hawaii, Illinois, Michigan and Minnesota--do not require rate or form filings for most commercial policies. Other states exempt so-called "sophisticated" commercial insurance buyers based on premium thresholds and additional criteria, including net worth, net revenue or sales, number of employees, annual budget, population size, total insured property values, gross revenue, and use of an intermediary, risk manager, insurance consultant, or independent insurance advisor.
For example, New Jersey and Oklahoma have lenient premium thresholds of $10,000, while New Hampshire requires $500,000 in premiums or exemptions based on net worth, net revenue/sales, number of employees, use of a risk manager, and annual budget or population size.
Often, the most controversial deregulation issue is the exemption criteria. Some believe exemptions are necessary to protect "unsophisticated buyers."
"One potential downside (to deregulation) would be an instance where the standards for participation are so low that unsophisticated insurance consumers wouldn't be properly protected and would be negotiating at a disadvantage," says Daniel Barry, director of government affairs for the Risk and Insurance Management Society in New York.
Many insurers support low or no thresholds for participation. "We support a zero threshold in terms of premium so everyone can benefit," says AIA's O'Connor. Thresholds are not the only protection, she says. "If you have an agent, broker or risk manager within an organization, you have 100 percent consumer protection right there."
Plus, consumers still benefit from the presence of the insurance commissioners, O'Connor says. "Under almost all bills, the insurance commissioner maintains 100 percent regulatory authority."
National Standards Possible
Although insurers and policyholders support deregulation, such a piecemeal approach has left many playing catch up on changes in the various states they do business in. "As states have been implementing these laws, they've varied widely, which is problematic," says RIMS' Barry. "It's very fragmented and we would like a uniform standard."
Enter the NAIC's Speed-to-Market Plan, which the commissioners adopted at their winter meeting and are in the process of implementing. The NAIC says it is "reengineering and modernizing" regulation of commercial insurance lines. The national standards developed by the organization's Speed to Market Working Group continue where individual state-based deregulation initiatives left off by recommending decreased front-end regulatory requirements and improved operational efficiencies.
The main goal of the plan is to create a competitive marketplace for commercial lines while maintaining effective regulatory oversight, Covington says. The overall goal of the national standards--which must be implemented by each state--is to have all products approved and on the market within 30 days, Covington says. How? First, by implementing operational efficiencies, such as review checklists for insurers. Before Colorado's insurance department developed a checklist of statutory requirements, less than 20 percent of policies being filed conformed to state law, he says. After the state developed clear guidelines, 90 percent to 95 percent of the policies conformed.
The NAIC is also relying heavily on its System for Electronic Rate and Form Filing (SEREF). In February, the commissioners approved a $1.2 million budget for the electronic filing system, which Covington says should be implemented in 41 states by the end of this year.
Unlike the state initiatives--which set exemptions to form and rate filing regulations according to premium or perceived sophistication of the insurance buyer--the Speed to Market Plan identifies four regulatory frameworks and recommends how different products should be regulated. The four systems include no filing, information filing, file and use, and prior approval. In the Speed to Market plan, the subgroup recommends that states first determine whether the regulatory purposes of state law can be achieved under one of the other systems before imposing a prior approval filing system. (See sidebar on page 42 for an overview of the regulatory frameworks.)
"Having to have prior approval before forms can be used holds up everything," says Nicole Allen, director of state affairs for the Council of Insurance Agents & Brokers in Washington. Instead, regulators should review policies as a part of market conduct reviews, Allen says. "If there are problems, companies are going to complain.
"One of good things about the new NAIC initiative is the uniform approach, but we also don't want it to stop what states have been doing on their own," Allen says. Individual states and regions have different risks and, therefore, different concerns, she says. For example, coastal area markets are concerned about hurricanes, while California is more concerned about earthquakes.
The reliance on back-end monitoring concerns consumer groups, however. "I don't think they should let crummy products into the marketplace. It makes much more sense to do the monitoring on the front end," says Bob Hunter, director of insurance, Consumer Federation of America in Washington.
He is also concerned that smaller companies, who are perceived to be less sophisticated buyers, will not be protected under deregulation. "We're all for simplification, but we're opposed to broad deregulation," Hunter says. "Regulators shouldn't get in between large sophisticated buyers and sophisticated seller. But I don't think they make enough differentiation between small and large commercial accounts."
"The NAIC is falling all over themselves to deregulate as a way to keep insurers from supporting federal regulation. Consumers don't care who regulates. What they care about is the quality of the regulation," Hunter says.
In the end, a federal regulatory system may not be out of the question if the NAIC fails to reach its goals, says the Council of Insurance Agents & Brokers' Allen. In fact, she points to the creation of the National Association of Registered Agents and Brokers as evidence of congressional willingness to intervene in the historically state-run insurance oversight. Congress gave the industry an ultimatum: three years to achieve reciprocity or a uniform licensing law or else a federal organization would be created.
"This is the time to move forward and if (the NAIC) is not prepared to move forward, there are people who are," Allen says. "If they can't get there, the federal option may come into existence."
States That Have Deregulated Commercial Insurance STATE PREMIUM THRESHOLD, EFFECTIVE DATE IF ANY Arizona None: "industrial insurance" is exempt 8/21/98 from form filing requirements and industrial insureds may enter into consent-to-rate arrangements. Arkansas $250,000 for rate and form deregulation. 7/30/99 Colorado Currently: $50,000. Instead of a 1/15/00 statutory minimum premimum, insurance commissioner defines terms of exemption from rate and form deregulation through rules. Georgia $100,000 in GA or $500,000 in multistate 1/11/99 operations for rate deregulation. Hawaii None for forms. Illinois Rate filings are not statutorily required. Indiana No statutory provision for forms. 5/13/99 $75,000 threshold for rate deregulation. Kansas Rates: property premiums of $50,000, 7/1/99 general liability premiums of $50,000, or annual multiple lines premiums of at least $100,000. Kentucky Rates: annual aggregate insurance 7/14/00 premiums of $500,000. Louisiana $200,000 for form deregulation. Set by 4/1/00 insurance commissioner. Review of threshold in one year. Maryland $75,000 for form deregulation. Workers' 10/1/2000 comp not exempt from form filing. Maine Four-year phase down for rate and form 9/18/99 deregulation: 2000: $90,000 2001: $75,000 2002: $60,000 2003: $50,000 Michigan Most forms exempt from regulation. Minnesota None - for rate and form deregulation. Missouri $50,000 for rate and form deregulation. 8/28/99 Nebraska Threshold to be established by rule - 1/1/01 for rate and form deregulation. New Hampshire $500,000 for rate and form deregulation. 8/25/98 New Jersey $10,000 for rate and form deregulation. 1995 Oklahoma $10,000 for rate deregulation. 11/1/99 Pennsylvania $25,000 for rate and form deregulation. 12/98 to 2/99 Rhode Island $150,000 for rate and form deregulation. 6/18/99 South Carolina $50,000 for rate and form deregulation. 3/7/00 Texas $25,000 property premium, $25,000 for 9/1/95 general liability premium, or $50,000 for multi-peril insurance -- for form deregulation. Virginia $250,000 on workers' comp large 7/1/99 for workers' comp; deductible plans - rate deregulation. 7/1/00 for commercial $100,000 on large commercial insureds - deregulation rate and form deregulation. Washington $25,000 for rate deregulation, 11/15/99 accomplished by regulation. STATE ADDITIONAL CRITERIA FOR EXEMPTION EFFECTIVE DATE Arizona 8/21/98 Arkansas Number of full-time employees; full-time 7/30/99 certified risk manager. Also, consent to rate forms and "A" rated risks. Colorado Rules may include: use of risk manager, 1/15/00 aggregate premiums, net worth, net revenues, number of employees, annual budget for nonprofit, minimum population for a municipality. Georgia Number of employees, asset size, 1/11/99 revenues. Hawaii Illinois Indiana Rate deregulation: number of full-time 5/13/99 employees, net worth, net revenue or sales, size of annual budget, use of a risk manager. Insured property value, annual gross revenues. Kansas 7/1/99 Kentucky Use of an intermediary, risk manager or 7/14/00 insurance consultant, population, annual budget, assets, net worth, net revenue/ sales, number of employees. Louisiana 4/1/00 Maryland Annual revenues; net worth; number of 10/1/2000 full-time employees; annual budget; population size. Maine Use of risk manager, net worth, net 9/18/99 revenue or sales, number of employees, size of annual budget (non-profits), minimum population size for municipality. Michigan Minnesota Missouri Use of independent insurance advisor, 8/28/99 number of employees, net worth, net revenue/sales, size of budget, population size for municipalities. Nebraska 1/1/01 New Hampshire Net worth, net revenue/sales, number of 8/25/98 employees, use of a risk manager, annual budget, population size. New Jersey 1995 Oklahoma 11/1/99 Pennsylvania Number of employees. 12/98 to 2/99 Rhode Island Use of a risk manager, net worth, net 6/18/99 revenues/sales, number of employees, size of budget (for nonprofit), size of population. South Carolina 3/7/00 Texas Total insured property values, annual 9/1/95 gross revenues. Virginia Net worth, annual revenues, number of 7/1/99 for workers' comp; employees, annual budget, population 7/1/00 for commercial size. deregulation Washington 11/15/99 Source: American Insurance Association, Washington.
A Framework for National Regulation
The National Association of Insurance Commissioners in Washington Speed to Market Plan identifies four regulatory frameworks and recommends how different insurance products should be regulated. The four systems include no filing, information filing, file and use, and prior approval.
Under a no filing regulatory framework, insurers are not required to file any information with the regulator to introduce a product to market, but regulators may request information to ensure compliance with statutory requirements. The Speed to Market plan recommends the following products be regulated under a no filing system: financial guaranty, aviation, ocean marine, employment practices liability, commercial inland marine (not written according to manual rates or rating plans), directors' and officers', boiler and machinery, nuclear insurance products, commercial credit insurance, manuscript policy forms, "A" rated and consent to rate risks, and products sold to exempt commercial policyholders.
Under an information filing system, insurers must file for informational purposes the rates, rating manual, policy forms and an explanatory memorandum of new products or revisions to existing products. The regulator may ask for additional information and review the filing during the market conduct process. Information filings are appropriate for all commercial lines, except those listed under other categories, workers' compensation, and "me-too" filings.
Insurers must file rates, rating manuals, supporting actuarial information and policy forms before use under the file and use system. The regulator generally reviews individual filings for compliance based on discretion. In a competitive market, the Speed to Market subgroup recommends Information Filing for workers' compensation, mortgage guaranty insurance, reference to other insurers' filings, and advisory organization filings.
Under the final regulatory framework--prior approval--regulators must formally approve all rates, rating manuals, supporting information and policy forms. This system is appropriate for title insurance, mortgage guaranty insurance, filings for residual market mechanisms, advisory organization filings, and products where the commissioner makes a formal finding that a competitive market does not exist for the line of business, subject to subsequent review of the market to determine whether competition returns to the market. The subgroup recommends that states first determine whether the regulatory purposes of state law can be achieved under a file and use system before imposing a prior approval filing system.
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|Author:||STIPE, SUZANNE E.|
|Publication:||Risk & Insurance|
|Date:||Apr 16, 2001|
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