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Short witness list produces time for debate: dept. defends flex-rating.

The New York Insurance Department, given a rare opportunity to engage in philosophical argument, did so with the three insurance representatives who testified on December 17 as to whether the state's flex-rating system should continue.

Usually, the department is faced with a long list of witnesses, necessitating a tight rein on speakers and a reliance on testimony summarization This time, however, Deputy Superintendent Richard Hsia. and division chiefs John Reiersen and Henry Lauer had the time to engage in a colloquy with the witnesses, two of whom represented state agents' associations while the third was from the Alliance of American Insurers.

Flex-rating. implemented by the department's Regulation 129, permits insurance companies to revise their rates upwards or downwards within defined flex-bands upon filing such rates with the Insurance Department. To go above or below these boundaries, prior approval from the Superintendent must be obtained. The flex-rating system was contained in omnibus legislation enacted in 1986, when the state was looking for ways to restore some stability to the liability insurance market in New York.


In a nutshell, both the Independent Insurance Agents Association of New York and the Professional Insurance Association of New York want flex-rating to continue, with some minor changes. The alliance doesn't want flex-rating to continue, but if it must continue then the alliance believes it should be with more substantive changes. The department thinks flex-rating might need some minor fine-tuning, but otherwise that it is a much better system than prior approval or open, competitive rating.

The first witness, IIAANY past president Frank Reidman. reported the concerns of his association's membership that the "basic flaw in the concept of flex-rating is the absence of a common benchmark of rates from which one can monitor the deviations." Pie called the concept a "valiant but simplistic approach to a very complicated rate-making process."

He said flex-rating was incompatible with ISO's Simplification Program. "Add to this the fact that some companies have implemented the program while others have not, and the end result is absolute chaos in the marketing of commercial lines accounts," said Reidman.

Richard Hsia admitted that the department "didn't give enough thought as to how insurers can deal with ISO simplification vis-a-vis flex-rating," but disagreed with IIAANY's contention that the "small businessman is being hurt the most, since premium credits cannot be applied to accounts which generate less than $3,500 in premium."

New York, said Hsia, wants to "enhance the ability of small business to do business. We believe that can be accomplished under flex-rating." The $3,500 threshold, he explained, was designed to be a "credible benchmark." If the amount of premium falls below that level, there is "no credibility to adjusting credits under the typical rating plan," said Hsia. To the department, the threshold is not a barrier and risks of $3,500 and under should not be turned away by insurance companies that think the risk is too small for a scheduled credit. Hsia acknowledged that "'maybe we can amend the regulation to clearly state that." Reidman said that would be "helpful" in keeping the companies from "shooting themselves in the foot."

The department was also very interested in alleged company violations of flex-rating While Reidman suggested how a company could get around the regulation, he did mot name names.

"It is naive to think the average producer will report an alleged violation--certainly not the producer who wrote the account," the IIAANY executive stated. "Nor will the producer who lost the account, since he or she hopes to get back the account upon expiration and would do nothing to upset the insured in the interim.

"We don't feel it is our responsibility to monitor the marketplace--the department should not promulgate regulations it cannot enforce. We have adopted the philosophy of 'Do unto others before they do it to you.'"

Chief Examiner John Reiersen noted that the producers who lost accounts due to under-pricing have been reporting violations by calling the department's hotline. He insisted that flex-rating was "not to be used as a pricing tool but to reflect the individual characteristics of the risk."

Reidman responded that the problem with the producer calling the department about violations is that the producer is usually not sure if there has been a violation or not. "We don't know the competition's rating plan," he noted.

Hsia, in turn, said that since all rates have to he filed and approved by the Insurance Department, the rates are on file. Anytime a producer is not sure of a violation, he or she only has to pick up the phone and ask a question, according to Hsia. Since the department does approve rates above or below 25 percent, depending on the risk. "just because the premium is beyond the flex band" doesn't mean the company is in violation of Regulation 129.

Reidman reiterated that the department "has to be the prime mover of enforcement rather than the agent," adding that it "takes a lot of time to do this checking" and that producers who "complain too loudly" will not be looked on with too much favor by their carriers. The regulators got the last word on this subject when Hsia noted that while the department "tried to make it as easy as possible" for doubters to doublecheck the companies, "we can't force people to pick up the phone."

Reidman told the regulators that the market is softening, but added the Insurance Department must be more concerned with company increases in rates rather than decreases in rates. "It is harder to control the upside than the downside," he explained.

"Neither prior approval with its rigidity nor its opposite, open and competitive rating with its flaccidity had enough discipline," Hsia stated. "There are dangers and vices quite apart from insolvency" which worry the department regarding decreasing premiums. Wide fluctuations--either up or down--are "intolerable, and won't be tolerated again," he warned.

Henry Lauer, head of the Property/Casualty Bureau, got a big laugh when he suggested that IIAANY seemed to be asking for a return to prior approval "because you can't cope with competition."

Reidman, a smile on his face, responded that he hadn't meant to give that impression because the producers "don't want to go back to that." The philosophy of flex-rating is "excellent," he staled, but "it's difficult to see that it will be followed. There [are] lots of 'tricks of the trade' a company can use. The more you know, the better you are able to compete. I don't want to go back to prior approval. It's no fun."

If the industry was expecting flex-rating to be a limited experiment, it could put those expectations on hold after John Reiersen stressed that it was going to take more than t5 months to evaluate whether flex-rating would work, "it's gonna take 10 years." This is despite a 150 percent increase in staff, which Hsia predicted would he "driving companies crazy looking over their plans."

The purpose of this hearing, said Hsia, was to "be abreast of developments" in the industry regarding pricing, and to catch companies either pricing too high or cutting too low "before it becomes a case of too little too late." While the department has the responsibility to enforce the law, he added, the producers have the obligation to watch for--and report--violations.

Like IIAANY, PIANY was in favor of the flex-rating system, and called for a lower threshold for credits.

"We feel that by not allowing credits to be applied to policies generating less than $2,500 in basic limits premium, or $3,500 if a package policy, the rules discriminate against the smaller insured," said Daniel Benerofe, president of PIANY. "We suggest a lower figure, in the neighborhood of $1,000--$1,500 for commercial auto; $750 for BOPs."

He also suggested closing a loophole which he said "works to the advantage of large carriers which maintain a fleet of individual companies writing comparable business at various filed rates.

"By moving a risk from company to company within the corporate group, such carriers can circumvent the spirit of the flex-rating program. This ability puts smaller, regional carriers at a competitive disadvantage. We suggest that the rate variations among the different companies, which constitute a group, be scrutinized, and perhaps held to a maximum percentage differential, unless wider variation is specifically justified."

Reiersen told Benerofe that if his association members see a company using that loophole, "call us. We want to conduct a market conduct investigation.'" Hsia asked Benerofe if he could name any violators. The PIANY president did not name any companies, but did say that in an informal poll conducted of association board members, more violations stemmed from under-pricing rather than over-pricing.

Although many company representatives were in the audience, John Cucci, eastern regional manager for the Alliance of American Insurers, was the only one to give a company view directly to the department.


Cucci disputed those who look to flex-rating as "'the solution to future insurance 'crises,'" saying that this "experimental system of price controls" has the potential of "imposing certain caps on needed rate changes or at least delaying their implementation, which may exacerbate the availability of insurance.

"With less ability to respond to increasing liability exposures, deteriorating loss experience and increased expenses, insurers may be reluctant to provide certain insurance coverages. If rates are set too low to cover costs, insurers may possibly stop offering these unprofitable lines of insurance."

The insurer organization suggested that if flex-rating is renewed--the Alliance wants a return to competitive rating--bands should provide for increases reflected in the Consumer Price Index and should take territorial variations into account. Also, the alliance wants a company's rating to be subject to the department's prior approval only if the premium is above 25 percent--in other words, no prior approval for company price-cutting.

Cucci also questioned "whether flex rates can really work to moderate "A" rates in a soft market. The insurer which now writes renewal business is subject to the flex band but competitors wanting to woo that business away are not. The renewing insurer must then make a 'prior approval' filing to deviate more than the band allows In this respect the flex-rate law does not meet the demanding criteria of protecting against delay or monitoring downward fluctuations." Hsia responded that the department would not exempt the "A" rates.

In written testimony submitted for the record, Cucci compared flex-rating to another "noble experiment," the Prohibition (18th) amendment to the Constitution, and expressed his hope that "the cure will not be worse than the disease."
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Title Annotation:LOOKING BACK ... Insurance Advocate, 25 years ago
Author:Beller, Margo D.
Publication:Insurance Advocate
Date:Jan 7, 2013
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