Under the Gun, NAIC Recommits to Modernization

By | October 6, 2003

In response to congressional pressure to more effectively regulate insurance at the state level or face federalization, the National Association of Insurance Commissioners (NAIC) unanimously passed its revised statement of intent, which calls for states to enact a broad range of modernization reforms by the end of 2008.

The document, “A Reinforced Commitment: Insurance Regulatory Modernization Action Plan,” is a revised version of a similar document passed by the NAIC in 2000, and was one of a number of items voted on by the commissioners at the opening session of the group’s fall meeting at the Chicago Hilton & Towers Sept. 13-16. The NAIC also delayed proposed moves to raise insurers’ risk-based capital requirements and study the alleged racially disproportionate impact of credit-based insurance scoring.

The statement of intent is specifically designed, NAIC president Mike Pickens (Arkansas) said at the meeting, as a “calling card to demonstrate to federal legislators that we are taking the lead in the effort to make [insurance regulation] less costly, more efficient while protecting consumers. This is not a document intended for regulators or the industry, but for federal legislators.”

U.S. Rep. Michael Oxley (R-Ohio) and U.S. Sen. Ben Nelson (D-Neb.), a former insurance commissioner, had both told the NAIC to speed up implementation of rules to make state-based regulations of insurance more uniform and more friendly to competition. State governments stand to lose an estimated $12 billion in revenues from premium taxes and other fees if regulation of insurance is moved to the federal level.

One major goal of the plan is to achieve uniform standards for market analysis, market conduct, producer and company licensing as well as providing the electronic tools, such as the System for Electronic Rate and Form Filing (SERFF), necessary to improve the speed to market for new insurance products.

On producer licensing, the plan calls for the development of a single uniform application across the states, implementation of an electronic filing/appointment system and an electronic fingerprint system. The plan also calls for having the National Insurance Producer Registry (NIPR) fully installed across the states by the end of 2006. Eighteen states participate in the registry now.

Under the plan, information on “nationally significant insurers”—property/casualty companies with $50 million or more in premium volume licensed in five or more states, or $30 million-plus volume and licensed 17-plus states—would be shared by all the states with examinations by non-domestic states eliminated. The plan also calls for speeding up mergers and acquisitions by designating a lead state in a multi-domestic state transaction to coordinate the regulatory oversight.

Industry representatives responded positively to the plan
“The re-vised version is more of a political document than any new statement or shift of philosophy and policy,” Lenore S. Marema, a policy analyst with the Alliance of American Insurers, said in a statement. “It is a recognition of all the new commissioners that came into office since the Nov. 2002 elections and the need for the new commissioners to buy into the regulatory modernization agenda and carry it out as their own in order for progress to be made.”

Whether all of the outlined reforms will be implemented by 2008 remains very much an open question. Before voting to approve the plan, for example, a representative for the California Insurance Department asked whether a vote implied endorsement of all the policies in the statement. Marema noted that Delaware also expressed reservations about some of the plan’s policy points.

Golden State regulators have expressed unwillingness to relinquish their role in market conduct and market analysis reviews of non-domestic insurers. Ultimately, California voted in favor of the plan in spite of the department’s reservations.

“I don’t think California was saying what everyone else is thinking,” said Bob Zeman, a lobbyist for the National Association of Independent Insurers (NAII), an industry trade group. “Few commissioners here think that way. Most understand the need for reform.”

Move to raise capital requirements delayed
In other news, a proposal to increase from 50 percent to 75 percent the authorized control level risk-based capital (RBC) factor earned across-the-board disapproval from industry representatives and was tabled for the time being by an ad hoc group of the NAIC’s Risk Based Capital Task Force.

The RBC formula was developed in conjunction with the industry in the early 1990s to replace the static capital requirements many believed were inadequate because they didn’t adjust with the volume of an insurer’s business. After the failure of Legion Insurance Co., Reliance Insurance Co. and others in recent years, some insurance regulators have proposed beefing up the RBC requirements to move more insurers into the company action level, in which regulators have wide latitude to take control of a company and steer it away from a possible insolvency.

“We need to get more companies into the company action level so we have the authority to regulate and put them back on the right track,” said Steve Johnson, a regulator with the Pennsylvania Insurance Department who has spearheaded the proposal and said he believes 3.4 to 4 percent of companies at an action level is too small.

“We need something to wake up the management and the board so they have to give concrete explanations to us of what their problems are and what they’re going to do fix them,” Johnson said at the ad hoc group’s hearing.

Industry representatives objected that the new requirements would go after the wrong targets and raise the cost of capital for the industry as a whole. A coalition of property/casualty insurance trade groups estimated that $43.5 billion in new capital would be needed to get all companies at 250 percent above the authorized control level (ACL), considered necessary because of the possibility of catastrophic losses suddenly diminishing reserves.

A study by Wendy Germani of the Texas Insurance Department estimated that only $35 billion more in capital would need to be raised to keep insurers above the ACL.

“All of the trade associations are opposed to this proposal because it’s just too broad,” said Phillip Carlson, senior counsel on financial reporting for the American Insurance Association (AIA). “Eleven percent of the industry would be below these new minimum capital levels. We just don’t think that’s the truth about this industry.”

Disparate impact study tabled
Meanwhile, a proposal to study the possible disparate impact of the use of credit-based insurance scoring was tabled after vehement opposition from insurance lobbying groups.

The proposed study was “the subject of many public and private discussions,” admitted Oregon Insurance Administrator Joel Ario, co-chair of the NAIC Credit Scoring Working Group that decided to seek further legal advice on the matter and allow states to go ahead with their own studies apart from the NAIC.

“We’re not saying the study should not happen,” Ario said at a meeting of the working group. “We’re saying it should not happen right now.”

The Texas Legislature has ordered its Insurance Department to conduct a study on credit-based insurance scoring’s impact on minorities in the Lone Star state. Another member of the working group proposed a collaborative study by states in a “coalition of the willing.”

All the property/casualty insurance trade groups objected to the study on legal, methodological and public policy grounds and called the decision a win for consumers. Interestingly, so did at least one consumer representative.

“By putting the NAIC study in the background, this helps consumers by taking away a bogus platform from insurers who were using that study to throw out these so-called legal analyses,” said Birny Birnbaum, executive director of the Austin, Texas-based Center for Economic Justice.

“This ends the laborious debate over the issue at NAIC, and it’s now clear a number of states intend to do studies and now they can go ahead and do that without having to deal with these delaying tactics at NAIC,” said Birnbaum, whose registration fee is waived and whose lodging and travel expenses to the meeting are reimbursed by the NAIC under a special program to encourage consumer participation.

“It’s much more difficult to do anything through the NAIC unless there’s near unanimity,” admitted Washington Commissioner Mike Kreidler, co-chair of the working group. Ario claimed that a disproportionate impact study could be conducted through a state insurance department’s legal authority to prevent unfairly discriminatory insurance practices, though he admitted that such an effort would face just as much industry opposition as an NAIC-sponsored study.

Testifying at the working group’s hearing on behalf of the industry was former Illinois Insurance Director Nat Shapo, now a partner in the law firm of Sonnenschein Nath & Rosenthal. The crux of Shapo’s case to the working group was his contention that the alleged disparate impact of insurance scoring was an invalid subject for an NAIC study because it is “not the default rule for evaluating discrimination in the federal courts. Under Washington v. Davis, the Supreme Court ordinarily requires a showing of intentional discrimination to establish a civil rights violation.”

It would be impossible for insurers to be using insurance scoring to intentionally discriminate, Shapo contended, because they do not collect information about insureds’ racial or ethnic backgrounds.

Study proponents, including Birnbaum, disagreed.

“Every state prohibits discrimination on the basis of race, religion and national origin,” Birnbaum said via e-mail. “It is both relevant and necessary to examine whether credit scoring, as used by insurers, is a proxy for these prohibited factors. We are not enforcing existing unfair discrimination laws if we allow proxies for prohibited factors.”

In a legal memo to the working group, Shapo claimed that a public policy questioning an actuarially justified underwriting criterion such as credit scoring because of its disparate impact would call into question any criterion with such an unintended effect.

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Insurance Journal West October 6, 2003
October 6, 2003
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