Pa.’s Insurance Chief Koken Performs Balancing Act at Home and On the Road for NAIC

By | February 16, 2005

The nickname probably won’t be showing up anytime soon on the state’s license plates but Pennsylvania could be the Land of Stable Insurance Markets.

Not that things are perfect but, according to Insurance Commissioner Diane Koken, things are in pretty good shape.

“I think we take a very balanced approach,” Koken explained of her department’s attitude in a recent interview with Insurance Journal.

“As commissioners, we have to balance all aspects. If we make insurance too cheap, no company will write it. If it’s too expensive, consumers won’t be able to afford it. So it’s constantly balancing solvency versus affordability.”

That approach has helped Pennsylvania maintain competitive prices with hundreds of insurers competing for auto, homeowners and workers’ compensation business. Even in medical malpractice, where most states find troubles, a surge in risk retention groups is sparking renewed competition in the state.

“Our auto insurance market is very healthy,” Koken boasts, pointing to the state’s success with a limited tort policy and a slew of recent and planned rate reductions as proof.

A recent department analysis confirmed that the existing 40 percent cost differential between full and limited tort electors was still appropriate for bodily injury, first party benefits and uninsured/underinsured motorist coverages. According to officials, about 60 percent of motorists choose the less expensive tort option, with an even higher percentage in urban areas doing so.

The same department analysis looked at territorial rates and practices of insurers and found that current geographic ratings are in keeping with historical premium and loss experience and there are no “systemic inappropriate geographic rating disparities.” At the same time, the data indicated that loss experience in urban areas is improving. The department is using the study as it reviews rate filings. Thus far, insurers including Progressive, Allstate, State Farm and Erie have agreed to pass along some $120 million in premium savings to drivers, many in urban neighborhoods, over the next few months.

The Pennsylvania workers’ compensation market has experienced several years of modest fluctuations in loss costs recently, a trend that looks like it will continue. The Pennsylvania Compensation Rating Bureau has recommended that loss costs be reduced an average 2.89 percent effective April 1. Last April, the department approved PCRB’s filing for a 3 percent rise.

Koken credits past legal reforms for much of the stability in the workers’ compensation marketplace, which boasts about 300 active insurers. In July 1993, the state approved caps on medical fees, new methods of resolution for medical fee disputes, and peer review of medical treatments. While rates have been about even for the past few years, an extended review paints a different picture. Since the 1993 reforms, Koken said, loss costs are 15 percent below what they were 12 years ago. “So the reforms have worked,” she concluded.

Pennsylvania has not been immune to the controversies over medical malpractice insurance and the effect of rising premiums. Its response has been to try to put some reforms into effect while providing doctors with financial assistance and relying on market forces.

In December, Gov. Ed Rendell signed legislation extending the Medical Care Availability and Reduction of Error (Mcare) Fund abatement program through 2005. Mcare provides from $500,000 to $1 million of malpractice insurance for obstetricians, neurosurgeons, other high-risk surgeons and nurse midwives.

“By helping these providers with the cost of their malpractice insurance, we hope to keep them practicing in Pennsylvania until malpractice reforms undertaken by the Supreme Court, the legislature and the administrative branch have a chance to take effect,” Rendell said.

To date, the 2003 Abatement Program has provided $211,350,525 in financial relief. The deadline for the 2004 abatement application is Feb. 15, 2005.

Gov. Rendell has proposed longer-term reforms as well, including patient safety initiatives, a cap on lawyers’ fees, giving judges more power to limit runaway awards and mandatory mediation as an alternative to the courts. Several proposals that can be implemented by the administration or the judicial branch are under way. Others that require legislative approval have been hung up, largely over the issue of the capping of damage awards.

While Mcare deals with costs temporarily, Koken sees other trends as hopeful signs for the longer-term, including a slowing in the rate of premium increases (“but current premiums are still too high,” she adds), a reduction in the number and cost of claims, and the introduction into the picture of new risk retention groups. The most recently approved is the Northeast Physician Risk Retention Group for physicians and surgeons in northeastern Pennsylvania.

As balanced as Koken believes her department’s approach has been, she also believes it could still use a stronger consumer voice within its halls. The department already has a consumer services unit and three offices around the state where personnel handle incoming calls and complaints. In addition, Koken now has a new consumer liaison reporting directly to her, someone who can help the department be proactive in identifying consumer concerns. “We believe it will be helpful to have a unit to go out, set up advisory groups of consumers and get more input and more involvement from consumers … I wanted this person to report directly to me and be involved in meetings and policy development and education.”

Gov. Rendell appointed Cindy Fillman to the new position. A graduate of Muhlenburg College and Widener University School of Law, Fillman most recently served as an attorney in the governor’s office.

While the new liaison position elevates consumer issues at the department, the other side of the balancing equation, insurer solvency, remains a serious matter in Pennsylvania, where the Reliance and Legion cases are among the liquidations still in progress. Koken says her department will continue to “aggressively” pursue asset recovery and reinsurance as it “works for the interest of consumers” in these high-profile cases.

While attention is naturally focused on the companies that failed, there is an aspect of solvency regulation Koken thinks is overlooked. “Since I’ve been here we’ve had 50 companies in financial difficulty that we’ve worked with and help turn them around. But the public never hears about those.”

In addition to balancing the interests within Pennsylvania’s own insurance markets, Insurance Commissioner Diane Koken must balance that job with being president of the organization of all state insurance commissioners, the National Association of Insurance Commissioners.

She assumed the NAIC presidency shortly before the Spitzer charges over bid rigging, account steering and contingent fees were first aired and, since then, much of her own and NAIC’s efforts have been focused on that controversy.

The NAIC has developed a model act calling for disclosure of all contingent fee agreements, a model that many in the industry have criticized as too broad and sweeping in its requirements.

She is troubled by suggestions that the compensation disclosure requirements the NAIC has recommended for agents and brokers are too broad. “I have a bias toward disclosure and transparency,” Koken said, adding, “I’m puzzled why disclosure and transparency are considered harmful.”

At the same time, she is willing to acknowledge there are differences between so-called Main Street independent agencies and the large commercial Wall Street agencies. “I understand they are different and that Main Street agents are in much more competitive situations with consumers and must compete on a daily basis. But how do you define the difference between these agents and others in a meaningful way?” she asked.

This is an edited version of a story that can be found in the February 7, 2005 edition of Insurance Journal East.

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