Risk-Based Capital, Scoring Will Highlight NAIC Meeting

September 8, 2003

The Alliance of American Insurers says proposals to increase capital requirements for insurers and to study the alleged disparate impact of credit-based insurance scoring will likely stir heated debate at the upcoming Fall Meeting of the National Association of Insurance Commissioners (NAIC).

Some regulators have proposed increasing the level of required risk-based capital for insurers as a means of preventing the likelihood of financial problems leading to insolvency, said Roger Kenney, associate vice president of research at the Alliance.

“The bottom-line impact of this could mean that 150-200 insurers in the country, many of them highly rated by the various rating agencies, would have to increase their capital levels significantly,” said Kenney. “This could require them to raise somewhere in the neighborhood of $40 billion in capital, which is an unrealistic expectation in today’s insurance market environment. Last year, only $17 billion in new capital became available and that was a record. To require the industry to attract $40 billion is totally unrealistic.”

Kenney said the NAIC would be wise to forget such a drastic approach and instead adopt other methods to detect pending financial problems for insurers under their oversight. A more thorough analysis of existing data and financial information and an analysis of trends over time would paint a clearer picture of a company’s situation without requiring them to raise more capital.

A proposal to conduct a study of alleged disparate impact on minorities and ethnic groups because of insurers’ use of credit-based insurance scores should also be tossed, said Alliance Policy Manager Lynn Knauf.

“This is nothing more than an effort by a few regulators who are opposed to the use of credit-based insurance scores to create a study that will reach only one conclusion, the one they’ve already reached,” Knauf said. “The regulators can’t, or simply won’t accept the unbiased studies that have shown a clear correlation between insurance scores and risk of loss. Instead, they insist on a study that, if it were conducted by the industry, would be condemned from the start. Insurers don’t have information on the race, ethnicity, or income of individual policyholders. Federal law prohibits using that information when credit is considered. But these commissioners are listening to their consumer advocates who are always convinced there is a conspiracy around every corner.”

The Alliance is urging the NAIC to reject the proposed study and accept the use of credit-based insurance scores as one of the factors in underwriting and rating auto and homeowners policies.

Other issues likely to generate discussion at the Chicago meeting of the NAIC Sept. 13-16, include market conduct and regulatory modernization efforts.

“There’s no lack of plans to modernize market conduct regulation,” said Lenore Marema, vice president of legal and regulatory affairs at the Alliance. “Both the NAIC and the National Council of Insurance Legislators (NCOIL) have a full agenda, but there are differences in the NCOIL and NAIC agendas. In some cases they can be coordinated, but in other cases they appear to be headed in conflicting directions.

“There is a role for both state regulators and legislators in modernizing state regulation in this and all other areas. NAIC and NCOIL need to work together and to set common priorities for reform among their respective agendas so that the ideas and projects for which there is broad consensus proceed and something gets done.

“Right now, the market conduct agenda is being tugged in too many directions. Regulators and legislators both need to understand that bringing in contract examiners and consultants with a profit motive may exacerbate the problems, as well as add significant costs to the industry. What an insurer spends on ‘outsider’ auditors should not be the test of its compliance with states laws or the litmus test of its marketplace behavior.”

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