South Carolina Insurance Chief Faults Legislative Audit of Department

A report by the auditing arm of the South Carolina Legislature has concluded that the state insurance department overall does a good job regulating insurance companies and their rates but it could do a better job of documenting its decisions and procedures.

The report by the Legislative Audit Council (LAC) suggests that because certain documentation is lacking, it’s difficult to know if some of the insurance department’s decisions have been right or wrong.

The report, covering fiscal years 2005 through 2007 and some earlier dates, said the Department of Insurance (DOI) “generally regulates the insurance industry appropriately,” but found areas where it says “improvement is needed to ensure that the department, the insurance industry, and the public are aware of possible problems and issues.”

But Insurance Director Scott Richardson, who was named to the post in 2007, has criticized the report, claiming it does not put matters into proper timeframe or context and leaves the impression that issues cited are more pervasive than they really are. He says many of the documents the auditors wanted are not required since the state deregulated some insurance rates and that their absence should not be interpreted to mean that DOI’s reviews or analyses have been inadequate.

Richardson told Insurance Journal that his department accepts that it “can always do better,” but that this report is “unfair to our employees.”

Workers’ Compensation
The audit is most critical in the workers’ compensation area and this is where, according to DOI, it is also most flawed.

The audit found fault with the workers’ compensation recordkeeping, claiming that 73 (or 97%) of 75 of the rate filings auditors reviewed had missing information. Also, the report found that since there was no summary document or checklist in each filing, it was difficult to determine what, if any, analysis was conducted by the department.

However, Richardson and the department claim this is “misleading and inaccurate” and that the auditors themselves acknowledge that more than half (55%) of these filings were between June 2003 and June 2007, a period of deregulation when insurers were exempt from filing documentation.

In the remaining cases, the missing documentation typically amounted to a checklist, which DOI has since implemented, according to Richardson.

The report notes that workers’ compensation insurance companies have been allowed to use any year’s loss cost data when calculating workers’ compensation rates and recommends that state law should be amended to require insurers to use the most recently approved loss cost data when calculating rates.

According to Richardson, the DOI already requires carriers to use the most current loss cost information even though it is not required by law. Also, he said, his department raised this issue with LAC and, in 2008 his department wrote and submitted legislation to change the law.

In June 2007, the General Assembly passed legislation that again required workers’ compensation insurers to file their loss costs and made DOI responsible for approving loss cost multipliers and manual classification rates.

Property Insurance
In the regulation of coastal property insurance, auditors found that nine (25%) of 36 filings reviewed had no evidence of DOI’s review or an explanation of its decision. Once again, the DOI says its analysts did in fact review all of the necessary information even though there was no supporting checklist with the file.

The audit notes that DOI required further information from companies that requested rate increases when the department was not convinced that the increased rates should be approved. DOI also required companies to lower the percentage of some requested rate increases and denied some rate increases when they would have been excessive or inappropriate.

The report acknowledges that DOI’s documentation of its review of filings has been improved in the past few years by using the electronic system SERFF (System for Electronic Rate and Form Filing) developed by the National Association of Insurance Commissioners ( NAIC).

After reviewing how the South Carolina Wind and Hail Underwriting Association (SCWHUA) operates, the LAC auditors recommended that this insurer should include procedures in its plan of operation for how it buys reinsurance, as the law requires. These procedures should include better use of evaluation criteria to make the process more open and objective, the audit said.

J. Smith Harrison, Jr., executive director of SCHUA, told LAC that his organization has an “open and competitive” request-for-proposal process for buying reinsurance and choosing a reinsurance broker and its omission from the written plan of operations is an oversight that will be corrected.

Also in the coastal insurance area, the report urges the department to continue to evaluate hurricane models for South Carolina “to ensure that the rates charged by insurers are appropriate.” These models are used by insurers to predict the likelihood, frequency, and severity of future hurricanes for different coastal regions.

Unlike Florida, South Carolina has not developed a hurricane model specifically for insurers in its state. While three models were filed with the department, no model was ever approved as a South Carolina-specific model.

DOI says it has been monitoring Florida’s hurricane model to see if aspects can be incorporated in South Carolina and appointed a panel of experts to review models for use in South Carolina.

Financial Solvency, Other Lines Regulation
For life, health and automobile insurance, the audit found that most procedures and documents regarding rate changes were adequate.

The auditors assessed whether the DOI’s financial analysis division is ensuring that insurance companies comply with South Carolina law and National Association of Insurance Commissioners’ (NAIC) guidelines. Overall, they found that the files contained adequate documentation to establish that desk audits had been conducted on schedule and in accordance with South Carolina laws and NAIC regulations.

However, the report raised one area of concern. None of the samples studied indicated that the risk-based capital (RBC) ratio had been reconciled between the company’s annual statement and the NAIC calculations, according to LAC.

But DOI notes that its software automatically reconciles the RBC ratio and this is subsequently verified by the NAIC.

Captive Insurance
Finally, LAC reviewed DOI’s regulation of captive insurance companies. As of September 2008, the department had licensed 197 captive insurance companies. Thirty-three of those captives were no longer licensed due to a variety of reasons. The report found that generally the department’s licensing and examinations of captives complies with state law and regulations.

It did, however, cite a few problems in the captive area, including what is said was a failure to collect all required information from captives, a failure to complete all examinations of captives within the three year period required by law, and a lack of standard procedures for conducting the financial examinations of captives that are not risk retention groups.

DOI said that some of the delays were due to the need for coordination with other states, while others resulted from DOI having to prioritize its resources. DOI has since developed standard procedures and, according to an agency official, implemented them in December 2008.

Topics Carriers Legislation Workers' Compensation Hurricane South Carolina