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Public Policy Analysis & Opinion

The case for state regulation

Commissioners go to Washington to tell their story

By Kevin P. Hennosy

On May 20, 2009, the National Association of Insurance Commissioners (NAIC) issued a news release that urged Congress not to ignore them.

During meetings conducted in Washington, D.C., NAIC Chief Executive Officer Dr. Therese M. (Terri) Vaughan and state regulators stressed that any reforms must provide consumers with the time-tested protections of the current national system of state insurance oversight.

According to the NAIC statement, “The state-based insurance regulatory system has remained a constant in an otherwise erratic economic climate.” The regulators also emphasized that they believe that the state-based system has “consistently worked.”

Thirty-five states sent a representative to the Washington, D.C. meetings. Commissioners heard from Congressman Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, on his views for financial regulatory reform; from Health and Human Services Secretary Kathleen Sebelius (a former Kansas Insurance Commissioner) on health insurance reform; and from Congressman Earl Pomeroy (D-N.D.) on his perspective as a former NAIC president and North Dakota insurance commissioner.

“It is imperative that we preserve and build upon the successful model of our national state-based regulatory system,” said Vaughan. “The American people want more financial stability, not less. Reform proposals must ensure that consumers have accountable and local regulators who can provide continued stability despite these challenging economic times. State insurance regulators work hard every day to make sure that insurers honor their promises to policyholders.

“Any reform framework must integrate but not displace our current state-based system of insurance regulation,” she continued. “It must serve to further safeguard the assets of the insurance companies these regulators oversee so the companies can meet their obligations to the individuals and businesses who, as policyholders, have put their trust in them. We have continually improved and strengthened the state insurance regulatory system for more than 150 years.”

NAIC President and New Hampshire Insurance Commissioner Roger Sevigny said the visits were designed to ensure careful consideration of reforms to the nation’s financial services regulatory structure.

“As Congress works to address the current financial turmoil, we want to make sure the comprehensive national system already in place—the existing state-based insurance regulatory system—is given full consideration and review,” Sevigny said.

The NAIC statement also opined, “As a whole, the business of insurance has not posed systemic risk to the nation’s economy, instead providing a source of relative calm in an otherwise turbulent time. State insurance solvency oversight has kept insurance companies stable and has protected policyholders from the worst of the financial meltdown, and state regulators continue to provide a local response to consumer issues at no cost to federal taxpayers.”

Actions and inactions

Apparently, there was little discussion about the forgiving-system of accounting that is applied to insurance companies that is arguably the reason why insurers have not failed at a rate similar to banks. In particular, in the life insurance sector, carriers report their bond holdings at par value rather than market value—no matter how worthless those bonds happen to be.

In other words, if federal regulators would just drink the Kool-Aid and ignore the true financial condition of the banking sector, America could continue lying to itself. Why get so hung up on reality?

“While we agree that reforms are needed, we believe that federal and state regulators should work together in a way that continues to protect consumers and promote financial stability. There are areas in which we might need federal assistance, but that assistance should streamline the strong state-based regulatory framework—not supplant it with a new federal bureaucracy,” Sevigny said.

State insurance regulators also shared with members of Congress the NAIC principles for health insurance reform, which stress substantial experience and expertise of the states in the crafting of federal legislation.

“States already have many patient protections, solvency standards and fraud prevention programs in place that should not be preempted by the federal government,” said Kansas Insurance Commissioner Sandy Praeger, who also chairs the NAIC’s Health Insurance and Managed Care Committee.

“We encourage the development of broad standards rather than prescriptive rules wherever possible to maximize state flexibility to implement reforms in a manner that is responsive to local and regional market conditions. States must be allowed to go beyond the minimum standards to protect consumers.”

The NAIC statement reminds the reader of the breadth of jurisdiction held by insurance departments. The following is a survey of recent news items and regulatory bulletins issued by state insurance departments. It is quite a diverse mix of actions and inactions.

Arizona On May 12, 2009, Insurance Director Christina Urias ordered National Home Protection, Inc. (NHP), to immediately cease and desist offering or soliciting home warranty service contracts, and to stop taking or receiving any premium or fees for any warranty service contracts in Arizona.

Director Urias ordered NHP to pay all valid claims arising from the warranty contracts it issued in Arizona. “Regrettably, this serves as a reminder that we as consumers must be diligent about researching the legitimacy of a business before we buy its contract or service,” said Director Urias. “Consumers should call us first, before they buy a warranty service contract or insurance product, to confirm that a company is properly licensed in Arizona.”

Several Arizona residents filed complaints with the Arizona Department of Insurance (ADOI) alleging that NHP did not pay its home warranty service claims. ADOI’s subsequent investigation revealed that NHP did not hold the required license to issue these contracts to Arizona residents. NHP also ignored an ADOI subpoena and failed to appear at a hearing.

A New York-based company, NHP solicited customers nationwide from its Web site. The states of Oklahoma and Texas also took action against NHP for unlicensed activity.

Arkansas The Arkansas Insurance Department will host the convention of the Southeastern Regulators Association (SERA), October 18-20, 2009, at the Peabody Hotel in Little Rock. The SERA, an organization comprised of 12 states of the Old Confederacy, the Virgin Islands and the Commonwealth of Puerto Rico, conducts an annual conference for regulators and industry personnel to discuss mutual interests.

Colorado The Colorado Division of Insurance issued a cease and desist order against Prime Travel Protection, Inc., formerly known as Vacation Protection Services, Inc.; and Traveler Protection Services, Inc.; Universal Assurance, Ltd.; Jerry Watson; and Christine Watson, for the unlawful transaction and sale of insurance in Colorado.

“There are many protections in place for consumers when purchasing insurance from a licensed company or through a licensed agent,” said Marcy Morrison, Colorado’s commissioner of insurance. “Travel insurance companies must prove they have adequate financial reserves to cover claims, for example. Licensed companies must answer to the Division of Insurance if we receive documented complaints about their practices. But when a consumer chooses to go with the too-good-to-be-true deal, he may find that he has paid for absolutely zero protection. If the company isn’t licensed by the state, many of the legal protections in place don’t apply.”

Connecticut The Connecticut Insurance Department’s pilot program to exempt certain commercial lines filings as promulgated under 38a-692 from Department review is extended until further notice. The exceptions focus on lines of business where there is little or no competition, which runs counter to the legislative intent of the McCarran-Ferguson Act—but who is really paying attention to that? Insurers are cautioned that the commissioner’s actions under this Bulletin do not include a review exemption for the following lines of commercial insurance: workers compensation, excess workers compensation, medical malpractice, professional liability, environmental impairment liability, policies affording claims-made coverage, and policies issued to municipalities and other local government entities.

Georgia Georgia requires the submission of all electronic filing fees to be submitted via electronic funds transfer (EFT) payments. This change will be effective on any System for Electronic Rate and Form Filing (SERFF) submission on or after May 1, 2009.

The department reported an increase of approximately 85% in the use of EFT payments even prior to the rule change. This has dramatically decreased the lag time for filings being assigned. The implementation of mandatory EFT payments for filing fees will allow for faster review and more efficiency in the filing process.

Hawaii Hawaii Insurance Commissioner J.P. Schmidt delivered an address touting the strengths of state-based insurance regulation in the United States to the 16th Annual Global Financial Conference, sponsored by the Global Financial Association.

“State-based insurance regulation relies on high level principles-based and rules-based requirements and boots on the ground,” said Schmidt. “We have supervisors, examiners, investigators, all close to the consumer and the industry, looking at activities from multiple angles to see any red flags as signs of trouble. A good example is American Insurance Group (AIG), where all the insurance subsidiaries remain strong, while the financial services companies have encountered extensive problems.”

The conference solicits innovative ideas and research studies in global finance and related disciplines. This year, the best papers presented at the conference were submitted by attendees from diverse countries, such as: England, Norway, Nigeria, Pakistan, Egypt, Malaysia, China, Brazil, Montenegro, Korea, as well as several universities in the United States.

Illinois Based on a review of the Illinois Department of Insurance Web site, the Illini regulators have had nothing to announce to the news media since 2007.

Kentucky The Kentucky Insurance Department issued a statement following an inclement weather event in early May that reminded insurers that companies must file a special form to register unlicensed claims adjusters.

Louisiana The insurance department announced that it would host the Annual Health Care Conference, which presents a venue for state legislators and state and federal regulators to discuss a variety of health care topics. The conference was held for May 28, 2009, at the Hilton Baton Rouge Capitol Center.

The agenda featured John Maginnis with Politics Weekly, keynote luncheon speaker. In addition, there were several panel discussions focusing on topics designed to raise fear and doubt in universal health reform: 1) Universal Health care in Today’s Economy: Is it the Answer?, 2) Health Insurance Mandates: How Costly Are They to Consumers?, and 3) Payment Reform: What Are the Best Options?

Maine The Maine Insurance Department issued Bulletin 357 to address coercive claim handling practices. The text of the bulletin explains, “At a recent public hearing of the Joint Standing Committee on Insurance and Financial Services of the Maine Legislature, witnesses testified to incidents in which automobile liability insurers sent claims adjusters to obtain statements, information, and/or settlements from hospitalized accident victims, some of whom were in pain, not fully conscious, and/or medicated (e.g., with morphine drips altering their mental capacity).”

Through the bulletin, Superintend­ent Mila Kofman reminded insurers that “such coercive claim handling activities violate Maine law.

“Insurers are also reminded that while they have the right and responsibility to contest claims legitimately in dispute, this does not include the right to take unfair advantage of claimants who are in a vulnerable situation, as in the cases described earlier, nor to wear claimants down by delaying payments that are not reasonably in dispute. Such business practices, which compel insureds or third-party claimants to file suit in order to get full payment of the amount to which they are entitled, are grounds for suspension or revocation of an insurer’s license under 24-A M.R.S.A. § 417(2)(B),” wrote Superintendent Kofman.

Missouri The Missouri Depart­ment of Insurance reports that it is receiving complaints about contractors going door to door in Jefferson City telling home owners that they have hail damage to their roofs or other parts of the house. Consumers are being told the damage will be covered by their insurance company, when that may not be the case.

The Department of Insurance offers tips for home owners who are visited by an unsolicited contractor claiming the residence has storm damage.

Oklahoma Oklahoma Insurance Commissioner Kim Holland and Illinois Insurance Director Michael McRaith, on behalf of the NAIC, conducted a public hearing Thursday, April 30, 2009, about insurance companies’ use of credit scoring.

“Insurance companies are constantly developing new tools to more accurately reflect and assess risk. This generally benefits the consumers and the companies by more accurate pricing,” said Commissioner Holland, who also chairs the NAIC’s Market Regulation and Consumer Affairs Committee. “Our goal in conducting this hearing is to provide greater transparency in how credit scoring is used by insurance companies and to ensure it does not have unfair or unintended consequences for consumers.”

Whether one believes that state regulation or the federal government is better suited to hold jurisdiction over insurance, it is one huge jurisdiction.

The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. His career includes working in the regulatory compliance office of Nationwide Insurance Cos. and as public affairs manager for the National Association of Insurance Commissioners (NAIC).


“Reform proposals must ensure that consumers have accountable and local regulators who can provide continued stability despite these challenging economic times.”

—Dr. Therese M. Vaughn
NAIC Chief Executive Officer







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