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NAIC Considers Reforms In Personal Lines Regulation

by E. E. MAZIER on 5/21/01.

As promised at the spring meeting of the National Association of Insurance Commissioners in March, the Improvements to State-Based Systems (EX) Working Group has begun looking into the possibility of modernizing the regulation of personal lines insurance.

Insurance regulators, industry trade groups, consumer advocates and educators participated in an interim session in Kansas City, Mo. from April 30 through May 1. A day-and-a-half was devoted to panel presentations and the last half-day consisted of roundtable discussion.

Ohio Director of Insurance Lee Covington, co-chair of the Improvements working group, called the session "a very good first step to modernizing our regulation of personal lines."

He added that "everything is on the table" at this point, meaning that his group will study all aspects of personal lines modernization, including file-and-use, flex-rating, and open-competition systems.

One industry participant, Robert Zeman, vice president and assistant general counsel for Des Plaines, Ill.-based National Association of Independent Insurance, echoed Mr. Covington's enthusiasm.

"We were pleasantly surprised," Mr. Zeman said, adding that there was "very excellent discussion" among the different interested parties.

Nebraska Insurance Director Tim Wagner began with a historical overview of insurance regulation, Mr. Zeman noted. The purpose of the overview was "to outline the rise and fall of the bureau system and . . . the relationship between rate regulatory laws and rating bureau practices," according to Mr. Wagner's written abstract of his presentation.

Mr. Zeman favored Mr. Wagner's historical approach because it illustrated how some states came to welcome competitive systems for rates while other states ended up with more restrictive regulatory systems.

In a written summary of his presentation, Mr. Wagner indicated that the three outcomes which personal lines rate regulation must ensure are the existence of a competitive market, the adequacy of rates and the fair treatment of consumers.

Mr. Wagner believes that "the prior approval system has resulted in a dysfunctional marketplace based on differing regulatory approaches to the excessive standard."

Therefore, he supports laws calling for "file and use of rates and rating plans," among other reforms.

Regulators from the District of Columbia, South Carolina and Illinois reported on how their particular jurisdictions have fared by utilizing a competitive approach to insurance regulation, Mr. Zeman said.

He particularly noted that that District of Columbia insurance commissioner, Larry Mirel, who also co-chairs the Improvements working group, revealed that since adopting a more competitive approach, the District has seen the return of several insurance companies, a drop in the assigned-risk-pool population and rate reductions of about 5 percent.

This has translated into more insurance choices for District residents, Mr. Zeman pointed out.

In contrast, Brent Kabler, an official with the Missouri insurance department, called for "a more activist regulatory approach."

Consumer advocate Kevin Hennosy of Spread the Risk, Inc., declared that regulators cannot shirk their duty to regulate, particularly in the areas of automobile and homeowners insurance.

However, Wayne T. Brough of the District of Columbia-based Citizens for a
Sound Economy Foundation presented a working paper entitled "Competition Serves Consumers Better Than Regulation."

Mr. Zeman also reported that several professors presented their studies and views on the merits of competitive rating versus "rate suppression" under prior-approval systems.

Mr. Covington and Mr. Zeman explained the circumstances leading up to the Kansas City interim session.

"All 50 commissioners signed the Statement of Intent in March of last year, and we committed at that time to move away from prior approval systems where appropriate," Mr. Covington stated.

Late last summer, the "Vision Statement" of the NAIC's Speed to Market Working Group declared that the states should review their respective regulatory requirements and eliminate the ones that are no longer essential for consumer protection, Mr. Covington said.

He added that the Improvements working group spent the balance of 2000 and the first quarter of this year tackling a "very aggressive agenda" on identifying and implementing "operational efficiencies" and "regulatory framework efficiencies" in the context of commercial lines modernization.

Mr. Zeman observed that, in fact, the Improvements working group and other NAIC committees have spent the better part of three years actively studying and deliberating the subject of commercial insurance modernization.

He also noted that pressure for modernization has mounted since the passage of the federal Gramm-Leach-Bliley Financial Services Modernization Reform Act in 1999.

"As a result of all those different strands but especially in light of what . . . [the NAIC has] done on commercial modernization, the members of the personal lines property-casualty industry were pressing the NAIC to explore personal lines reform as well," Mr. Zeman stated.

As Mr. Covington pointed out, it was at the NAIC's spring meeting in Nashville this past March that the Improvements working group called for an interim session devoted exclusively to the issue of personal lines modernization.

Both Mr. Covington and Mr. Zeman acknowledged that much work lies ahead on the issue of personal lines modernization.

"We're trying to figure out whether we can move away from prior approval systems, and there's a range of options to look at" and a variety of viewpoints to consider, Mr. Covington stated.

At the same time, the regulators seek to "maintain necessary consumer protections," he said.

Mr. Zeman stated that the Improvements working group must determine what sort of competitive system would work best for rates and for product and insurance forms, how much regulator oversight would be appropriate, and whether to recommend an amendment to the NAIC's model law on rate regulation.

Mr. Covington believes that time constraints will prevent his group from delving further into personal lines modernization at the summer meeting of the NAIC next month in New Orleans. But he foresees additional interim sessions on the topic later this year because his group is "committed to a consistent schedule to try to move this issue along."