cas seminar on ratemaking

CAS SEMINAR ON RATEMAKING

GENERAL SESSION II

EMERGING ISSUES

MARCH 2001

EMERGING ISSUES

Moderator Carole J. Banfield, Insurance Services Office, Inc.

Panelists Mona Carter, Kentucky Department of Insurance Peg Ising, Ohio Department of Insurance Sonja Larkin-Thorne, The Hartford Financial

Services Group, Inc. Lenore Marema, Alliance of American Insurers

EMERGING ISSUES

AGENDA1. Background

1. Impact of Gramm-Leach-Bliley

2. Need to modernize state regulation

3. Doing business globally

4. E-commerce

5. Optional Federal Charters

EMERGING ISSUES

AGENDA1. NAIC Activity

Statement of Intent Improvement to State Based Systems Coordinated Advertising, Rate and Form

Review Authority (CARFRA) Privacy National Treatment of Companies

EMERGING ISSUES

AGENDA1. Planned NAIC Activity

Personal Lines Next Steps/Implementation Plans

EMERGING ISSUES

AGENDA1. Some Major Company Implications

Privacy/Agents Licensing--What states must do

Filings Data Collection Market Conduct Company Licensing/Optional Federal

Charters

EMERGING ISSUES

Background1. Gramm-Leach-Bliley (Financial Services

Modernization Act) enacted in November 1999

2. Eliminated barriers to affiliations among banks, securities firms and insurance companies

3. New order of financial regulation

EMERGING ISSUES

Background

1. Doing business globally--requires uniformity in:

Regulation Privacy Other areas

2. E-commerce

Major effort underway at the NAIC

Going beyond GLB--Undertaking Regulatory Modernization

What states must do after GLB

What states need to do after GLB

to modernize regulation

REGULATORY MODERNIZATION

NAIC Statement of Intent1. Improve Speed to Market

1. Operational Efficiencies

2. Commercial Lines Rate Regulation

3. Regulatory Framework Efficiencies

2. Reform system of rate and form filings1. Coordinated Advertising, Rate, and Form

Review Authority (CARFRA)

REGULATORY MODERNIZATION

NAIC Statement of Intent1. Market Conduct Reform

2. E-commerce that protects the consumer

3. National Treatment of Companies

Improvements to State-Based SystemsAREAS OF WORKPLAN

Operational Efficiencies/ Best Practices

Commercial Lines Rate Regulation

Regulatory Framework Efficiencies Commercial Lines Form Regulation

Personal Lines Forms & Rates

Personal Lines Regulation--Tabled

Improvements to State-Based Systems

OPERATIONAL EFFICIENCIES 1. State Transmittal and Review Standards Checklists

2. Uniformity Among State Filing Requirements

3. 30 Day Review and Compliance Timeframe

4. SERFF Implementation and Usage in All States

Improvements to State-Based Systems OPERATIONAL EFFICIENCIES

State Transmittal and Review Standards Checklists--Purposes:

1. Speed and Uniformity

2. Clear Guidance

3. Elimination of Unnecessary Regulations and Uniformity

4. Identify CARFRA Products       

Improvements to State-Based SystemsOPERATIONAL EFFICIENCIES

State Transmittal and Review Standards Checklists— Recommendations:

4. Certification

5. State Agreement/Memorandum of Understanding• Apply only the requirements set forth in the transmittal and

review standards checklists• Recognize that certain decisions are made based on regulatory

judgment that cannot be articulated in checklists (exception rather than the rule)

• Require approval by Commissioner or designee for regulatory actions that conflict with checklists

Improvements to State-Based SystemsOPERATIONAL EFFICIENCIES

SERFF Implementation in All States:

1. Adequate Funding and Resources

2. Integration and Customization

3. Cost Structure

4. Support Staff

5. Customer Input/Value Added

Improvements to State-Based SystemsSERFF Status

All Lines (9)

Limited Lines (12/9 (P&C))

Licensed/Not in Production (17)

Not Licensed (13)

Arkansas

District of Columbia

Maine

New Hampshire

North Dakota

Ohio

South Dakota

Utah

Wyoming

California (L,D)

Colorado (H,P,C)

Indiana (Personal, L)**

Kansas (L,A)

Kentucky (L,P,C)

Missouri (L,H,P,C)

New York (Some P,C)**

North Carolina

Oklahoma (P,C)

Tennessee (P,C)

Texas (GL, CP, IM)

Washington (P,C,L,D)

Alabama**

Arizona

Connecticut

Florida

Illinois

Iowa

Louisiana

Maryland

Michigan**

Minnesota

Mississippi

Nebraska

New Jersey

New Mexico

Oregon**

Pennsylvania**

Wisconsin

Alaska

Delaware

Georgia

Hawaii

Idaho

Massachusetts

Montana

Nevada

Rhode Island

South Carolina

Vermont

Virginia

West Virginia

Improvements to State-Based SystemsREGULATORY FRAMEWORK--DEFINITIONS

Prior Approval File and Use Informational/ Competitive

No Filing

Approval Before Use File rates, rating manuals, actuarial information and policy forms on or before the date of use.

Compliance Review

Discretion to determine the nature and extent of this review

Presumption of prospective corrective action (overcome when retrospective is necessary based on nature and extent of consumer harm and other factors (ex: Costs)

File rates, rating manual, policy forms, explanatory memorandum. No supporting actuarial info required

No review for approval or compliance upfront

Statutory standards apply

Market Conduct Authority Remains

White Paper 1998 Definition

No Information Required

Statutory Standards Apply

Insurer must maintain all information relating to the rate, rate manuals and policy forms

Regulators may ask for information to ensure compliance with statutory requirements or at request of consumers or other insurers

*No discussion of ECP

*No Findings on Total Deregulation

Improvements to State-Based SystemsCommercial Lines Rates

No Filing Financial Guaranty

Aviation

Ocean marine

Employment Practices

Commercial Marine

Directors & Officers

Boiler & Machinery

Nuclear Insurance

Commercial Credit

“A” Rated

Consent to Risk

ECPs

InformationFilingMost Commercial Lines

Workers’ Comp.*File and UseWorkers’ Comp.*

Advisory Orgs. Filings*

Mortgage Guar.*

Prior ApprovalTitle Insurance

Mortgage Guar.*

Residual Mkts.

Advisory Orgs.*

Non-Competitive

Improvements to State-Based SystemsCommercial Lines Forms

No Filing Financial Guaranty

Aviation

Ocean marine

Employment Practices

Commercial Marine

Directors & Officers

Boiler & Machinery

Nuclear Insurance

Commercial Credit

“A” Rated

Consent to Risk

ECPs

Information FilingReference to Advisory Organization Filings

Reference to Other Insurers’ Filings

Products with Coverage Floors

File and UseMost Commercial Lines

Workers’ Comp.*

Reference to Other Insurers' Filings

Advisory Org. *

Mortgage Guar*

Prior ApprovalTitle Insurance

Mortgage Guar.*

Residual Mkts.

Advisory Org.*

Non-Competitive*

CARFRA

CARFRA (Coordinated Advertising, Rate and Form Review Authority)

1. Quality Reviews

2. Fast Review

3. Single Point of Filing and Review

4. National Standards

CARFRA

Limited Launch—10 States1. New York2. Texas3. Michigan4. Pennsylvania5. Maine6. Oregon7. Ohio8. Indiana9. Arkansas10.Alabama

CARFRA

Review Panels-Review Process

1. Filing with the CARFRA electronic repository

2. 5 Member Review team appointed from the pool of state analysts meeting qualification standards

3. Review of filing according to the national standards

CARFRA

Review Panels-Advisory Recommendation

1. The review team’s Advisory Recommendation will be communicated to states

2. The review decision is adopted by the states

CARFRA

Review Panels-MOU/AcceptanceMOU will commit state to accept a review panel’s recommendation unless:

1. State law or other relevant legal authority prohibits the action proposed; or

2. Regulatory action has been taken against the insurer that may prohibit the insurer from operating in the proposed manner.

CARFRA

Review Standards—National Standards1. Single set of national standards created for each

limited launch product 2. Self Certification for State Specific Requirements3. National standards created from a review of statutes,

regulations, best practices, NAIC model acts, and input form interested parties

4. Process evaluated as possible basis for creating national standards for additional lines of insurance

National Treatment of Companies

NAIC Plan

1. Adoption of Best Practices: Develop “best practices” applications by December 2000 and June 2001, respectively

2. Implementation by MOA: Implement national treatment process through memorandum of agreement between June 2001 and June 2002.

3. Possible State Legislation: If necessary, develop enabling state legislation to implement any component of national treatment system requiring statutory changes for enactment by June 2003

Planned NAIC ActivityPersonal Lines Rate & Form

Regulation-Work Plan for 2001

1. Study whether a file and use system for personal lines forms is appropriate

2. Study whether a file and use system or flex-rating system is appropriate for personal lines rates

3. Evaluate deregulation and competitive rating for personal lines rates

Next NAIC Steps

1. Develop and Implement Transmittal and Review Standards Checklists

2. Implement SERFF—Plan Approved 3. Review Regulatory Framework (e.g. Commercial

Lines File and Use and Informational Filings)—Assess Need for Legislation

4. Conduct Staff Educational Meeting Communicate commitment to the Plan; and Create a sense of urgency for completing the Plan with the

specified timeframes.

5. NAIC Memorandum of Understanding

Implementation Plans Uniformity and Consistency Among State Filing

Requirements--Implementation (July 2001–December 2001):

1. Eliminate All Desk Drawer Rules

1. Eliminate Unnecessary Regulatory Requirements

1. Maintain and Add Necessary Regulations

1. Uniformity

2. Standardized Transmittal Form

Implementation Plans

Review and Compliance Timeframe—30 Days Implementation:

Operational Standard: 30 Days whether Prior Approval, Deemer, or File and Use (45 day until checklists implemented in June 2001)

Extensions: One 30 day Extension (Exception rather than rule)

Review for Completeness: 15 Days

Implementation Plans

Review and Compliance Timeframe—30 Days Implementation:

Substantive Review Timeframe: 15 Days Target; 30 Days Final

Monitoring System: SERFF or other system by June 2001

Filing Frequency Requirements: Eliminate, except in flex rating

P&C Model: Revise to incorporate these recommendations

State Agreement/Memorandum of Understanding

Implementation Plans

Commercial Lines Rates Determine Specific Authority to Move to

Information Filing If Discretion, Identify Competitive Markets by

March 31, 2001 If Authority Does Not Exist, Seek Legislation (18

Prior Approval) If File and Use State, Consider Effectively

Implementing Information Filing (20 States) (10 States—Use &File)

Adopt Monitoring Competition Provisions

Implementation PlansCommercial Lines Forms Evaluate Laws for Authority to Move to File and

Use If Authority, Identify Competitive Markets by March

31 If No Statutory Authority, Seek Legislation NAIC To Monitor Implementation—Report by

March 31 Revise P&C Rate & Policy Model Law

Implementation PlansCompetition and Information Needs

1. Information Needs/NAIC Charge: Study additional information needs to enhance process of monitoring and promoting competition (Dec. 2001).

2. Competitor Pricing Information: Obtain sufficient information to allow access to competitor pricing information.

3. Annual Statistical Reports: Continue to receive annual detailed statistical reports to facilitate market entry and solvency.

Implementation Plans

Competition and Information Needs

Advisory Organization Loss Costs: Continue to allow insurers to use loss costs developed by advisory organizations.

Consumer Complaints Information: States and NAIC should publish consumer complaints information in appropriate form. States should publish insurer financial information.

Market Conduct Exams: Publish final results of market conduct examinations.

Public Availability of Filings: Make filings publicly available.

Implementation Plans

State Transmittal and Review Standards Checklists— Implementation:

State Filing Transmittal Checklist—June 2001 State Filing Review Standards Checklists—June 2001

Speed To Market Working Group Charges—March 2001• Provide guidance to states in developing transmittal and

review standards checklists• Develop published central filing repository for checklists

and procedures for publishing on state websites. • Develop procedures for amending checklists• Establish method to monitor states use of checklists• Establish procedure to disseminate information on state

disapproval reasons

Some Major Company Implications

Privacy & Agents Licensing1. Two issues states must address after

GLB Privacy--July 2, 2001 implementation Agents Licensing--29 states must act by

November 2002

2. First major test of functional regulation after GLB

Some Major Company Implications

Privacy & Agents Licensing1. 2001 state legislative sessions--We’re

working on it!

2. How important is uniformity? 3 model privacy acts will not result in

uniformity by July 2001 Some local agent opposition

3. Is more federal intervention on the horizon?

Some Major Company Implications

Filings Much to be gained from states’

implementing NAIC “best practices” Law is not always the problem

More legislative change may be needed SERFF: Speed to Market vs. Speed to

Destination Personal lines simplification needed as

well Short term success stories are needed

Some Major Company Implications

Data Collection1. Regulators need data to respond to market

disruptions and consumer complaints

2. Consumers demand more data from insurers Access to individual insurer filings

3. More rate and form freedom vs. increased statistical reporting--Is there a trade off?

4. Can data requests be more standardized

5. Personal lines writers--More data but no less regulation?

Some Major Company Implications

Market Conduct Modernization1. Simplifying, streamlining, coordinating

market conduct vs. raising the bar in all states

2. Is domestic deference the answer?3. Catch 22 for personal lines writers? No

upfront deregulation but backend market conduct regulation

Some Major Company Implications

Market Conduct Modernization1. Minimum Standards For Resources/

Alternative Mechanism2. Enhance Coordination and Uniformity

(Focus resources on violations that have the greatest impact on consumers)

3. Monitoring Mechanism4. Encourage Self Audit and Self

Reporting

Some Major Company Implications

Company Licensing & Optional Federal Charters

1. Are we on ALERT yet? Uniformity vs. streamlining--Is there

compatibility?

2. National Treatment Necessary? Doable? Pros and cons of domestic deference

Some Major Company Implications

Company Licensing & Optional Federal Charters

1. Federal charters Two regulatory systems better than one? Where does state regulation end and

federal charter begin?

2. Competitive equality for insurers

3. Known state system vs. unknown federal system

Future Directions: Will States Succeed in

Regulatory Modernization? Continued Federal scrutiny

GAO investigations Congressional hearing

Insurer insolvency: Has the tide turned? Consumer pressures Local pressures--Commission turnover Insurance department funding

CAS SEMINAR ON RATEMAKING

GENERAL SESSION II

EMERGING ISSUES

MARCH 2001