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 AGENDA 1. Background 1. 2. 3. 4. 5. Impact of Gramm-Leach-Bliley Need to modernize state regulation Doing business globally E-commerce Optional Federal Charters EMERGING ISSUES AGENDA 1. 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 AGENDA 1. Planned NAIC Activity Personal Lines Next Steps/Implementation Plans EMERGING ISSUES AGENDA 1. Some Major Company Implications Privacy/Agents Licensing--What states must do Filings Data Collection Market Conduct Company Licensing/Optional Federal Charters EMERGING ISSUES Background 1. 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 Intent 1. Improve Speed to Market 1. Operational Efficiencies 2. Commercial Lines Rate Regulation 3. Regulatory Framework Efficiencies 2. Reform system of rate and form filings 1. Coordinated Advertising, Rate, and Form Review Authority (CARFRA) REGULATORY MODERNIZATION NAIC Statement of Intent 1. Market Conduct Reform 2. E-commerce that protects the consumer 3. National Treatment of Companies Improvements to State-Based Systems AREAS 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 Systems OPERATIONAL 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 Systems OPERATIONAL 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 Systems SERFF Status All Lines (9) Arkansas District of Columbia Maine New Hampshire North Dakota Ohio South Dakota Utah Wyoming Limited Lines (12/9 (P&C)) 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) Licensed/Not in Production (17) Alabama** Arizona Connecticut Florida Illinois Iowa Louisiana Maryland Michigan** Minnesota Mississippi Nebraska New Jersey New Mexico Oregon** Pennsylvania** Wisconsin Not Licensed (13) Alaska Delaware Georgia Hawaii Idaho Massachusetts Montana Nevada Rhode Island South Carolina Vermont Virginia West Virginia Improvements to State-Based Systems REGULATORY FRAMEWORK--DEFINITIONS Prior Approval Approval Before Use File and Use File rates, rating manuals, actuarial information and policy forms on or before the date of use. Informational/ Competitive File rates, rating manual, policy forms, explanatory memorandum. No supporting actuarial info required Compliance Review No review for approval or compliance upfront Discretion to determine the nature and extent of this review Statutory standards apply Presumption of prospective corrective action (overcome when retrospective is necessary based on nature and extent of consumer harm and other factors (ex: Costs) Market Conduct Authority Remains White Paper 1998 Definition No Filing 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 Systems Commercial Lines Rates No Filing Information Filing Prior Approval File and Use Workers’ Comp.* Title Insurance Advisory Orgs. Filings* Mortgage Guar.* Mortgage Guar.* Financial Guaranty Aviation Most Commercial Lines Ocean marine Workers’ Comp.* Employment Practices Commercial Marine Directors & Officers Boiler & Machinery Nuclear Insurance Commercial Credit Residual Mkts. “A” Rated Advisory Orgs.* Consent to Risk Non-Competitive ECPs Improvements to State-Based Systems Commercial Lines Forms No Filing Information Filing Prior Approval Title Insurance Mortgage Guar.* File and Use Most Commercial Lines Workers’ Comp.* Reference to Advisory Organization Filings Financial Guaranty Aviation Ocean marine Employment Practices Reference to Other Insurers’ Filings Products with Coverage Floors Commercial Marine Directors & Officers Boiler & Machinery Nuclear Insurance Reference to Other Insurers' Filings Commercial Credit Advisory Org. * “A” Rated Mortgage Guar* Consent to Risk Residual Mkts. Advisory Org.* Non-Competitive* ECPs 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 States 1. New York 2. Texas 3. Michigan 4. Pennsylvania 5. Maine 6. Oregon 7. Ohio 8. Indiana 9. Arkansas 10.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/Acceptance MOU 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 Standards 1. Single set of national standards created for each limited launch product 2. Self Certification for State Specific Requirements 3. 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. 2. 3. Adoption of Best Practices: Develop “best practices” applications by December 2000 and June 2001, respectively Implementation by MOA: Implement national treatment process through memorandum of agreement between June 2001 and June 2002. 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 Activity Personal 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 flexrating 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 5. Communicate commitment to the Plan; and Create a sense of urgency for completing the Plan with the specified timeframes. 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 Plans Commercial 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 Plans Competition 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 Licensing 1. 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 Licensing 1. 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 Collection 1. 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 Modernization 1. 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 Modernization 1. Minimum Standards For Resources/ Alternative Mechanism 2. Enhance Coordination and Uniformity (Focus resources on violations that have the greatest impact on consumers) 3. Monitoring Mechanism 4. 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