This is in response to John Pedrick's posting on this subject. I am a
regulatory actuary that supports the initiative for substantially reducing
the amount of regulation that applies to commercial lines insurance rates.
(I also support certain changes in forms regulation, but I believe that
forms regulation is more generally necessary and in the public interest
than most rate regulation.)
> In mid-March, the (EX) Special Committee on Regulatory Re-engineering
> accepted a white paper produced by a working group which was charged with
> exploring means of streamlining certain aspects of commercial lines
> regulation. If you've followed this issue, you may know that Ohio is the
> only state to voice opposition to this report.
>
> Our concerns are based on a number of issues:
>
> 1. Model rating laws already provide commissioners with the authority
> and flexibility to recognize the effectiveness of competition as a means
> to regulate rates. In Ohio, our law already provides: "Special Filings
> may be made at any time with respect to any individual or special risks
> whose size, classification, degree of exposure to loss, previous loss
> experience, or other relevant factors call for the exercise of sound
> underwriting judgment in the promulgation of rates..." Insurers must
> keep documentation on these risks and report a little bit of data on them
> on a quarterly basis. About 14,000 risks were reported last year.
I disagree with the statement that model laws provide sufficient authority
and flexibility for commissioners that want to recognize competition as an
effective regulator of rates. The Ohio law cited does not appear in the
model laws. The model laws contain the following individual risk rating
provision:
Under such rules and regulations as may be adopted, the commissioner
may, by written order, suspend or modify the requirement of filing as to
any kind of insurance, subdivision or combination thereof, or as to
classes of risks, for which the rates cannot practicably be filed before
they are used.
It would be a stretch to say that this can be used to recognize competition
and I am not aware of any state that has used this language to do so.
> 2. Exempt Commercial Policyholders (ECP's) would self-certify that they
> meet criteria that they are large enough to buy unregulated insurance.
> We frequently see filings for policies that: take away an insured's right
> to bring legal action against the insurer; force an insured to submit to
> jurisdictions chosen by the insurer; and mislead insureds about whether
> the policy is an occurrence or claims-made type; among many other
> restrictive provisions which have emerged in this soft market.
The provisions that would allow ECPs to negotiate their own policy forms
are indeed a trade off, because my experiences with large policyholders
has left me a little less than in awe of their policy form analytical
capabilities. But, on balance, I think that the sophistication of such
insureds (albeit over-rated) combined with the attention that is given
these accounts will do a reasonably good job of providing them with good
coverage forms. It is not so much that I see an unregulated environment
for these folks as being blissfully problem-free; rather, it is just that
I don't feel like, on balance, that the protection that regulators offer
such large insureds justifies the impediments that we provide for their
legitimate activities. Besides, if we were really helping these folks, we
would be hearing pleas from these large insureds for our protection. I've
been around regulation a long time, and I have certainly heard plenty of
consumers that want regulatory protection, but I have not been hearing it
from these jumbo guys.
> 3. In Ohio, we have a very busy public documents service. We have an
> average of two industry reps a day looking at competitors' rates, rules,
> and forms. We have three high speed microfilm reader/printers for their
> use. We hope to be able to provide this same info on the Internet some
> day soon. We believe this increases competition. It also keeps us in
> check, since the industry can see what we've done and doesn't hesitate to
> point out our mistakes (rare as they are), or insist on the equal
> treatment they have a right to. By removing some industry products from
> regulation, access to competitive information will diminish.
I agree that access to information is an important role that state
insurance departments fulfill. However, while I expect that reduced access
to competitive information may occur to a small extent, I think that this
effect will be small. I doubt that policy form self-certification will be
embraced by many. As such, policy forms will be filed that will apply on
the same basis as always except that ECPs can do their own thing. Rating
manuals will also be filed for insureds smaller than ECPs, even if they are
not subject to an approval process. (This would not be all that different
from file-and-use as practiced in some states already.) But consider the
status quo -- insurers have and use a great deal of flexibility in applying
what they have on file, and a lot of stuff is written in alternate markets
where no info is available. Looking at filings is only a part of the
picture. It is true that it may be a little less of the picture in the
future, but I doubt that it will make a big difference.
> 4. There may be some implications with McCarran-Ferguson protections.
I fail to see McCarran-Ferguson implications. McCarran-Ferguson applies to
collective activities like advisory organizations (rating bureaus) and to
stat collection. The White Paper contemplates more regulatory attention
for advisory organizations than for insurers and does not contemplate any
changes for stat collection. The following statement is made:
Prior approval, if used, should generally be restricted to noncompetitive
lines and to loss costs submitted by advisory organizations.
Admittedly, the White Paper does not go into the n-th detail about advisory
organizations, but I certainly don't find it inconsistent with the level of
oversight of collective activity that necessary to avoid MF problems.
> 5. The white paper makes many assertions without any supportive
> documentation. One of which is that the cost to the industry of
> regulation exceeds $1 billion. There is no distinction of costs for
> personal lines, commercial lines, or for large sophisticated risks. $1
> billion is an impressive figure. It sounds like, and is , a lot of
> money. However, it represents only 0.4% of industry earned premium. If
> this percentage is subdivided to reflect the cost of regulation on large
> commercial risks, we might see a cost which rounds-off to 0.0%.
The dollar figures came from studies done by other NAIC groups. While I
am not aware how they were developed by other groups, the dollars were not
plucked out of thin air by the drafting group.
> 6. We agree that there are problems. We hope to be ready to accept
> filings electronically some day, for those companies who wish to do so.
> Many states do not have the staff of 3 actuaries and 3 actuarial analysts
> that we do, and are therefore reluctant to consider all actuarially sound
> arguments for rates. Similarly, we have 4 CPCU's among other analysts
> reviewing policy provisions. We don't pretend to be perfect, and can
> count on the industry to point out our imperfections. However, we do
> believe that regulation can be effective for those who need us, while
> being receptive to industry concerns. We like to think that our approach
> and the highly competitive marketplace in Ohio are not a coincidence.
>
> I am interested in feedback on this topic.
On balance, the regulatory community needs to seriously re-evaluate how
much it is helping versus how much it hinders versus the cost of doing
this. As a regulator for over 20 years, I am convinced that there is a
valuable role for states to play in both the forms and rates areas. In
the forms areas, the involvement would be fairly similar to what we have
now, with concessions made to multi-state and jumbo insureds. For forms
in general, I still think that state approval is a good thing because I
see far, far too much bad stuff out there in forms. Competition simply
doesn't have the ability to eliminate stupidity in forms. But when it
comes to rates, an insured does not need to be sophisticated when he/she
is comparing prices on similar products. While I don't think that
competition works for forms like some of the most liberal might want us
to believe, I certainly think that it works for rates.
The valuable role for states to play in the rate arena is to monitor the
system, collect data and work to assure that the information to optimize
competition is out there. This is a complex subject all by itself, and
I don't assert for a moment that the regulatory community now does all
that it can or should in this respect. But it can do this without the
necessity to impose approval-type restraints on price competition except
in a few situations (and I really do mean only a few).
I am also interested in feedback on this topic, particularly from those
actuaries that are not regulators but that have dealt with "the system"
for a long time from the other side.
Alan Wickman, ACAS
Administrator, Actuarial Division
Nebraska Department of Insurance Fax: (402) 471-6559
941 "O" Street, Suite 400 Phone: (402) 471-4646
Lincoln, NE 68508 Internet: ins1008@vmhost.cdp.state.ne.us
Visit the CAS Web Site at http://www.casact.org
===============================================
To subscribe or unsubscribe from CASNET:
Send an e-mail to caslists@lists.casact.org
Type in the body join casnet to subscribe
or leave casnet to unsubscribe.