OPPONENTS FIGHT NORTH CAROLINA BILL TO RESTRICT FRONTING

RALEIGH, N.C.-Opponents of a bill that would restrict fronting arrangements in North Carolina are stepping up efforts to kill the legislation in the state House after the Senate recently approved the bill.

Insurance Commissioner James Long backs the measure, but foes say it is unnecessary, is overly restrictive, discriminates against group captives and could damage national insurance programs if other states follow North Carolina's lead.

"If you want to put North Carolina businesses at a disadvantage, this is one way to do it," said Anne Allen, legislative counsel for the Risk & Insurance Management Society Inc. in New York.

"It sets up cumbersome reporting and pre-approval requirements on fronting carriers, which will naturally have at best an adverse cost effect," said Jon Harkavy, president of the Coalition of Alternative Risk Funding Mechanisms and vp and general counsel of USA Risk Services Inc. in Arlington, Va.

The Insurance Department has held throughout the debate that a fronting law is necessary to protect certain businesses that are involved in self-insured workers compensation programs, though regulators have said they have received few complaints about fronting (BI, Dec. 2, 1996).

"No one has been able to identify a problem, just a solution that they're dying to use," said Mr. Harkavy.

The bill-S.B. 611-has been sent to the House for concurrence. The House Rules Committee, which meets at the pleasure of its chairman, has yet to look at it. Opponents hope the Republican-controlled House might be less disposed to do a favor for a powerful Democratic regulator such as Mr. Long than the Democrat-dominated Senate was.

The bill, which has gone through several metamorphoses, is based on a 1993 model act promulgated by the National Assn. of Insurance Commissioners (BI, Dec. 13, 1993). The North Carolina bill would require that an insurer that delegates any underwriting or claims settlement authority to an unauthorized reinsurer meet a series of new reporting requirements set by the Insurance Department.

The insurer would have to receive prior approval for the arrangement if the reinsurance ceded, including ceding commission or "any other allowances," amounted in total to more than 10% of the insurer's statutory policyholder surplus. Insurers that did not comply would be subject to numerous sanctions. The bill exempts single-parent captives from regulations but would apply to group captives if passed.

No state has adopted the NAIC model, and opponents of the North Carolina measure want to keep things that way.

RIMS' Ms. Allen noted that the current measure is less onerous than some proposals that floated around Raleigh before a final bill was introduced earlier this year.

"But we don't care how much they tinker around with it; it's still going to add another layer of regulation," she said. "It still basically follows the NAIC model."

"The entire structure of the model bill is still in place and is still incredibly cumbersome for businesses in North Carolina that want to pursue an alternative risk mechanism," said Ms. Allen.

RIMS sent a legislative alert to its North Carolina members last week, calling on them to contact their representatives in opposition to this bill.

The American Insurance Assn. also opposes the bill, said Ray Farmer, assistant vp in the insurer trade group's Atlanta office.

"We think the commissioner has enough regulatory authority under current statutes" to deal with fronting questions, he said.

"If each state adopts a North Carolina approach, it's going to make it very difficult to operate a national insurance program," said Mr. Harkavy.

"If states continue to adopt these things, we're back to the Articles of Confederation," he added, referring to precursor of the U.S. Constitution that didn't prohibit states from interfering in interstate commerce.