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KANSAS CITY, Mo.-State insurance regulators crafting a white paper on commercial insurance regulation are extending their June deadline, primarily to determine which buyers would be sophisticated enough to be exempt from state law protections.

A drafting group of the National Assn. of Insurance Commissioners had planned to finalize its work on a new, preliminary white paper on regulatory re-engineering during the NAIC's June 7-11 meeting in Chicago, but will probably need an extra three months to complete the task.

"We have made tremendous progress, but we still have a lot

to do," commented Brian Atchinson, Maine's insurance superintendent. Mr. Atchinson chairs the group that is drafting the paper, as well as the NAIC's Special Committee on Regulatory Re-Engineering, its parent committee.

The drafters' latest recommendations, which will be discussed at the June meeting, call for broad deregulation of rates, forms and market access for "industrial insureds."

That term is not precisely defined yet, though drafters use it to refer to large, sophisticated buyers of insurance.

"I'm really pleased with the recommendations that have been put forth," said Patricia C. Vaughan, associate general counsel for the Risk & Insurance Management Society Inc. in New York. "Most are consistent with recommendations that RIMS made last year," she said (BI, June 10, 1996).

Anne Flanagan, state affairs director for the National Assn. of Insurance Brokers in Washington, said such measures are needed to make U.S. insurance markets "more streamlined and competitive" with popular offshore markets.

Jon Harkavy, vp and general counsel of USA Risk Services Inc. in Arlington, Va., said he considers regulators' efforts important. "State regulators have been slow to catch up with the multistate, or even international, nature of commercial insurance."

The latest two-page summary of findings and recommendations, includes proposals urging the NAIC's Commercial Lines Property and Casualty Insurance Committee to:

Combine the current "prior approval" and "file and use" rate and form laws, ideally by relying on administrative rulemaking to effect the changes.

Extend deregulation to rates, forms and market access for industrial insureds.

That would allow insurers, without regulatory approval, to use different rates and contract terms, including shorter cancellation and non-renewal provisions.

However, the premium attributable to each state in a multistate policy must arise from the exposures in that state, the draft says.

Deregulating market access "will provide unlimited access to excess and surplus lines markets for industrial insureds," the draft says.

The National Assn. of Professional Surplus Lines Offices Ltd. in Kansas City, Mo., plans to ask regulators to clarify that proposal.

"We would have some difficulty if regulators are saying that an industrial insured could do business through a surplus lines broker with any non-admitted insurer they choose to use, without that surplus lines insurer being screened for solvency and management," said Richard Bouhan, NAPSLO's executive director. "It opens up the marketplace too broadly and could invite in bad actors."

Define industrial insureds as "of such a size that it is likely that they will have risk managers"

While the drafters made no determination regarding specific thresholds, "discussions have appeared to favor multiple thresholds designed to recognize the size of the entity as opposed to a single, simple premium threshold," the draft says.

"Smaller insureds with risk managers that have provided evidence of sophistication could also be considered for exemption, perhaps through passage of a consultant's exam or a set of agent's licensing exams," the drafters propose.

RIMS plans to propose that regulators also accept as evidence for exemption certification as an Associate in Risk Management, or another advanced designation, RIMS' Ms. Vaughan said.

The Alliance of American Insurers in Schaumburg, Ill., is recommending that drafters "dismiss the term 'industrial insured' in favor of establishing white paper guidance on sophistication that would identify the smaller insured who needs regulatory protection, and extend a deregulated environment for rate, form and market access to all insureds above the small-definition threshold," wrote Larry E. Kibbee, vp and director of public affairs, in a letter to the drafters.

Extend rate deregulation to policyholders "that are smaller than 'industrial insureds'"

Address problems caused by "inconsistent form approval provisions" for multistate policyholders

"Forms approval laws should allow the commissioner to promulgate regulations that would exempt insurers from the necessity to use various state exception forms for multistate insureds where the premium attributable to the state is less than half of the total policy premium," the draft says.

Drafters recommended further study of issues they discussed, but did not agree on, including whether industrial insureds should be allowed to outsource the entire risk management function, avoid guaranty fund assessments and protection or use only specially licensed and regulated insurers. They also would like to improve surplus lines tax collection for multistate policyholders.

According to the current timetable, the drafting committee will present a final proposal to the re-engineering committee at the NAIC's September quarterly meeting.

However, formal NAIC adoption of the white paper may not take place until December, an NAIC spokes-woman said.