WASHINGTON-Members of the National Assn. of Insurance Commissioners are struggling with how to define insurance buyers sophisticated enough to be exempt from various state law protections.

The regulators reviewing a proposals for deregulation of commercial insurance currently are considering a two-tiered model, in which one tier of buyers would be exempt from broader regulation.

State insurance regulators also are seeking comment by Oct. 15 on a more detailed and better organized draft of an NAIC position paper on streamlining commercial insurance regulation.

The deregulation issue was discussed during the fall quarterly meeting of the National Assn. of Insurance Commissioners, held last week in Washington.

Regulators are expected to consider a variety of factors in defining what the draft now calls "large commercial buyers," which states should exempt from form, rate and market access regulations, according to the proposal. Regulators also must define parameters for a second-tier of buyers who would be exempt from just rate regulations, the proposal says.

Relevant factors for differentiating the two classes of buyer may include size, complexity, geographic locations, number of employees, sophistication level and ability to absorb loss, according to regulators' discussions.

The Risk & Insurance Management Society Inc. is expected to provide relevant database information to help state regulators design appropriate parameters, following an offer by Anne Allen, RIMS' state legislative counsel.

The drafting group of the NAIC's Special Committee on Regulatory Re-engineering is committed to completing its task by the organization's winter quarterly meeting in Seattle in December, said drafting group Chairman Robert G. Lange of Nebraska, who took over the effort a few months ago following the previous chairman's resignation.

The Commercial Lines Property & Casualty Committee is anxious to begin modifying model rating and other laws as a way to encourage states to implement the recommendations, according to committee Chairman Darla L. Lyon of South Dakota.

Mr. Lange said the latest draft "is a little more comprehensive and better organized" than the version discussed in June.

The draft still includes many pro-business recommendations to states, including:

Form filing laws should exempt multistate commercial insurance policyholders of all sizes-and some insurers-from various cancellation, notice, coverage and non-statutory requirements.

Other states also may consider adopting a Colorado program for insurers to self-certify that they are using state-required forms rather than having to file samples with each insurance department, according to a suggestion made last week by Colorado Deputy Commissioner Maryellen Waggoner, who serves on the drafting group.

Flex rating, which makes it easier for insurers to make minor rate changes, should be approved as an alternative by states with prior approval laws.

Surplus lines export lists, which identify risks for which a state does not have a ready market, should be adopted to make it easier for buyers to find coverage.

Countersignature laws in 36 states, which typically require signatures from agents in at least two states to place a risk, should be eliminated as unnecessary.

In addition, drafters of the deregulation proposals endorse current NAIC initiatives such as the Producer Information Network, which is designed to improve agent licensing. They also will add wording endorsing the Accelerated Licensure and Evaluation Review Techniques project, which is designed to standardize insurer licensing forms.

In related issues, drafters rejected the idea of creating a special class of industrial insurer and recommended that states allow more flexibility in their regulation of workers compensation.

But they have not decided whether it is appropriate to exempt large commercial buyers from mandatory participation in guaranty funds or residual market mechanisms.

The deregulation proposals are generally in keeping with the principles outlined in a recent letter by an Ad Hoc Industry Group on Commercial Lines Deregulation, which represents about a dozen companies including insurers, brokers and consumers. The Coalition of Alternative Risk Funding Mechanisms and Kansas City, Mo.-based Hallmark Cards Inc. are among its members.

"RIMS generally endorses the letter but didn't sign it because the letter addresses issues outside the scope of RIMS' main concerns, which are rate and form deregulation," Ms. Allen said.

However, insurers have some concerns about the current draft.

The Alliance of American Insurers would like to see more proposals that would reduce insurer transaction costs related to the filing of forms.

Members of the National Assn. of Independent Insurers have "serious concerns" over proposals that segment or fragment the marketplace by giving the benefits of deregulation to only large commercial risks, according to its Sept. 15 letter.

Comments on the draft position paper should be made by Oct. 15 to Mike Barth at the NAIC's office in Kansas City, Mo.

In other action at the meeting last week:

NAIC President Josephine Musser announced plans to resign as Wisconsin's insurance commissioner when her NAIC term ends at the conclusion of the NAIC's winter national meeting in Seattle in December.

Wisconsin state law prevents her from discussing her future plans while serving as commissioner, Ms. Musser said. However, published reports are that she intends to run for the congressional seat held by Rep. Scott Klug, R-Wis., who will not seek re-election in 1998.

NAIC members formally adopted a draft resolution outlining the organization's position on 21 key issues related to financial services modernization. The measure specifically addresses proposals found in federal legislation, H.R. 10, the Financial Services Competition Act of 1997.

The NAIC resolution outlines' members opposition to any pre-emption of state authority over the business of insurance, especially in the areas of mutual holding companies or state redomestication. State insurance regulators are seeking an affirmation by Congress of "functional regulation," whereby the states would regulate all insurance products regardless of whether they are sold by banks or insurers.

In keeping with the meeting theme of "Get Up, Stand Up for State Regulation," NAIC regulators visited key members of Congress and hosted a reception for them on Capitol Hill. They also heard encouraging words from Rep. Earl Pomeroy, D-N.D., a former insurance commissioner and NAIC president, as well as Washington, D.C., Mayor Marion Barry.

NAIC regulators are seeking comment by Oct. 29 on a final package of about 20 redrafted statutory accounting principles, which will be available soon at the NAIC's World Wide Web site.

Many insurers were pleased that regulators agreed to remove investment limitations in favor of disclosure of investments. However, they are upset that the final package of papers is not yet available for them to comment on.

Despite that, regulators are pushing the measures through the NAIC's committee structure in hopes of expediting the NAIC's formal adoption of the measure, which could occur as early as December, though March 1998 appears more likely.

The approximately 75 newly codified rules are expected to go into effect beginning Jan. 1, 1998, in California and other states that require no state-specific legislative or commissioner action.

NAIC regulators gave interim approval to allowing states to ban insurers from using information about domestic abuse as an adverse underwriting tool for property/casualty companies writing personal or business-related lines of insurance, such as coverage of shelters for battered spouses.

The discussion included viewing of film footage of a Seattle woman whose homeowner claim was denied after her estranged husband burned down their home shortly before a court approved their divorce. A state court recently affirmed SAFECO Insurance Co.'s denial of the claim because the policy excluded intentional acts by a co-insured. The case is being appealed.

NAIC members unanimously adopted on a roll-call vote a position paper on the use of credit reports in insurance underwriting. The paper details current sources of information about an individual's consumer credit history and how insurers are using it for underwriting purposes in life, health and property/casualty lines. The paper is designed to help state insurance regulators identify possible insurer misuse of credit information and actions they can take to prevent it.

Despite extensive discussions, the National Assn. of Independent Insurers and the Alliance of American Insurers continued to oppose portions of the paper, which representatives of the insurer groups said understated the actual correlation between negative credit reports and higher risk of loss.

Discussion of the issue heated up when elected insurance commissioners Donna Lee Williams of Delaware and Deborah Senn of Washington state voiced umbrage at what they perceived as a threatening letter opposing NAIC adoption of the measure, especially by anonymous voice vote.

The letter was written and distributed by the Citizens for a Sound Economy, a conservative lobbying group.

Regulators are expected to formally vote in December on whether the NAIC should revert to its pre-1997 arrangement of scheduling its Executive Committee meeting before its formal Plenary, or voting, session. Regulators are apparently concerned that the new arrangement, which typically adds three months to the process, creates excessive delay. The NAIC had changed the order beginning this spring with the goal of enhancing deliberation on issues.