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SEATTLE -- The National Assn. of Insurance Commissioners is advancing the much-awaited movement to streamline commercial insurance regulation by issuing its formal policy recommendations for public comment.
The 23-page white paper is broader in scope and better organized than previous drafts, while also providing more specifics for identifying large buyers eligible to be exempt from most current regulatory protections and requirements.
A working group of the NAIC finalized the policy paper and submitted it to the Special Committee on Regulatory Re-engineering during the NAIC's quarterly meeting in Seattle last week.
Early reaction to the insurance regulators' proposals is generally enthusiastic across a wide range of industry participants.
The committee is now asking for public comment on the paper during the next three months as a first step toward implementing the proposed changes.
However, before the white paper's promise becomes a reality, other NAIC subgroups must develop proposals for implementing the various aspects of deregulation and then individual states must adopt them.
During the NAIC's 21/2-year drafting process, a consensus has emerged that "opportunities exist for the streamlining and rebalancing of commercial insurance regulation," according to the white paper.
When compared with previous versions, "the latest white paper contemplates stronger reliance upon competition as a regulator of rates, rather than a formal approval process," said Alan Wickman, acting chairman of the working group that drafted the paper.
"In terms of forms, it didn't walk away from prior approval but asked the Commercial Lines Committee to consider how self-certification could work," said Mr. Wickman, administrator of the Nebraska Insurance Department's actuarial division.
The concept of self-certification typically requires insurers to annually certify that they are following state laws, rather than having them annually file all forms with regulators.
To streamline both rate and form regulation, the paper recommends that "the NAIC replace the prior model rating laws with a single model that will address both rate and form filing."
However, it also recommends giving each state commissioner the authority to adopt a flexible, cost-efficient approach for rate regulation without stipulating what that approach should be. Options include prior approval, flex rating and a use-and-file approach, among others.
As part of deregulation, the white paper also proposes exempting some large commercial buyers from most laws or regulations governing the form and content of commercial insurance policies.
According to the paper, to be eligible for "Exempt Commercial Policyholder" status, a company must self-certify that it meets two of these characteristics:
Has a net worth of more than $50 million.
Has net revenues or sales of more than $100 million.
Employs more than 500 persons, or is part of a holding company that has more than 1,000 employees in the aggregate.
Procures its insurance through the use of a risk manager, who is either employed or retained.
Has aggregate annual insurance premiums of more than $500,000.
Is a not-for-profit, or public entity with an annual budget or assets of at least $45 million.
Is a municipality with a population of more than 50,000.
The parameters were developed using research provided by a variety of sources, including the Risk & Insurance Management Society Inc.
Drafters also asked the Commercial Lines Committee to prepare a self-certification statement for an exempt policyholder to sign that confirms it knows its insurance is unregulated.
"Mandatory coverages, such as auto and workers comp, must still provide for the substantive rights or protections accorded individuals," as specified under various statutes, the paper says. However, "the ECP and its insurer would still be free to negotiate all other terms and conditions of these policies."
"One of the most important opportunities that this package seizes upon relates to multistate considerations" affecting buyers and brokers, the white paper's authors say.
Drafters recommended that the new NAIC model rating law allow a commissioner to waive state requirements for corporate policyholders that are primarily located in another state.
In addition, they recommended that the NAIC "facilitate efforts by states to achieve greater uniformity in cancellation, non-renewal and other statutory requirements."
The white paper also offers proposals for eliminating what it calls "significant problems" with surplus lines regulation.
The panel recommended that state regulators expand lists identifying hard-to-find coverages that are automatically eligible for surplus lines placement. That would eliminate prior searches in the admitted market,, as most state laws require proof that three admitted insurers have declined the risk before it can be placed in the surplus lines market.
It also recommended several ways to simplify the allocation and payment of surplus lines taxes, though that issue has historically been a problem for state regulators who fear losing tax income for their state.
The white paper also addresses ways to streamline insurer licensing procedures, such as through the development of reciprocal agreements among states and a streamlined application process.
It also recommends simplifying producer licensing, through use of the Producer Information Network, a database of license and regulatory information on agents, as well as exploring model reciprocal agreements between states and eliminating countersignature laws.
Early indications are that representatives of risk managers, brokers and insurers are enthusiastic about the NAIC's final streamlining proposal.
"The paper recommends a very good, broad, conservative approach to deregulation," said Anne Allen, assistant director of government affairs for New York-based RIMS. "It doesn't have as many concrete proposals as earlier drafts did, but it does allow for exploration of a number of options."
The National Assn. of Insurance Brokers "is very pleased and excited about the possibility for change that the white paper offers," said Anne Flanagan, director of state affairs for the Washington-based organization.
"Our concern is that the ball stay in the air and the momentum keep going. We hope the NAIC remains committed," Ms. Flanagan said.
The white paper is "positive," said Phillip Schwartz, vp-financial reporting and associate general counsel for the American Insurance Assn. in Washington.
Larry Kibbee, vp with the Alliance of American Insurers in Schaumburg, Ill., said, "We think it is a great product."
Mary Cannon Veed, an attorney with Peterson & Ross in Chicago specializing in reinsurance, predicted that there will be "a groundswell" of interest in streamlining regulation among state insurance regulators. Small states that adopt such forms of flexible regulation will have "a competitive edge in recruiting new industry and business," she added.
Regulators from New York and Virginia, however, questioned the appropriateness of some characteristics used to define exempt commercial policyholders.
For example, they felt the term "risk manager" was too vague and lacking in credentials.
They also questioned exempting large policyholders from some laws, such as requiring bankruptcy protections for third-party claimants. Those concerns were passed on to the Commercial Lines Committee to consider.
A copy of the white paper is available through the NAIC's web site at www.naic.org or by calling Mike Barth or the publications department at 816-842-3600. Comments should be directed to Mr. Barth at the NAIC's headquarters in Kansas City, Mo.
In other action at the meeting, regulators:
Elected Glenn Pomeroy of North Dakota president; George Reider Jr. of Connecticut vp; and George Nichols III of Kentucky secretary/treasurer. Mr. Nichols is the first African-American to be elected as an officer of the 126-year-old organization.
Voted to revert to the pre-1997 arrangement of scheduling its Executive Committee meeting before its formal plenary, or voting, session at its four quarterly meetings beginning next year.
In 1997, the NAIC changed the order to enhance deliberations because the experimental schedule typically added three months to the approval process.
The latest change was made because some regulators felt the change had caused unacceptable delays. However, they also adopted new procedures to guarantee that model laws are given adequate consideration before adoption, including requiring the Executive Committee to consider all model laws, regulations and policy papers separately rather than as part of a consent agenda.
Awarded second-round accreditations to Alaska, Missouri, Nebraska and Texas.
The accreditation program requires that every accredited state be re-reviewed every five years. There are now 49 accredited insurance departments -- excluding New York and Nevada -- and 13 of those 49 have received their second-round accreditations.
The accreditation review group also approved "exposing" a model law to public comment for two years before it can become a future standard required for accreditation.
Approved sending a letter informing the Securities and Exchange Commission that most annuity or life insurance policies with an equity-indexed component are closer to being "fixed products" rather than variable ones and should be regulated as insurance rather than securities.
Delayed an Executive Committee vote on a codification project to standardize insurer accounting and referred two controversial issues to an ad hoc task force of state regulators who will be chosen by NAIC President Glenn Pomeroy.