Accreditation withdrawal sparks debate

OLYMPIA, Wash. -- Efforts by Washington state's insurance commissioner to downplay the impact of her department's withdrawal from a national regulatory accreditation program are sparking controversy.

Washington state insurance officials and knowledgeable observers disagree on the possible repercussions for insurers and consumers of the Insurance Department's decision to end its participation in the National Assn. of Insurance Commissioners' voluntary accreditation program.

Washington's elected insurance commissioner, Deborah Senn -- who has acknowledged she intends to seek the Democratic U.S. Senate nomination this year -- said in a statement that the withdrawal "will have no adverse effect on insurance consumers" and "does not. . .reflect on the quality of a state's financial oversight."

Those statements drew strong criticism from some observers, though others generally supported the commissioner's decision.

The department's May 25 announcement was designed to preclude a hearing -- scheduled for May 30-31 -- that Ms. Senn had requested earlier to appeal the NAIC's proposed suspension of Washington's accreditation status, said Chief Deputy Robert Harkins, Ms. Senn's spokesman on the issue.

Late last year, the NAIC's Financial Regulation Standards and Accreditation Committee recommended the suspension because of ongoing concerns that the department lacked sufficient financial examiners to review insurers' financial reports and operational procedures (BI, Dec. 13, 1999). The Insurance Department, which passed its first-round accreditation review about five years ago, was seeking second-round approval.

In its recent statement, the department said it was forced to drop out of the NAIC's accreditation program after the Legislature, for the second time, denied a budget appropriation. The department, whose budget exceeds $13 million per year, was seeking $318,000 to pay financial examiners competitive salaries.

Washington state officials' assertion that withdrawing from the accreditation program would not harm consumers or financial oversight of insurers drew fire from some observers, including a key regulator.

"I think it's a mischaracterization," said Vermont Insurance Commissioner Elizabeth Costle, chair of the NAIC's accreditation oversight committee. "I would challenge" the notion that accreditation doesn't reflect on the quality of a state's financial oversight -- "that's the whole point of the program."

The NAIC adopted the program in June 1990 in response to criticism by federal lawmakers about uneven solvency regulation nationwide. The program requires states to adopt uniform standards so that each insurance department has adequate statutory and administrative authority, including appropriate organizational and personnel staffing and practices.

Mel Sorenson, assistant vp and Northwest regional office manager for the National Assn. of Independent Insurers, also challenged the Washington Insurance Department's statement.

"I would quarrel or disagree with the commissioner's assertion that (loss of accreditation) has no impact on consumers," Mr. Sorenson said. Consumers should care about uniformity and appropriate financial oversight, because it helps keep insurers solvent and able to pay policyholders' claims, he said.

In its defense, Mr. Harkins noted that the department has received high marks in its NAIC reviews for the two remaining criteria reviewers consider -- fiscal analysis as well as rules and regulations. He expects the department to continue those oversight activities, which have helped the state avoid any insurer insolvencies during the last 12 years.

The Washington department's statement also downplayed the NAIC accreditation program's significance, saying that "the program has never included all the states." Nevada was the only U.S. jurisdiction, however, that did not receive first-round accreditation. New York subsequently lost its first-round status after its Legislature failed to adopt a few necessary laws.

Five years after obtaining first-round status, states must seek second-round accreditations, which 36 jurisdictions have obtained thus far. Only Tennessee, Washington state and West Virginia bid for and failed to win second-round approval, but the departments are working to achieve it.

"We think it (accreditation) isn't essential, but important," Mr. Harkins said.

The NAIC program previously barred an accredited state from accepting an unaccredited state's examination unless an examiner from an accredited state signed off on it, Ms. Costle said. Several states apparently adopted that requirement and may still have it on their books, though the NAIC withdrew the requirement several years ago, she said.

Vermont is one of the states that removed the requirement. Ms. Costle was unable to identify other states where it may still be law.

"Even though the New York Insurance Department is acknowledged to be one of the leaders in regulating solvency, the fact that the department is not accredited has resulted in problems for at least two insurers domiciled there," said Phillip Schwartz, vp-financial reporting and associate general counsel for the Washington-based American Insurance Assn.

Regulators in other accredited states have asked for financial examinations from New York's Insurance Department to be overseen by an examiner from an accredited department, he said.

A New York Insurance Department spokeswoman declined to comment.

Washington state regulators and a spokesman for SAFECO Insurance Cos. in Seattle, which underwrites nationally, either were unaware or unconcerned about such problems.

For the short term, the department's lack of accreditation is not "that big a deal," said Ed Southon, SAFECO's assistant general counsel for property casualty companies. The Washington Department could invite an examiner from an accredited state to oversee the exam process, he said.

Another insurance industry observer, however, warned that being located in a non-accredited state could cause "humongous monetary consequences" for an insurer seeking to write business nationally. Increased costs could stem from other states seeking to do their own exams or needing to bring in examiners from accredited states to participate in exams.

Without such accommodations, an insurer based in an unaccredited state could jeopardize its licenses in other states, the observer said.

In addition, others have noted that higher administrative costs may be passed on to policyholders in the form of higher rates.

"In the long run, though, we do think it is important for Washington State to be accredited," Mr. Southon said.

If the department remains unaccredited, its stature in the eyes of other regulators could fall, creating a barrier that would result in the loss of local insurance industry business, said Basil Badley, a Washington attorney who acts as a lobbyist for several insurer trade associations, including the AIA.

If insurers withdraw, competition is reduced, and consumers may have to pay more for coverage, observers have noted.

Most Washington state-based sour-ces, however, are optimistic that the state Legislature will eventually see the need to improve the salaries of financial examiners and specifically appropriate the higher pay, as required by law. The department is expected to then seek reaccreditation.

According to the NAIC's latest figures, Ms. Senn's departmental budget is the 17th largest among jurisdictions tracked by the NAIC and paid full-time equivalent financial examiners between $30,996 and $48,300 in 1998. The Washington department said this level was the lowest in the nation.

Some critics, however, argue the commissioner should have been aware of the problem sooner and taken special budgetary steps to remedy it before now. The department disagrees, Mr. Harkins said.

"It is an ongoing problem until the job market changes or the Legislature sees fit to fund these positions," Mr. Harkins said.