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NAMIC Federal Affairs Key Issues 2002
(click on the heading below to visit that section)
Threat of Terror
Auto Issues
Vehicle Safety Defect Reporting Requirements
Other Issues
Federal Regulation and the Fair Housing Act
Health Care Patients' Bill of Rights
Insurer Access To Criminal Records
Legal Reform
Natural Catastrophe Exposures
Financing Major Natural Catastrophes
Wind Hazard Reduction Legislation
Privacy
Motor Vehicle Information Privacy
Social Security Number Privacy
Small Company Tax
Small Company Tax Exemption & Election
TERRORISM INSURANCE
THE ISSUE IS. The need for federal terrorism reinsurance legislation to prevent an insurance availability and affordability crisis due to the tragic events of September 11, 2001 and further terrorist attacks.
IT'S IMPORTANT BECAUSE. Due to the tragic events of September 11 - and the possibility of further acts - there is a need to establish new mechanisms to assure the financial capacity to pay claims resulting from terrorism in the future.
The September 11 attacks were of a nature and scope unlike any other catastrophe in world history. Prior to September 11, insurance and reinsurance companies did not collect premiums to cover terrorism. There is no way to predict how, when and where future terrorist attacks against the United States will be launched; and, according to U.S. Department of Defense and Central Intelligence Agency warnings, future attacks are likely to be even more massive and deadly than those of September 11. Under these circumstances, insurers (including reinsurers), cannot assess, measure, or spread the risk resulting from acts of terrorism.
The property/casualty insurance industry is wisely managed and is well-capitalized overall. But the industry cannot be expected to absorb unlimited losses from multiple terrorist attacks in the future while maintaining the financial strength to pay claims for auto accidents, fires, natural disasters, workplace injuries and other hazards.
Since September 11, reinsurers have generally excluded terrorism from treaties negotiated with primary insurance companies. This leaves those companies with the added exposure of terrorism for which they have not collected premiums. In the cases where primary insurers have been approved by their regulators to exclude terrorism, the policyholders are left with the exposure of terrorism. When primary insurers or policyholders have been able to obtain terrorism coverage, it is extremely limited and expensive. The lack of available and affordable coverage for terrorism leaves the policyholders with either limited coverage or no coverage at all.
Congress must take action immediately to create a federal backstop for insurance against terrorism. On November 29, 2001 the House of Representatives passed H.R. 3210, the Terrorism Risk Protection Act, by a vote of 227-193. Introduced by House Financial Services Committee Chairman Michael G. Oxley, R-Ohio, and Capital Markets Subcommittee Chairman Richard H. Baker, R-La., H.R. 3210 would provide a special loan program for the property/casualty insurance industry and individual companies if losses exceed significant amounts. Any assistance the industry and individual companies receive from the federal government would be repaid to the U.S. Treasury.
On June 18, 2002, the Senate passed S. 2600, the Terrorism Risk Insurance Act, by a vote of 84-14. This legislation, sponsored by Senator Chris Dodd (D-Conn.), would create a mechanism under which the federal government would provide direct assistance to insurers in the event of a catastrophic terrorist attack. For attacks causing at least $10 billion in damages, the federal government would pay 90 percent of the losses, and the insurance industry would pay 10 percent. There would also be an individual company trigger based on market share. If company losses exceed the trigger amount, the company could receive assistance for 80 percent of the losses and pay the remaining 20 percent for events of at least $5 million. Once total industry losses reach $10 billion, the government would cover 90 percent of the losses. S. 2600 would provide for a one-year program with an option for a second year if authorized by the Treasury Secretary.
NAMIC POSITION. NAMIC believes that a federal backstop for terrorism reinsurance is necessary and should be passed by the Congress as soon as possible. In reviewing the legislation pending before Congress, NAMIC supports the Senate legislation as a way to make terrorism insurance more readily available and affordable. The loan program proposed in the House legislation does not erase the underwriting, pricing and reserving challenges that currently make terrorism uninsurable. Insurers would still be exposed to potential losses from terrorism with no possible reprieve from making payments, bringing the insurers' solvency into question. The Senate legislation would provide clear boundaries for terrorism risk where none currently exist and would allow insurers to assess the risk in order to price terrorism policies appropriately. This in turn would allow insurers to reenter the market with confidence and the ability to make terrorism coverage more freely available and affordable.
AUTOMOBILE ISSUES
THE AUTO CHOICE REFORM ACT
THE ISSUE IS. The enactment of federal legislation that would allow drivers to choose between no-fault automobile insurance or a slightly modified version of the insurance system currently available in their state.
IT'S IMPORTANT BECAUSE. In several states throughout the nation, complaints are common among consumers and public officials that the automobile insurance system is costly, inefficient, and fails to adequately compensate the seriously injured.
One major reason for these inefficiencies is the amount of litigation and fraud prompted by those who seek unwarranted awards for non-economic losses. Over the past 30 years, several states have experimented with no-fault and "auto choice" insurance systems under which individuals, to various extents, have their rights to sue for pain and suffering limited in exchange for reduced premiums, surer compensation and immunity from suit for pain and suffering awards in certain cases.
In the 1970's, there was a major, yet ultimately unsuccessful effort in Congress to establish a federal no-fault auto insurance system. Beginning in 1996, a renewed interest in a modified no-fault system emerged among an influential bipartisan group of Senators including Mitch McConnell (R-KY), Robert Dole (R-KS), Daniel Patrick Moynihan (D-NY), and Joseph Lieberman (D-CT). They introduced the "Auto Choice Reform Act," which would give individuals the right to choose between two types of auto insurance.
Under the first option, personal injury protection (PIP), drivers would collect economic damages from their own insurance company and give up the right to sue for non-economic losses in exchange for lower premiums and immunity from suit for non-economic losses. Under the other option, tort maintenance coverage (TMC), drivers would retain the right to sue for economic and non-economic losses. States would be able to opt-out of the auto choice system.
The bipartisan group of Senators, led by Mitch McConnell, reintroduced the Auto Choice Reform Act in the 105th and 106th Congresses. The House of Representatives also became involved in the issue in 1997 when Majority Leader Dick Armey (R-TX) and Representative Jim Moran (D-VA) introduced companion legislation.
In addition, the Congressional Joint Economic Committee (JEC) released two reports in 1998 highlighting the potential savings an auto choice system could provide for low-income residents of urban areas as well as United States businesses and local governments. In March, 1998, the JEC published a study estimating that auto choice would reduce premiums by 24 percent overall, averaging $184 per year, per car, a significant savings, particularly for low-income persons. In July, 1998, the JEC released a report estimating that auto choice would reduce the cost of commercial auto insurance by 27 percent, saving U.S. businesses $8.1 billion annually. Proponents of the Auto Choice Reform Act point to these studies as well as earlier studies of the RAND Institute for Civil Justice. In addition, RAND found that seriously injured persons (those with injuries costing between $25,000 and $100,000), on average, recover only 56 percent of their actual damages under the current tort liability based system. For victims with the gravest injuries (over $100,000 in medical bills and lost wages), the recovery level averages only 9 percent of their actual damages. This inefficient compensation system is in large part the result of monies going not to the victims, but to lawyers and fraud.
In the 107th Congress, House Majority Leader Armey and Rep. Moran reintroduced the Auto Choice Reform Act, H.R. 1704, on May 14, 2001. To date, the legislation has not been reintroduced in the Senate, nor has the proposal been the subject of any Congressional hearings.
The Auto Choice Reform Act is a major piece of legislation that could dramatically change the way consumers purchase their auto insurance and the way insurance carriers provide coverage. It is important for Congress to have a full and open debate to ensure that all affected parties understand the potential benefits, challenges and complications of an auto choice system.
NAMIC POSITION. NAMIC supports the study of ways to improve the legal system in the United States in order to reduce litigation and fraud and therefore supports reasonable alternatives to the traditional tort system. Because many states do not have significant problems with their auto insurance systems, and insurance is a business best regulated at the state level, many members of NAMIC believe auto no-fault proposals should be considered by individual states, rather than at the federal level.
VEHICLE SAFETY DEFECT REPORTING REQUIREMENTS
THE ISSUE IS... Whether automobile insurers should be required to report possible vehicle safety defect information to the federal government.
IT'S IMPORTANT BECAUSE... During the summer of 2000, Congress began to investigate the Ford Explorer-Firestone Tire tread separation cases that resulted in numerous deaths and serious injuries. The Senate and House Commerce Committees began public hearings on the issue in mid-September, 2000; and legislation was passed by Congress and signed by the President by the beginning of November. The legislation, the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act, became Public Law No: 106-414.
The legislation affects insurers by directing the Secretary of Transportation to "conduct a study to determine the feasibility and utility of obtaining aggregate information on a regular and periodic basis regarding claims made for private passenger automobile accidents from persons in the business of providing private passenger automobile insurance or of adjusting private passenger automobile insurance claims for such automobiles."
Insurers would have preferred to have been left out of the legislation altogether, but the provision in the law was a tremendous improvement over the proposal that the U.S. Department of Transportation (DOT) originally sent to Congress. The fact that one large auto insurance company had provided some limited trend information to the National Highway Traffic Safety Administration (NHTSA) in the past gave DOT the idea that they should require insurance companies to report auto claims information dealing with safety defects to the agency. The original proposal would have required insurers to submit claims information on incidents in vehicles and equipment that resulted in fatalities, serious injuries or fires, including the vehicle identification numbers, names, addresses and telephone numbers of the policyholders.
In late 2000, NHTSA sent a legally binding order to eight large auto insurers asking them for detailed information on their claims files and databases and subrogation procedures. Based on the letter and subsequent conversations with NHTSA, it became evident that the agency was interested in seeking detailed claims information from auto insurers. Also in late 2000, NHTSA published a notice in the Federal Register asking for comments regarding the insurance study. NAMIC, along with the Alliance of American Insurers, the American Insurance Association and the National Association of Independent Insurers submitted comments. The trades stated that the insurance industry is not the best or most feasible source of information for establishing an early warning vehicle defect detection system and expressed their contention that vehicle and component manufacturers will always be a much better source of information for such a system. However, the industry did offer that there is some tertiary insurance industry information that may be of assistance to NHTSA to supplement their defects investigations, although this would not be an "early warning" system.
NHTSA released its insurance study on March 5, 2001 and concluded that some information from insurance companies such as non-crash fire data and subrogation information could be useful in helping to identify defect trends. In addition, on January 3, 2002, the DOT Office of Inspector General released a review of NHTSA's implementation of the TREAD Act. In this report, the OIG suggested that NHTSA should solicit information from a wide range of sources such as insurance companies and plaintiff attorneys in order to help identify potential safety defect trends sooner.
NAMIC POSITION... NAMIC strongly supports efforts to remove unsafe vehicles from the roads but believes that it is unrealistic and unreasonable for NHTSA to require automobile insurers to submit vehicle safety defect information. Over one-thousand companies write private passenger automobile insurance in the United States. The majority of these entities are regional or smaller companies that serve policyholders in limited geographic areas. The focus of these companies is personalized customer service. When a policyholder submits an auto accident claim, the goal is to resolve it quickly and efficiently.
Requiring automobile insurance companies to submit safety defect information to the National Highway Traffic Safety Administration (NHTSA) would be extremely expensive and burdensome for regional and smaller companies that provide automobile insurance. In addition, any information that these companies could provide to NHTSA would be sporadic, incomplete and possibly inaccurate. Therefore it would provide little or no benefit to the agency.
Today, insurers only conduct detailed engineering analyses in extremely rare cases that involve extensive litigation. Companies do not have in-house expertise to undertake these investigations and must hire outside entities. Because these types of investigations are so rare and are conducted by outside entities that have the necessary expertise, insurers do not have defect information in their claims files to submit to NHTSA. When insurers conduct defect investigations for the purpose of subrogation, it is usually done after the manufacturers and NHTSA have made defect information available.
Setting up a system to even attempt to find out whether crashes are caused by vehicle defects would be extremely costly. Insurance company employees would need to be trained on exactly what to analyze and how to tell if a crash was possibly caused by a defect. Companies would also need to completely update their computer systems and codes to track this information. The coding would need to be extremely specific to be of any benefit. For example, a code simply indicating a fire would not be of any benefit. The company would have to code the cause of the fire, which could be due to a substantial number of factors, and have a code for each possible factor. The costs of compiling all of this data, including the staff resources required for coding and inputting the information, would cause a tremendous expense and hardship for smaller and regional carriers.
A reporting requirement could conceivably drive numerous small private passenger automobile insurers out of business. These companies would be forced to divert a significant portion of their resources to creating systems to investigate and code possible vehicle safety defects, which would lead to delays and inefficiencies in settling claims, increased premium rates and extremely dissatisfied policyholders.
The best sources of information for vehicle defects are the manufacturers of the vehicles and their parts, including tires. The manufacturers clearly possess this information, while insurance companies do not. Information required from insurers would most likely be incomplete. The benefits of requiring insurers to submit this information would clearly not be worth the costs to insurers and their policyholders, especially smaller and regional companies. In addition, reporting requirements would distract insurers from their primary goal of settling claims on behalf of policyholders.
NAMIC is working with the industry and organizations including the Highway Loss Data Institute to see if aggregate information is available that could be helpful to NHTSA in preventing further incidents such as the tread separation cases.
COMMUNITY REINVESTMENT ACT
THE ISSUE IS... Application of the Community Reinvestment Act (CRA) to the insurance industry.
ITS IMPORTANT BECAUSE... Consumer lobbyists, community organizers, certain members of Congress and state legislatures have raised the issue of applying the CRA to the insurance industry. Congress passed the CRA in 1977 to encourage banks and thrifts to lend in certain communities - particularly low-income, minority neighborhoods - in which they accept deposits. Representative Tom Barrett (D-Wisc.) and several other members of the House of Representatives have introduced legislation in the 107th Congress, H.R. 865, to extend the CRA to insurance.
Insurance companies, which are not depository institutions, have not been subject to CRA requirements. Proponents of applying CRA to insurance companies believe that consolidation is erasing the boundaries between financial services companies, such that CRA should apply to all financial services companies. However, important differences remain between banks and insurance companies.
First, insurance companies are chartered to provide insurance, not credit. Insurance companies would violate their fiduciary duty to policyholders as well as safety and soundness requirements of state insurance investment laws if they were to extend credit in the manner and to the degree contemplated by the CRA. In addition, banks enjoy federal benefits not available to insurance companies. The federal government insures bank deposits and grants other financial advantages to depository institutions, providing a quid pro quo for banks' social obligations under CRA. Insurance companies do not enjoy the same federal benefits. Finally, insurance companies do not unfairly discriminate. It is unnecessary to extend CRA to insurance companies because the industry does not unfairly discriminate against low-income and minority communities - the assertion made against the banking industry that led to the creation of CRA. To the contrary, insurance companies participate in many voluntary programs in disadvantaged and minority areas and are seeking to expand their business in urban areas. In addition, existing laws prohibit unfair discrimination, insurance regulators enforce anti-discrimination laws and residual markets exist to cover high-risk properties. Further, most insurance companies do not have a geographic community. The Community Reinvestment Act is by definition oriented to a specific geographic "community." Many insurers have no similar geographic orientation.
The idea of extending CRA to insurance companies is not only fundamentally flawed, it is impractical from a policy standpoint. Subjecting the industry to an unnecessary government mandate would: 1) raise policyholders' premiums, 2) financially weaken the insurance industry, 3) undermine competition in the industry, and 4) jeopardize the ability of companies to pay customers' claims, especially in a catastrophic situations.
NAMIC POSITION... Problems do exist in our nation's urban centers. Some of these problems are the result of ineffective or misguided government policy. Imposing lending and social investment obligations on other financial services companies, especially insurance companies that are not in the lending or social program business, will not solve the problems. It will only create new ones. Moreover, attempts to legislate community involvement on an industry already making a considerable investment would serve precious few while harming many. The insurance industry should be given credit for its proactive stance rather than burdened with additional legislation. The record shows that the insurance industry contributes to communities because giving back to one's own community is good business and is the socially responsible thing to do.
ERGONOMICS
THE ISSUE IS... A federal regulation to require businesses to establish comprehensive ergonomics programs.
IT'S IMPORTANT BECAUSE... In late 2000, the federal Occupational Safety and Health Administration (OSHA) issued a final rule in the Federal Register requiring millions of businesses to establish ergonomics programs in order to reduce musculoskeletal disorders (MSDs) in the workplace. The regulation would have applied to all of general industry, not only to the manufacturing and manual handling industries. There was no exemption for small businesses.
Under the rule, all businesses would have been required to educate all of their employees about MSDs and the new ergonomics standard. If certain thresholds were met, including more than one MSD report in a job category, companies would have been required to establish full ergonomics programs, including job hazard analyses, extensive training, employee involvement and reporting systems. Employees who experienced MSDs would have been entitled to work restriction protection (WRP) benefits, which included 90 percent pay and 100 percent benefits for up to 90 days. The WRP provisions clearly conflicted with the state-based workers compensation system.
OSHA estimated that the new rule would have cost businesses between $4 and $5 billion annually, but several different studies demonstrated that this figure was extremely low. The U.S. Small Business Administration estimated that annual costs would have been around $18 billion. The Employment Policy Foundation conducted an analysis of the proposed rule and determined that it could have actually cost businesses $100 billion annually. These costs would have been particularly harmful to small businesses, which were specifically included in the regulation.
Despite objections from Congress and thousands of comments OSHA received expressing serious concerns about the necessity and scope of the ergonomics proposal, the agency was determined to push forward with implementation of the rule. The agency issued the final rule so it would take effect on January 16, 2001, four days before the Clinton Administration relinquished control to the new Bush Administration.
With a new Administration in place, Congress for the first time in history used a mechanism called the Congressional Review Act to repeal the ergonomics regulation. This act gives Congress a limited time period to hold an up-or-down vote on federal regulations that would cost the United States economy $100 million or more annually. Early in 2001, the Senate and House both passed a joint resolution of disapproval, S.J. Res. 6 to overturn the ergonomics rule. President Bush signed the measure on March 20, 2001.
Early in 2002, Secretary of Labor Elaine Chao announced a comprehensive plan to reduce ergonomic injuries through a plan including industry-specific guidelines, strong enforcement measures and outreach and compliance assistance. To date, the Labor Department has announced guidelines for the nursing home, grocery store and poultry processing industries.
Some members of the Senate and House believe that the guidelines are inadequate and that it is important for OSHA to issue another ergonomics regulation as soon as possible. On June 19, 2002 the Senate Health, Education, Labor and Pensions (HELP) Committee approved, by a straight party-line vote of 11-10, S. 2184, to require the Department of Labor (DOL) to promulgate a final ergonomics rule within two years. The ergonomics standard must address work-related MSDs and workplace ergonomic hazards and must not apply to non-work related MSDs. It also must clearly establish the circumstances under which an employer is required to take action to address ergonomic hazards, the measures required of an employer under the standard, and the compliance obligations of an employer. In addition, the standard must emphasize the prevention of injuries before they occur and cover all industries where workers are exposed to workplace ergonomic hazards and there are economically and technologically feasible measures to control these hazards. S. 2184 also prohibits the new rule from expanding the application of state workers compensation laws. There is no provision in the legislation that specifically addresses small businesses. A companion bill, H.R. 1241, has been introduced in the House, but there has been no action on the legislation.
NAMIC POSITION... NAMIC was opposed to the Clinton Administration's ergonomics standard and actively participated in the effort to overturn it. The standard would have imposed unreasonable costs and regulatory burdens on businesses, including NAMIC members. These requirements would have been particularly harmful for small companies as businesses with 1-19 employees were specifically included in the regulation. There was no way for businesses to opt out of the system. Although there was a "grandfather clause" for businesses that already had established ergonomics program, these companies would have had to comply with all of the provisions of the OSHA standard. The "work restriction protection" (WRP) provision that would have supplanted the state-based workers compensation system was of particular concern to the property/casualty industry. The requirement to provide 90 percent pay and 100 percent benefits for up to three months to those unable to work due to an MSD would have been extremely costly and could have had the effect of encouraging employees to stay home rather than returning to work.
NAMIC has concerns about proposals in Congress such as S. 2184 to require OSHA to adopt a new ergonomics standard within a specific time period. These proposals could lead to another costly and prescriptive standard that does not give companies necessary flexibility to address their unique situations.
It is in the best interest of businesses to provide employees with safe workplaces, and companies have taken measures to improve ergonomics. Because companies and individuals have different situations and needs, allowing individual companies to adopt their own solutions is a better approach than a one-size-fits-all mandate from the federal government. The Labor Department's approach of industry-specific guidelines, outreach and compliance assistance, and enforcement is an effective way reduce ergonomic injuries without subjecting businesses to expensive regulations that may not address the problem. NAMIC strongly believes that Congress should allow the Department of Labor to continue this sensible approach and allow the guidelines to take effect before mandating another costly one-size-fits-all regulation.
FEDERAL REGULATION OF PROPERTY INSURANCE UNDER THE FAIR HOUSING ACT
THE ISSUE IS... Whether the U. S. Department of Housing and Urban Development (HUD) has the authority to regulate the property insurance industry under the Fair Housing Act (FHA).
IT'S IMPORTANT BECAUSE... HUD has attempted to act as a federal regulator of property insurance, without having the congressional authority to do so.
Congress gave states the regulatory authority over insurers more than 50 years ago through passage of the McCarran-Ferguson Act. The act specifically grants states primary and preemptive responsibility for regulation of insurance. The act reads, "No act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulating the business of insurance...unless such act specifically relates to the business of insurance."
The intent of Congress is clear. Not only did Congress choose not to include such language when the FHA was enacted, several attempts to amend the act to make it apply to property insurance failed. Congress rejected such amendments in 1980,1983,1986, and 1988.
HUD started to develop proposed property insurance regulations after consumer activists charged insurers routinely "redline," or discriminate against minority, inner-city residents in the sale of property insurance. Scientifically based studies demonstrate these charges are unsubstantiated. The A.M. Best Company concluded that allegations of insurance company redlining are unfounded. In addition a survey by R.L. Associates, a private research firm, found that the vast majority of low to moderate income homeowners have property insurance. Most recently, the Urban Institute, in a study conducted at the request of HUD, determined no "... systematic discrimination in the provision of home insurance...".
HUD's lack of authority has not stopped the agency from pursuing its own agenda, under the auspices of the federal Fair Housing Act (FHA). HUD has maintained it has the right to regulate property insurers since homeowners need insurance to obtain mortgages. This is despite the fact that the FHA makes no mention of property insurance. The act governs home sales and rentals and the service provided by home sellers, landlords, mortgage lenders and real estate brokers. This mandate is lost on HUD as it seeks to expand its enforcement powers by ignoring boundaries set by law.
The agency has also exceeded its authority by awarding grants totaling several million taxpayer dollars to activist groups as part of an initiative to enforce the FHA. Fair Housing Centers and other similar organizations across the country have received the money to conduct investigations into alleged insurance discrimination that may lead to complaints with HUD under the FHA. The grants were given under the Fair Housing Initiatives Program (FHIP), Private Enforcement Initiative Special Project. Through 2000, this activity by HUD continued despite assurances to the contrary from former Secretary Cuomo when he testified before the House Appropriations Committee, Subcommittee on VA-HUD and Independent Agencies in the spring of 1997.
State insurance departments already handle consumer insurance complaints. HUD's efforts are unnecessary duplications, wasting taxpayer dollars.
NAMIC is working with the insurance industry and Congress to address perceived urban insurance problems. Also, the association helped form and fund the Urban Insurance Partners Institute in 1996 to maximize property insurance availability and affordability in America's urban communities. The foundation brings together community organizations and insurance companies for education and community development.
In addition, NAMIC is actively involved with Neighborhood Housing Services (NHS) organizations across the country. The association believes such insurance industry partnerships are an effective way to address the issue of insurance availability in urban areas. NAMIC is also a member of the Neighborhood Reinvestment Corporation's National Insurance Task Force, which includes participants from consumer groups, the state insurance regulatory arena, insurance companies and other trade associations. The task force is dedicated to facilitating partnerships between insurers and community groups to address the urban property insurance issue.
NAMIC POSITION... NAMIC opposes unfair discrimination of any kind in the issuance of insurance policies. Redlining is illegal in all 50 states and the District of Columbia. Property insurance is available in urban areas through the private marketplace and Fair Access to Insurance Requirements (FAIR) plans. Regarding urban areas specifically, NAMIC agrees with the insurance principle that higher risks necessarily involve higher rates for consumers. To do otherwise would involve lower-risk policyholders subsidizing higher-risk policyholders. The association is convinced regulation and oversight of the industry should remain with the states and not be shifted to the federal level, particularly at the whim of a federal agency.
NAMIC believes that HUD lacks the jurisdiction to regulate the insurance industry. The McCarran-Ferguson Act, properly interpreted, precludes federal jurisdiction in this area under the Fair Housing Act. Further, any congressional action to change the current position is unwarranted in view of the state laws prohibiting redlining.
HEALTH CARE PATIENTS' BILL OF RIGHTS LEGISLATION
THE ISSUE IS... Health care patient protection, or patients' "bill of rights" proposals that could expose health plans and employers to lawsuits and substantially raise costs for employers who provide health benefits to their workers.
IT'S IMPORTANT BECAUSE... The majority of insured working Americans receive their health care coverage through their employers. As health care costs have significantly risen in the last decade, many employers have turned to managed care as a way to control these costs and have the flexibility to continue providing health benefits to their employees. Approximately 60 percent of Americans, or 160 million people, are now enrolled in managed care plans.
In recent years, consumers have raised concerns about the quality of care provided by managed care plans, particularly health maintenance organizations (HMOs). Some specific concerns include the denial or delay of certain treatments to save money and the lack of access to specialists. While public complaints regarding managed care have focused more on anecdotes than statistics, the outcry has been loud enough to spur legislative activity on both the state and federal government levels.
Most states have passed some form of managed care legislation over the past several years. Most significant was likely the 1997 Texas law permitting medical malpractice lawsuits to be brought in state courts against HMOs for medical decisions resulting in injury or death. This state law contrasts with the federal 1974 Employee Retirement Income Security Act (ERISA), which preempts state laws relating to employee benefit plans and prevents employees from bringing malpractice suits in state courts in connection with employer-provided health plans.
In the 107th Congress, both the Senate and the House passed a version of a Bipartisan Patient Protection Act in the form of S. 1052 and H.R. 2563, respectively. Both S. 1052 and H.R. 2563, which apply federal patient protections to all insured Americans, include many identical provisions to ensure that health plan enrollees have access to certain types of services and providers. Some of these common provisions include information disclosure, continuity of care when a provider is terminated, and access to emergency health services, specialists, and pediatric care. However, the House and Senate versions also have significant differences, including such issues as access to courts and available judicial remedies. Health insurers and business organizations have expressed concern about such patient protection legislation, arguing that additional regulation will increase health care costs and increase the number of uninsured Americans. It is likely that Congress will appoint a conference committee to negotiate between the two versions of the Bipartisan Patient Protection Act within the first few months of 2002.
NAMIC POSITION... NAMIC supports the objective of increased access to health benefits. Because the vast majority of people in the United States who have health benefits have obtained it through their employers, NAMIC would oppose legislation that would substantially increase employers' costs in providing health insurance to their employees.
NAMIC believes that certain provisions of the Bipartisan Patient Protection Act would significantly increase health care costs and, as a result, prohibit many employers, particularly small businesses, from being able to continue providing health benefits to their workers. Potentially, the most costly provision of these proposals is the one that would amend the ERISA to allow patients to sue their health plans for medical malpractice in state court for denial or delay of treatment. NAMIC believes that it is important for businesses to continue to have the ability to choose health care plans within their budgets that will meet the needs of their employees. Quality health care, access to necessary treatment, full disclosure of plan benefits and restrictions and reasonable grievance procedures are all worthy goals. In seeking to achieve these goals, however, certain legislation would impose too many mandates and costs on health plans. Rather than benefiting consumers, these bills could make health insurance too expensive for many companies, which could then be forced to discontinue health benefits programs. NAMIC will continue to closely follow this issue in Congress to determine whether the provisions will result in increased costs for businesses and decreased availability of health benefits for employees.
INSURANCE FRAUD
THE ISSUE IS... Reducing the incidence of insurance fraud.
IT'S IMPORTANT BECAUSE... Insurance fraud, in all its forms, is costing the American public hundreds of billions of dollars a year and threatens the affordability of insurance in some parts of the country. Insurance fraud is estimated to add at least $80 billion to the cost of health insurance and $20 billion to property/casualty insurance each year.
Insurance companies have been working for several years to address the problem of fraud. The industry formed and continues to fund the National Insurance Crime Bureau (NICB). In addition, several years ago, various consumer, insurance and government groups formed the Coalition Against Insurance Fraud to reduce fraud through appropriate state and federal regulations and public education.
NAMIC POSITION... NAMIC supports efforts to reduce, and ultimately eliminate, insurance fraud. The Association is working closely with legislators, regulators, consumer organizations, and other insurance trade associations to accomplish this goal. NAMIC also endorses heightened penalties for insurance fraud, and it is strongly supportive of work to combat the crime by the NICB, Coalition Against Insurance Fraud, various Attorneys General and fraud bureaus.
NAMIC believes the problem of insurance fraud is primarily a state issue, since states have the responsibility for insurance regulation and are in the best position to detect and remedy fraudulent practices. As a strong supporter of the state-based insurance regulatory system, NAMIC is encouraged that many state legislatures and insurance departments have made addressing fraud issues a top priority.
NAMIC is also closely monitoring the activities of Congress and federal agencies to ensure that new federal laws and regulations, such as the establishment of personal privacy standards, do not inadvertently interfere with efforts to combat fraud.
INSURANCE REGULATION
THE ISSUE IS... A proposal that would provide for an optional federal charter of insurance companies who would be primarily regulated by a new federal agency, the Office of the National Insurance Commissioner.
IT'S IMPORTANT BECAUSE... With the passage of the Gramm-Leach-Bliley Act (GLBA), financial services companies, including banking, insurance and securities, may form holding companies and create affiliate companies to conduct business in any of the financial industries. For many years, both the banking and securities industries have been licensed and regulated at the federal level, although licensing and regulation also occurs at the state level for banking institutions. In fact, of the total banking institutions operating in the United States today, approximately two-thirds are chartered by the states. As both banking institutions and insurance companies seek to diversify and expand the services they provide, some institutions and their national trade associations are advocating that insurance companies should be given the option of obtaining a federal charter, licensing, as occurs in the banking industry.
In 1945, Congress enacted the McCarran-Ferguson Act that specifically delegated to the states the regulatory authority over insurers. The act grants states primary and preemptive responsibility for regulation of insurance. The act reads, "No act of Congress shall be construed to invalidate, impair or supersede any law enacted by any state for the purpose of regulation of the business of insurance...unless such act specifically relates to the business of insurance." In fact, the business of insurance has been regulated by the states since insurance companies first began operating in this country. For more than 200 years, the states have overseen insurance company operations with respect to solvency and market conduct. While state regulation of insurance is not a perfect system, it has worked very well as witnessed by the infrequency of insurance company failures. In addition, consumer protection has always been an element of state regulation that has been foremost in the minds of state regulators.
In December 2001, Senator Charles Schumer introduced the National Insurance Chartering and Supervision Act. Senator Schumer's basic argument in support of the legislation is that it is cumbersome for insurance companies to be regulated by 50 different regulators and that insurers should be given the same option as banking institutions, to be charted and regulated by either the federal government or the states.
In short, Senator Schumer's bill would create the Office of the National Insurance Commissioner, which would be contained within the U.S. Treasury Department. The National Insurance Commissioner (NIC) would be authorized to charter, regulate and supervise two federal instrumentalities: National Insurance Companies, which could underwrite and sell insurance and annuities, and National Insurance Agencies, which could broker or sell insurance and annuities. The National Insurance Commissioner would establish financial and operational standards, consumer protection standards and standards regarding insurance contracts. With respect to insurance contracts, companies could choose to have their policy contract (form) regulated by either the NIC or the state in which the company maintains its principal office. While the NIC would regulate the terms and conditions used by insurance companies in their contracts, rates would not be regulated. The NIC would have examination and enforcement powers similar to those given to federal banking regulators.
Of particular significance, the legislation would create the National Insurance Guaranty Corporation that would stand behind insurance and annuity contracts issued by all national insurance companies and some state chartered insurance companies that meet certain qualifications. Companies would be subject to risk-based assessments established by the Corporation. The Corporation would be administered and operated much like the FDIC. The Corporation would have a line of credit with the Treasury Department for up to ten years after the date of enactment. The proposal does contain prompt corrective action provisions that would be enforced by either the Corporation or relevant state insurance authorities. Receivership and conservatorship powers would be patterned after the FDIC.
There is also a provision to license all insurance agents through the federal agency. In addition, the bill preempts all state laws that relate to any matter addressed in the legislation. Most importantly, the bill provides that national insurance companies are not subject to the terms of the McCarran-Ferguson Act, although companies would still be subject to all state tax laws imposed upon insurance companies such as state premium taxes.
The state insurance regulators have acknowledged that the passage of the Gramm-Leach-Bliley Act (GLBA) has created the need to modernize and make more uniform state regulations. In fact, GLBA imposed two specific requirements on state insurance regulators while at the same time restating that the intent of Congress is that the business of insurance should continue to be regulated by the states. In addition to taking the lead to create privacy and producer licensing standards for the states, the 51 jurisdictions which belong to the National Association of Insurance Commissioners (NAIC) entered into a Statement of Intent in March, 2000 to bring focus to the issues of greatest concern to reform advocates. Emerging as the highest priority for change is the complex system of prior regulatory approvals that slows the availability of insurance products to consumers.
Despite the NAIC's status as a voluntary organization of regulators, their leadership has aggressively sought consensus for improvements to the present system. One concept with particular application to the life industry is the Coordinated Advertising, Rate and Form Review Administration (CARFRA) which will pool regulatory resources from several states in order to generate a speedier approval process. CARFRA will be initiated on a test basis beginning in March 2001. Results will not be available until mid-2002.
The NAIC has also recommended specific operational efficiencies and further rate deregulation for commercial lines of insurance to state insurance officials. NAIC leadership has asked regulators to assess the legal requirements in their states and to take steps to implement these reforms during 2001. Even though no commissioner is bound to take action, no member of the NAIC dissented to approval of the recommendations, indicating that a good-faith effort will be made by state regulators over the next several months.
The threat has not been lost on state legislators who understand that over $9 billion in premium tax revenues could be at stake if state insurance regulation is curtailed. Possibly the most dynamic of the reform processes is being undertaken by the National Conference of State Legislators (NCSL) and the National Council of Insurance Legislators (NCOIL). NCSL and NCOIL are informally collaborating on an insurance task force intended to recommend state law amendments to insurance statues to create a more uniform and efficient system of oversight that will preserve state autonomy over the business of insurance. NCSL undertook a similar project more than 10 years ago, resulting in the accreditation standards passed by state legislatures in the early 90's. The new task force is not expected to complete its work prior to August 2002 with state action to follow in 2003.
The insurance community, companies and agents alike, recognize the need to modernize regulation of the business of insurance. In many respects, the industry is collaborating, informally, and working with the NAIC, NCSL and NCOIL to accomplish the goals of modernization and uniformity. State insurance regulation is well established within state government. The reform process will require some time before the improvements will be enacted and implemented. Insurance regulation is a complex matter and any change to the process should not be undertaken without thorough review and analysis of the impact of change to the business, companies and agents, but also to the consumers and policyholders the industry serves.
NAMIC POSITION... NAMIC supports state regulation of the business of insurance. The association also strongly supports the modernization and efficiency efforts that are underway through the individual state insurance departments and state legislatures. In addition, NAMIC believes consumer protection is best provided by state regulation of insurance. NAMIC has dedicated its resources to the improvement process being pursued by the state regulators and is working collaboratively with others in the industry to develop consensus on the nature of the reforms. Any significant change to a regulatory regime the size of the state based system requires time. NAMIC would urge the Congress not to pursue federal legislation. With the passage of GLBA, however, it is important that the necessary reforms occur in the foreseeable future.
INSURER ACCESS TO CRIMINAL RECORDS
THE ISSUE IS... Providing a mechanism for insurers to have access to Federal Bureau of Investigation (FBI) criminal records.
IT'S IMPORTANT BECAUSE... Individuals in the insurance business have access to tremendous amounts of money. Thus, those in charge of insurance operations have an obligation to their policyholders, customers, and stockholders to ensure that these assets are handled legally and responsibly. Congress recognized this fact several years ago with the passage of the Insurance Fraud Prevention Act, which makes it a crime to employ felons in the insurance industry and specifically gives state regulatory agencies the responsibility for determining whether a convicted felon may re-enter the insurance business.
Currently, state insurance regulators do not have clear authority to access criminal records from the FBI concerning individuals who are seeking employment or who are employed in the insurance business. Insurance departments are the only government regulators who do not have access to FBI criminal background histories for potential or current employees. Banking and securities regulators have had this type of authority for many years. In recent years, operators of nursing homes and other groups have been granted statutory authority to check personal background information of service providers against the FBI's national data.
In addition, the Gramm-Leach-Bliley Act (GLBA) requires a majority of states and territories to enact either reciprocity agreements or adopt a uniform producer licensing act by November 2002. Under the reciprocity provisions, a state must agree to several components in licensing non-resident producers. State insurance regulators need access to the FBI criminal records in order to have a producer licensing system that achieves uniformity and effectively protects consumers.
In November 2001, the House of Representatives passed H.R. 1408, the Financial Services Antifraud Network Act. This Act would give insurance regulators access to the FBI criminal database and provide insurance companies a mechanism to comply with the 1994 Insurance Fraud Prevention Act. This law would also establish a network through which insurance, banking, and securities regulators could access information about individuals in each other's industries in order to prevent criminals in one financial industry from conducting criminal activities in another financial industry. Following its passage in the House, this bill has been received in the Senate and referred to the Senate Committee on Banking, Housing, and Urban Affairs.
NAMIC POSITION... NAMIC supports legislation, such as the Financial Services Antifraud Network Act, that provides state insurance regulators with access to necessary FBI criminal records. With the enactment of the Insurance Fraud Prevention Act and the uniform producer licensing initiative, it is more important than ever for insurers to possess a mechanism for checking the backgrounds of potential and current employees. The fact that other industry sectors, such as banking, securities, and nursing homes, are able to check backgrounds demonstrates its importance. The ability of insurance regulators to access FBI criminal records will be an important tool in the fight against insurance fraud.
CIVIL JUSTICE REFORM
THE ISSUE IS... Reform of the nation's civil justice system.
IT'S IMPORTANT BECAUSE... American businesses face enormous legal costs from the estimated 18 million civil lawsuits that are filed against companies each year. The annual price tag of $80 billion in direct litigation costs significantly impedes the ability of U.S. companies to compete with their counterparts in other countries. Many small businesses are unable to withstand the legal fees from personal injury lawsuits and must cease operations. Also, the current civil justice system is inefficient in compensating victims with fees for attorneys, expert witnesses, and others often consuming more than half of the amounts awarded to injured plaintiffs.
The problem stems from the fact that the courts have rewritten the law of torts so completely on a case-by-case basis over the past forty or more years that little is left of the original fault-based liability system. This is particularly true in the product liability area, which has developed into a system of liability without fault. To a large extent, it is also true of tort law in general. No one change has been of great consequence, but the cumulative effect of all of those changes has had a significant adverse influence on the cost of all goods and services, including the cost of insurance.
Punitive damage awards and the "shadow effect" of punitive damages is one area that presents a serious problem for U.S. businesses. While punitive damage awards have reached staggering proportions in some cases, a 1996 U.S. Supreme Court decision, Gore v. BMW, should have an ameliorating impact. In that case, the high court overturned a $2 million damage award won by an Alabama doctor who had purchased a touched-up BMW that was sold as new. The Court determined that the Constitution's 14th Amendment Due Process Clause was violated by the excessive amount of the award. The original judgment by an Alabama jury was for $4 million but was later reduced to $ 2 million by the Alabama Supreme Court.
Contingent fees for attorneys are also an area of concern. Some believe that such fees result in more lawsuits of questionable validity and the pursuit of excessive damage awards. There is little downside for attorneys who aggressively pursue lawsuits driven by contingent fees. While there have been some proposals to restrict claims for non-economic loss (i.e., pain and suffering) in return for the provision of economic loss benefits in automobile accidents and medical malpractice cases, most state reform efforts have been directed at reducing the excesses of the tort law system without making fundamental changes. Such proposed state reform includes: (1) the elimination of joint and several liability in comparative negligence states; (2) elimination of, or restrictions on, punitive damages; (3) elimination or modification of the collateral source rule; (4) control of contingent fee contracts; (5) limitations on non-economic loss recovery; (6) elimination of prejudgment interest; (7) prevention of actions which give third-parties the standing to sue liability insurers for alleged unfair claims practices; (8) product liability reforms; and (9) correction of class action and RICO abuses.
NAMIC POSITION... NAMIC supports civil justice reform efforts that promote a rational, equitable, and affordable legal system. Because an individual state cannot prohibit other states from imposing punitive damages on its citizens, federal reform legislation is desirable. Reform efforts should be directed at reducing the excesses of the tort law system to reduce insurance costs and should be clearly consistent with the best interests of insurance consumers, both as premium payers and potential tort victims. NAMIC believes individuals who have been wronged should have recourse against businesses and others that are at fault and should be fairly compensated, but equitable guidelines for such awards are needed to assure the system is not abused. NAMIC believes it is not in the best interest of consumers for courts to continue to expand tort law such that personal liability exposures increases without any thought being given to the economic impact of the decisions, particularly with regard to insurance costs. NAMIC is particularly interested in reasonable reforms that will enable its members to keep personal lines insurance affordable. Such reforms include: limits on punitive damages, particularly in the format of so-called "bad faith" suits against insurers; elimination of the doctrine of joint and several liability; elimination of duplicate recovery of medical expenses (collateral source reform); "loser pays" provisions to promote responsible attorney behavior regarding tort claims or defenses; and increased use of alternative dispute resolution mechanisms to avoid costly jury trials.
CLASS ACTION JURISDICTION
THE ISSUE IS... The appropriate forum for interstate class action lawsuits and the ability of plaintiffs and their attorneys to abuse the legal system to obtain settlements from defendants by exploiting loopholes in the federal jurisdictional statutes.
IT'S IMPORTANT BECAUSE... Increasingly, plaintiffs' attorneys are taking advantage of lax certification standards to bring class action suits in selected state courts. Many of these suits are interstate in nature (i.e. there is a multi-state plaintiff class or a diverse defendant) and are more appropriate in federal court. The proliferation of questionable class certification standards in state courts has created an unfair system that enables plaintiffs’ attorneys to use class action to achieve a desired result because of the settlement pressures facing defendants after a class is certified. The true winners in these cases are the plaintiff’s lawyers who receive large fees, while the class members receive a minimal recovery.
Listed below are several examples of class action abuses in state courts:
- In a class action suit regarding dental adhesives, the original plaintiff received $25,000. An additional 650 plaintiffs recovered $7 each, while the remaining 2,800 plaintiffs received discount coupons for dental products. The plaintiffs' attorneys, however, took home $954,934.
- In a class action suit against Arista Records, the court awarded the plaintiffs' attorneys $675,000, while the 100,000 plaintiffs received only a $1 to $3 dollar recovery.
- In a class action lawsuit against Cheerios, there was no evidence of injury to any consumers due to a food additive in the cereal, the lawyers were paid almost $2 million in fees. The plaintiff consumers received coupons for a free box of cereal.
- In a settlement of a state court class action involving toxic pesticide fumes from a chemical plant, the residents of a New Orleans neighborhood each received an average of $6,658. The class action lawyers, however, received over $25 million in legal fees and expenses
The House of Representatives passed H.R. 2341, the Class Action Fairness Act of 2002, on March 13, 2002. Introduced by Representative Bob Goodlatte (R-VA) and 17 cosponsors, the Act is designed to amend the procedures involved in interstate class actions to assure fairer outcomes for class members and defendants. Specifically, the bill grants federal district courts original jurisdiction of any civil action where the amount in controversy exceeds $2 million and the members of the class meet set requirements. The Act would also allow for the removal of interstate class action lawsuits from state to federal courts. Additionally, the Class Action Fairness Act would establish a consumer class action bill of rights that would include provisions for: judicial review of non-cash settlements; protection against loss by class members; and clearer settlement information.
A Senate companion bill -- S. 1712 -- was introduced by Senator Charles Grassley (R-IA) and 6 cosponsors in late 2001. While the Senate Judiciary Committee held a hearing on S. 1712 and class action litigation on July 31, 2002, neither the Judiciary Committee or the full Senate has yet voted on the measure.
NAMIC POSITION... NAMIC believes that Congress must pass legislation to stop the current class action crisis and put interstate class actions in federal court. NAMIC supports such legislation as the Class Action Fairness Act of 2002 that would remove class action lawsuits to federal court and provide consumers with increased protection.
PRODUCT LIABILITY REFORM
THE ISSUE IS... The enactment of federal product liability reform legislation.
IT'S IMPORTANT BECAUSE... The current state of product liability law is such that the former fault-based system has been transformed into one of strict liability, which punishes manufacturers and their customers regardless of fault. This strict liability system has served to inhibit the development of new products and adversely impact the international competitiveness of products manufactured in this country.
Efforts undertaken by various states to enact product liability reform measures have been largely unsuccessful. However, progress is being made in some states. On the federal level, legislation to create uniform national product liability rules has been pending for several years. However, powerful plaintiff trial lawyer lobbying groups have successfully assisted in stopping such reform measures to date.
NAMIC POSITION... The imbalance and uncertainty of evolving state tort law are major contributing factors to increasing product liability insurance costs. NAMIC endorses efforts to enact a federal product liability reform law that will restore fairness and predictability to the marketplace.
FINANCING MAJOR NATURAL CATASTROPHES
THE ISSUE IS... Finding solutions to allow insurance companies to be better prepared for mega-catastrophes.
IT'S IMPORTANT BECAUSE... The probability is increasing that a major catastrophe will strike the United States and cause tens of billions of dollars in insured losses. In 1992, Hurricane Andrew caused $16 billion in insured losses. This figure could have been $50 billion if Andrew had hit just 40 miles away in Miami. With all of the development that has taken place on the Southeast coast over the last 30 years, the chance that a major hurricane will hit a heavily populated area has increased tremendously. In 1994, the Northridge Earthquake caused $13 billion in insured losses. It is only a matter of time before another major earthquake strikes the United States. A $50-$100 billion catastrophe could cause insurer insolvencies and major disruptions throughout the industry and the United States economy as a whole.
For many years, the insurance industry has been struggling to craft a program that would allow companies to be better prepared for a mega-catastrophe. Most of these attempts have resulted in proposals that either do not achieve the desired goals, contain too much federal government involvement or provide a competitive advantage to certain segments of the industry.
Three states with the most severe exposures -- California, Florida, and Hawaii -- have created state programs to prepare for major catastrophes. These programs have increased insurers' ability to continue to write business in these states. Unfortunately, the possibility exists that a mega-catastrophe could exceed the claims paying ability of these state programs. In recent years, some in Congress and the insurance industry have supported legislation that would provide a federal backup to official state programs such as the California Earthquake Authority.
In the 106th Congress, the House Banking Committee approved a version of this proposal, titled the Homeowners Insurance Availability Act. The bill would have authorized the Secretary of the Treasury to offer annual federal reinsurance contracts to eligible state insurance or reinsurance programs that provided coverage for homes, condominiums, and the contents of apartments for damage caused by hurricanes and earthquakes as well as perils resulting from earthquakes such as fires and tsunamis. It would have also established a program under which the Treasury Department would have auctioned off excess of loss contracts in several separate regions of the country to private insurers, reinsurers, state pools and other interested entities. In order for the contracts to pay-out for either the state program or the regional auction program, a $2 billion or one-in-100 year event, whichever is greater, would have had to occur. Maximum total pay-outs on the contracts could not have exceeded $25 billion annually. The Senate has considered similar legislation, the Natural Disaster Protection and Insurance Act.
In addition, some members of Congress and the National Association of Insurance Commissioners (NAIC) and are considering proposals to allow insurance companies to set up catastrophe reserves, which would receive favorable tax treatment. This approach is intended to address the needs of individual companies. Representative Mark Foley (R-Fla.) has introduced legislation in the 107th Congress, H.R. 785, the Policyholder Disaster Protection Act, which would allow property/casualty insurers to set up tax-deferred reserves for future catastrophes. Each company's reserve would be subject to a cap, based upon its catastrophe exposures for qualifying lines of business. Each insurer's net written premiums for each business line would be multiplied by a cap factor. An insurer could access the reserve funds only to cover actual losses associated with events declared to be catastrophes by the U.S. President, the state or territorial chief executive or the Property Claims Service. Qualifying events would include hurricanes, cyclones, tornadoes, earthquakes, fires following earthquakes, severe winter storms, fires, tsunamis, floods, volcanic eruptions and hail storms. An insurer could draw from the funds to the extent that losses incurred exceed the lesser of the prior year's reserve cap or 30 percent of the insurer's prior year surplus. The reserves would be phased in over a 20-year period.
A third approach is insurance securitization, which is the transfer of risk from an entity, whether insurance company or other legal person, to investors via the cedant's or an intermediary's issuance of securities that generate or make available the capital for underwriting the risk transferred. This can be accomplished through the use of "special purpose reinsurance vehicles" (SPRVs). Under current law, insurance securitization through SPRVs can only be accomplished offshore. The transactions are greatly complicated by U.S. tax law and state regulation, and therefore, are limited to only those companies that are willing to bear the cost of the transaction and wade through the regulatory complexity. A proposal is being circulated that would allow for insurance securitization onshore, while at the same time limiting the burden of U.S. tax law and state regulation.
The NAIC is considering this issue and has taken a two-prong approach. First, the NAIC recently completed a model act for "protected cell companies" that would allow securitization from existing, "host" insurance companies. In addition, a working group of the NAIC recently approved a model law for creation of SPRVs that would permit creation of entities with legal existence separate from existing insurance companies for the purpose of accepting and securitizing risk. These SPRVs may better serve investors, who may have fears that a protected cell company within a host may not be sufficiently remote from bankruptcy-putting protected cell assets at risk to claimants on the insurance company's general assets.
NAMIC POSITION... NAMIC believes that exposures to mega-catastrophes present a tremendous challenge to the insurance industry. NAMIC is exploring several different avenues to address the problem. Recognizing that companies have differing needs, depending on their books of business, NAMIC believes that there could be several solutions to the problem.
In recent years, the awareness of catastrophe exposures has expanded and the marketplace has responded. An increasing number of insurers have turned to capital market solutions such as surplus notes, catastrophe bonds and derivatives to prepare themselves for mega-catastrophes. Private industry solutions such as these, whereby insurance companies can access the financial markets for coverage at the highest layers, are the most attractive solution to NAMIC members. However, if it is not possible to find suitable private market solutions, NAMIC believes that the next best alternative would be state or targeted regional approaches that could address the needs of specific areas. NAMIC believes that a federal government solution should only be pursued as a last resort.
NAMIC members have conducted a thorough review of the legislation to establish a federal catastrophe reinsurance program. While NAMIC recognizes that the proposal could provide assistance to some types of property/casualty companies, the impact it would have on many of the association's small and regional companies would be non-existent in most cases and minimal at best, particularly in areas that do not have significant earthquake or hurricane exposures. NAMIC further recognizes the fact that in order to preserve the private reinsurance market, high triggers must be established in catastrophe exposed regions. However, these high triggers may prevent smaller NAMIC member companies from accessing the program.
NAMIC appreciates that positive changes were made to the federal catastrophe reinsurance legislation in the 106th Congress such as the inclusion of anti-price gouging provisions and a recognition that mitigation is important. Moreover, NAMIC appreciates the fact that the bill would have made reinsurance contracts fully divisible and transferable. This would have made it easier for small and regional companies to purchase the contracts, or a portion thereof. NAMIC also believes that if such a federal solution is pursued in the future, the program should include farmowners and small commercial coverages and should be expanded to cover other potentially devastating perils such as hail and severe winter storms. In addition, there should be an assurance that an adequate number of regions would be established, so smaller and regional companies would have more opportunity to access the contracts.
Recognizing that the federal catastrophe reinsurance legislation could benefit some in the property/casualty industry, NAMIC would not stand in the way of its consideration. NAMIC remains concerned, however, that the proposal would lead to too much federal government involvement and provide limited benefit to the majority of its members. NAMIC will continue to consider additional changes to the proposal as well as other alternatives.
NAMIC does support the concept of a voluntary catastrophe reserve with favorable tax treatment. Such a proposal has the potential to more effectively address the needs of individual companies. However, as with any proposal, the costs and benefits associated with the proposal must be considered. It is important to determine the potential cost of a catastrophe reserve to the U.S. Treasury. That cost must then be contrasted against the cost of federal disaster assistance programs. NAMIC is also interested in considering alternative proposals that would achieve the same objective without having a negative impact on the Treasury.
NAMIC believes that insurance securitization through SPRVs is a viable and useful means of risk transfer. Mutual insurance companies by their nature have less convenient access to capital in comparison to stock companies; and SPRVs, as a potential source of capital for undertaking risk, are therefore attractive to these companies. In addition, securitization by way of SPRVs is a market-oriented approach to financing natural disasters, which is preferable to NAMIC than direct federal government intervention. NAMIC generally supports proposals that would allow insurance companies to better manage risks, while at the same time increasing the long-term viability of the industry. Insurance securitization seems to be a sensible approach, and NAMIC will continue to work with Congress and state regulators to ensure the promotion of broader access to capital markets and increased stability of the insurance industry.
Whatever market or governmental solutions are ultimately adopted, NAMIC believes that mitigation provisions are essential to minimize the loss of lives and property from a catastrophe. Strict building codes should be used and enforced in catastrophe prone areas. NAMIC is a member of the Institute for Business and Home Safety, an organization created to enhance and promote the use of building codes and other measures to ensure that structures are safe. NAMIC will continue to support efforts to assist individuals, businesses and communities to responsibly prepare for natural catastrophes.
FLOOD INSURANCE
THE ISSUE IS... The adoption of legislation to reduce repetitive losses under the National Flood Insurance Program (NFIP).
IT'S IMPORTANT BECAUSE... Congress created the NFIP in 1968 to address the increasing costs of taxpayer funded disaster relief for flood victims and the increasing amount of damage caused by floods. The Federal Emergency Management Agency (FEMA) administers the NFIP. Home and business owners are able to purchase flood insurance if their properties are located in communities that adopt and enforce floodplain management ordinances to reduce future flood damage. One of the objectives of the NFIP is to make flood insurance affordable, so full actuarial rates are not charged. The high incidence of repetitive loss claims is a major problem that has developed under the NFIP. A recent National Wildlife Federation (NWF) analysis of the NFIP demonstrated that 40 percent of the program's payments go to repetitive loss properties, although they represent only two percent of all NFIP-insured properties. In addition, the NWF analysis found that almost 10 percent of repetitive loss homes have had cumulative NFIP claims that exceed the property's actual value.
Several members of the House of Representatives have introduced legislation to reduce repetitive loss claims. On April 4, 2001, Representatives Doug Bereuter (R-Neb.) and Earl Blumenauer (D-Ore.) introduced H.R. 1428, the Two Floods and You Are Out of the Taxpayers' Pocket Act, which would impose actuarial, risk-based rates for flood insurance on property owners who have had two or more NFIP claims paid out by FEMA and who have refused buyouts, elevation or other flood mitigation measures funded by FEMA. It would also make repetitive loss policyholders who have refused flood mitigation measures ineligible for Federal disaster relief assistance.
On April 24, 2001, Representative Ken Bentsen (D-Texas) introduced H.R. 1551, the Repetitive Flood Loss Reduction Act, which would authorize $100 million to buy out repetitive loss homes in flood prone areas and provide funds to local governments for mitigation efforts. It would also allow for increases in flood insurance premiums and deductibles for properties whose owners do not accept purchase offers from FEMA.
On July 18, 2001, Representative Richard Baker (R-La.) introduced H.R. 2524, the Flood Loss Mitigation Act, which would authorize FEMA to carry out mitigation activities and to purchase repetitive loss structures. It would also allow FEMA to deny coverage or increase rates for those who refuse purchase offers or mitigation assistance.
The Housing and Community Opportunity Subcommittee of the House Financial Services Committee held a hearing on the NFIP and the various reform proposals on July 19, 2001.
NAMIC POSITION... NAMIC supports efforts to reform the national flood program. NAMIC believes that it is reasonable to require homeowners who live in flood-prone areas to take advantage of mitigation measures offered by FEMA as a condition of receiving future disaster relief.
WIND HAZARD REDUCTION LEGISLATION
THE ISSUE IS... The creation of a National Wind Related Hazard Reduction Program to find ways to reduce losses caused by high winds from hurricanes, tornadoes and other severe storms.
IT'S IMPORTANT BECAUSE... Severe windstorms, including hurricanes and tornadoes, cause dozens of deaths and billions of dollars in property damage each year. Currently, there is no comprehensive program in place to try to minimize these losses before they occur. Two organizations, the Wind Hazard Reduction Caucus in Congress and the Wind Hazard Reduction Coalition in the private sector, are working to establish a program to find out how to minimize the loss of life and property and help homeowners to implement these mitigation measures before severe windstorms occur.
On December 20, 2001, Representatives Dennis Moore (D-Kansas) and Melissa Hart (R-Penn.) introduced H.R. 3592, the Hurricane, Tornado and Related Natural Hazards Research Act. This legislation would provide for coordination of federal wind hazard reduction efforts through a multi-agency National Windstorm and Related Natural Hazard Impact Reduction Program to be coordinated through the Office of Science and Technology Policy, establish a wind hazard reduction technology transfer program and create a National Advisory Committee for Windstorm and Related Natural Hazards Impact Reduction. The proposal would also provide for the creation of a list of areas where wind hazard reduction research and development can make a significant impact on loss reduction and require transmission of a 10 year implementation plan to Congress with measurable goals to be coordinated with representatives of state and local government and the private sector, including annual progress updates. Finally, the legislation would authorize appropriation levels to bring the wind program closer to parity with the federally funded earthquake research program. All aspects of the program would be linked to the goal of a major, measurable reduction in losses of life and property due to windstorms within 10 years of the date of enactment.
NAMIC POSITION... NAMIC is a member of the Wind Hazard Reduction Coalition and supports the Hurricane, Tornado, and Related Natural Hazards Research Act. NAMIC strongly believes that mitigation provisions are essential to minimize the loss of lives and property from catastrophes. Strong mitigation programs can help to reduce the need for other federal programs to fund catastrophe relief efforts after the events occur.
NAMIC believes that strict building codes should be used and enforced in catastrophe prone areas and is an active member of the Insurance Building Code Coalition. This coalition helps to educate the public and private sector about state building codes as a loss prevention strategy, promotes legislation in states with no statewide building codes and closely monitors any building code changes in the other states. The federal wind hazard reduction legislation will enhance these efforts by providing the means to find out which building materials and methods are most effective in preventing wind damage. NAMIC is also a member of the Institute for Business and Home Safety, an organization created to enhance and promote the use of building codes and other measures to ensure that structures are safe. NAMIC will continue to support efforts to assist individuals, businesses and communities to responsibly prepare for natural catastrophes.
FINANCIAL INFORMATION PRIVACY
THE ISSUE IS... Allowing the privacy provisions of the Gramm-Leach-Bliley Act to be implemented before imposing additional burdensome requirements on financial services institutions.
IT'S IMPORTANT BECAUSE... The Gramm-Leach-Bliley Act (GLBA) creates the most protective consumer privacy framework to date. The privacy provisions of the GLBA require financial institutions to disclose their privacy policies annually; give consumers the right to opt-out of allowing financial institutions to make disclosures about them to non-affiliated third parties, with certain exceptions; refuse to disclose account information to third-party marketers; and follow standards to protect consumers' security and confidentiality.
The new GLBA privacy requirements are particularly challenging for insurers. Congress delegated the rule's implementation to each state's insurance commissioner. The National Association of Insurance Commissioners (NAIC), of which each insurance commissioner is a member, has drafted a privacy regulation that goes beyond the financial privacy requirements in GLBA to include provisions to protect a customer's health information. This was one reason why the National Conference of Insurance Legislators (NCOIL) drafted a model privacy regulation that more closely is aligned to the federal legislation. Moreover, 17 states have enacted the 1982 NAIC Health Information Privacy Model Act that already imposes certain health information privacy requirements on some insurers. The assumption is that these states may simply "extend" the requirements to property/casualty companies. Finally, each commissioner must determine whether the insurance department can promulgate a privacy regulation administratively, or if the department must first obtain legislative authority to enact a privacy rule. As a result of all of these questions, final determinations about what some states do to fulfill their privacy obligations are not yet completely clear.
Although the GLBA created these new and extensive privacy requirements, several members of Congress believe that the provisions are inadequate for consumers. Several pieces of legislation have been introduced that would require financial institutions to obtain affirmative consent (opt-in) from consumers in order to disclose information with affiliates or third parties. The issue of protecting consumers' medical information is a particular concern for some in Congress.
On January 22, 2001, Senator Paul Sarbanes (MD), then the Ranking Democrat on the Senate Banking, Housing and Urban Affairs Committee and now the Chairman of the Committee, introduced S. 30, the Financial Information Privacy Protection Act. The legislation would allow consumers to opt-out of having their financial information shared with affiliates of their financial institutions; require financial institutions to obtain an opt-in from consumers before medical, credit card, or check payee information could be shared; and give consumers the right to access and correct their financial information. On March 1, 2001, Senator Bill Nelson (D-Fla.) introduced S. 450, the Financial Institution Privacy Protection Act, which would require banks and financial services companies, including insurers, to obtain an "opt in" from customers before any sharing of their private financial information with other businesses or affiliates, require financial services companies to get written permission from consumers before they could disclose any personally identifiable medical information to any other business or affiliate, create a civil cause of action against companies and corporate officers when their firms sell or distribute financial or medical information without a consumer's specific written consent, and require that major financial services companies designate a privacy compliance officer.
On August 2, 2001, Representatives Ed Markey (D-Mass.) and Joe Barton (R-Texas) introduced H.R. 2720, the Consumer's Right to Financial Privacy Act, which would amend the GLBA to require financial institutions to obtain consumers' consent before disclosing nonpublic personal information to affiliates or third parties, prohibit financial institutions from denying services or products to those who have denied permission to have their information shared, and allow consumers to access their personal information to affiliates or third parties, prohibit financial institutions from denying services or products to those who have denied permission to have their information shared, and allow consumers to access their personal information and correct any inaccuracies.
Also on August 2, 2001, Representative Pete Sessions (R-Texas) introduced H.R. 2730, the National Consumer Privacy Act, which would amend the GLBA and the Fair Credit Reporting Act to establish federal preemption of financial privacy standards for financial institutions. The bill would allow state insurance regulators to issue regulations and enforce the federal law.
On October 9, 2001, Representative Bob Ney (R-Ohio) introduced H.R. 3068, the Financial Privacy and National Security Enhancement Act, which would establish a presidential commission to study and report to Congress on financial services industry practices for protecting the privacy of consumer financial information, how these practices are regulated and how to strengthen and improve financial information privacy while preserving the effective flow of financial information for national security.
NAMIC POSITION... NAMIC supports the privacy provisions contained in the GLBA. It is essential for consumers to know for what purposes their information will be used. It is important, however, for companies to be able to use the information within their organizations in order to effectively inform consumers about new products and opportunities. Combined with existing financial privacy law, the new GLBA provisions will give consumers strong and effective privacy protections. NAMIC does, however, have some concerns about the NAIC Model Act and would prefer to see states adopt the NCOIL Model Act. NAMIC believes that Congress should allow the current privacy regulations mandated under the GLBA to be finalized and implemented before changing them or adding new requirements. Privacy is an extremely complicated issue, and additional restrictions should not be adopted without an extensive analysis of their potential ramifications.
HEALTH INFORMATION PRIVACY
THE ISSUE IS... Ensuring that the enactment of legislation or the implementation of existing regulations on health information privacy does not impede the ability of property/casualty insurers to promptly and efficiently settle claims.
IT'S IMPORTANT BECAUSE... The Health Insurance Portability and Accountability Act (Public Law 104-191), enacted in 1996, required the Secretary of the U.S. Department of Health and Human Services (HHS) and Congress to develop standards on the confidentiality of medical records. The standards are required to address the following issues:
- The rights that a person who is a subject of individually identifiable health information should have.
- The procedures that should be established for the exercise of such rights.
- The uses and disclosures of such information that should be authorized or required.
On December 28, 2000, HHS published a final health information privacy rule, "Standards for the Privacy of Individually Identifiable Health Information (65 Fed. Reg. 82462)," that protects medical records and other personal health information. Published after HHS had received tens of thousands of comments from interested parties following its proposed November 1999 health information privacy rule, the final rule took effect on April 14, 2001, and HHS subsequently issued its first guidance document on July 6, 2001. Most affected parties covered by the new rule must be in compliance by April 2003.
The final rule included standards that: limit the non-consensual use and release of private health information; give patients rights to access their medical records and to find out who else has accessed them; restrict most disclosure of health information to the minimum needed for the intended purpose; create requirements for access by researchers and others; and establish criminal and civil sanctions for improper use and disclosure of records. Under the final HHS rule, property/casualty insurers, including workers compensation and auto insurance carriers, are not considered "covered entities" subject to the requirements of the new regulation. In addition, the rule includes a provision that health care providers can release needed information to workers compensation carriers for claims settlement purposes. The rule does not include a similar provision for automobile insurers; however, as long as auto carriers have authorizations from individuals to obtain the necessary information, there should be no problem. Obtaining such authorizations is standard practice for auto insurers under the current system, although problems could arise in third-party liability cases where health care providers may be reluctant to release certain information.
The HHS final rule also has a strict "minimum necessary" provision that only allows entities to release the information absolutely needed to facilitate treatment and payment of claims. This provision could prevent property/casualty insurers from having access to complete medical files in certain cases in order to verify claims histories and to prevent fraud.
NAMIC POSITION... NAMIC believes in the importance of protecting individual health information. NAMIC also believes that a balance must be struck between the need to protect this health information and the need to release necessary information for legitimate claims handling purposes. As a signatory to comments submitted by several property/casualty insurance and employer groups to the proposed HHS November 1999 health information privacy rule, NAMIC requested that the department clarify in the final regulation that property/casualty insurers would be able to obtain protected health information from covered entities, such as physicians' offices, in order to resolve claims in a timely and efficient manner. NAMIC is pleased that HHS, in its final rule, acknowledged this difference between health insurers and property/casualty insurers, as well as recognized that property/casualty insurers have different needs for certain information. NAMIC will continue to work with HHS and other industry representatives to clarify the remaining provisions of the rule that could potentially impede the ability of property/casualty insurers to obtain necessary health information.
MOTOR VEHICLE INFORMATION PRIVACY
THE ISSUE IS... Ensuring that automobile insurers are able to continue to access department of motor vehicle records as allowed under the 1994 Driver Privacy Protection Act.
IT'S IMPORTANT BECAUSE... In 1994, Congress enacted the Driver Privacy Protection Act (DPPA) as part of the Violent Crime Control Law Enforcement Act (Public Law 103-322). The law prohibits disclosure of personal information by departments of motor vehicles (DMVs), except for certain defined and necessary purposes such as law enforcement and safety recalls. The legislation was also carefully crafted to allow information to be obtained from motor vehicle departments for legitimate business purposes such as insurance risk evaluation and underwriting. Under the DPPA, individuals are able to opt-out of having their personal driver's license or motor vehicle information released for marketing purposes. States are also free to adopt more stringent provisions.
Insurance companies depend upon motor vehicle and driver's license information to properly evaluate risk, promote safety and ensure that consumers are charged a fair and appropriate price for their automobile insurance premiums. Insurers must verify information with motor vehicle departments in case potential policyholders omit traffic violations or accidents from their insurance applications, or existing policyholders fail to report these incidents. Due to the use of motor vehicle records, good, safe drivers pay less for auto insurance than do those with numerous traffic violations.
In the 106th Congress, Senate Transportation Appropriations Subcommittee Chairman Richard Shelby (R-AL), after learning that three states had tried to sell drivers' license photographs to a private company to compile a database, attached a provision to the FY 2000 Transportation Appropriations bill that would have prohibited the sale or provision of any personal information contained in a driver's license or in any motor vehicle record without the express written consent (opt-in) of the individual. NAMIC and others worked with Sen. Shelby, and he agreed to modify the language to allow continued access to DMV information for legitimate business purposes, such as insurance underwriting, as intended by the DPPA.
NAMIC POSITION... It is critical that automobile insurers continue to have access to driver records in order to effectively evaluate risk and underwrite policies accordingly. Without this access, it would be impossible to set appropriate premiums based on drivers' records; and safe drivers could be forced to subsidize risky drivers. NAMIC supports the provisions of the 1994 DPPA, which place reasonable restrictions on the release of driver and motor vehicle records, while allowing access for legitimate business and safety purposes.
SOCIAL SECURITY NUMBER PRIVACY
THE ISSUE IS... Legislation to prohibit the display of Social Security numbers by government agencies and the private sector.
IT'S IMPORTANT BECAUSE... Over the past few years, the incidence of identity theft has been rising. This increase is largely due to the fact that it is relatively easy for individuals to access other people's Social Security numbers. In an effort to reduce identity theft and to protect the privacy of individuals, several members in the 107th Congress have introduced legislation to restrict the use and display of Social Security numbers by government agencies and private entities.
On May 25, 2001, Representative Clay Shaw introduced H.R. 2036, the Social Security Number Privacy and Identity Theft Prevention Act. This legislation would prohibit Federal, State and local governments from: 1) selling Social Security numbers, with limited exceptions for law enforcement, national security, credit accuracy verification, insurance underwriting, and effective administration of Social Security Act programs; 2) displaying Social Security numbers to the general public and on Internet sites, with limited exceptions for law enforcement, national security, and credit accuracy verification; 3) displaying Social Security numbers on checks issued; 4) displaying Social Security numbers on drivers' licenses, motor vehicle registrations or other identification documents issued by State motor vehicle departments ; 5) displaying Social Security numbers on visible employee identification cards or military tags; and 6) employing prisoners in jobs that provide them with access to Social Security numbers. The bill would also authorize the Attorney General to issue regulations restricting the sale and purchase of Social Security numbers in the private sector, prohibit a person from obtaining another person's Social Security number to locate or identify the individual with the intent to physically injure, harm, or use the individual's identity for an illegal purpose, discourage businesses from denying services to individuals who refuse to provide their Social Security numbers by subjecting them to penalties under Federal law, and include the Social Security number in the definition of "credit report" under the Fair Credit Reporting Act so that the number receives the same protections as other consumer credit information. Finally, the bill would create new criminal and civil penalties for violations of the law relating to sale, purchase, or misuse of Social Security numbers. Senators Jim Bunning (R-Ky.) and Tom Harkin (D-Iowa) have introduced identical legislation in the Senate, S. 1014.
Senator Dianne Feinstein has introduced more comprehensive privacy legislation, S. 1055, the Privacy Act. This legislation would require companies to allow customers to opt-out of having their addresses, phone numbers and other non-sensitive information sold for marketing purposes and would require companies to obtain an opt-in from individuals before selling, licensing or renting sensitive personal information such as Social Security numbers, drivers' licenses, and financial and health information. The bill would also restrict the purchase, sale and display of Social Security numbers to the public. Federal, state and local governments would be prohibited from displaying Social Security numbers on records provided to the public and from using them as default drivers' license numbers. The bill would allow the sharing of Social Security numbers to facilitate business to business transactions provided that appropriate safeguards are put into place and public access is not permitted.
NAMIC POSITION... NAMIC believes that measures should be taken to reduce identity theft. Identity theft is a crime that causes tremendous expense for individual victims and the economy each year. It is important for certain entities to be able to continue to use Social Security numbers for legitimate business purposes such as transmitting credit reports for major financial transactions and accessing driver records for insurance underwriting purposes. Requiring governments and business to create other individual identifiers to use instead of Social Security numbers would be extremely expensive. NAMIC will work with Congress to find ways to protect the privacy of individuals while making sure that information is available for legitimate purposes that will ultimately benefit consumers.
SMALL COMPANY TAX EXEMPTION AND ELECTION
THE ISSUE IS... Preserving the tax-exempt status of small, mutual insurance companies.
IT'S IMPORTANT BECAUSE... Under current law (Internal Revenue Code Section 501(c)(15)), an insurance company with up to $350,000 in direct or net written premium, whichever is greater, is tax-exempt. In addition, Section 831(b)(2) allows companies with direct or net written premiums, whichever is greater, exceeding $350,000 but not exceeding $1,200,000 to elect to be taxed on their net investment income. Investment income or assets are not considered when determining qualification for either tax-exempt status or investment income taxation. The tax-exempt level and the investment income election level were last increased in 1986.
Since 1921, small insurance companies have been exempt from federal taxation so that all of their financial resources could be used for claims paying. It has been the public policy goal to maintain small, rural, farm-oriented insurers so that all Americans have access to coverage at a reasonable cost.
On May 17, 2001, Representatives Jim Nussle, Jim Ramstad and Earl Pomeroy introduced H.R. 1908, which would increase both the tax-exempt level from $350,000 to $551,000 and the investment income election level from $1.2 million to $1.89 million. This legislation would also index the levels according to a cost-of-living adjustment.
NAMIC POSITION... NAMIC supports legislation like H.R. 1908 that would increase the tax-exempt and investment income election levels to reflect inflation changes since 1986. Because small, mutual property and casualty insurance companies have such limited financial resources, all of their assets must be preserved for claims paying to ensure their important niche market in America. Providing these small insurers with tax-exempt status accomplishes that goal. NAMIC will continue to pursue similar legislation in the 2nd Session of the 107th Congress.
Legislative Action Network
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Benjamin Franklin Public Policy Award
Every two years, NAMIC presents their coveted Benjamin Franklin Public Policy Award© to lawmakers who have supported a stronger insurance market at least 75 percent of the time. This is demonstrated based on their support of NAMIC's position on certain roll call votes taken, or being a principal player/sponsor on legislation affected the property/casualty insurance industry, during the previous Congress.
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