Accepting The Challenge: Redefining State Regulation Now

SECTION II
THE REGULATORY PRACTICES TO REDEFINE

EXISTING ISSUES
PRODUCER LICENSING

NAMIC, while fully supporting the new NAIC Producer Licensing Model Act, understands why the insurance commissioners chose the reciprocity option to minimally satisfy NARAB. It requires states to follow a prescribed administrative procedure for licensing non-resident producers that includes accepting the producer’s home state continuing education requirements and not imposing additional requirements on them.

A reciprocity strategy is understandable given the tight timeframe imposed by NARAB. However, until the new model is adopted and all the attending procedural issues are resolved, NAMIC believes that producer licensing uniformity in the public interest will not become a reality.

Successfully implementing the reciprocity option without a commitment to appropriate uniformity will be perceived by proponents of federal regulation as yet another example of the insurance industry’s lack of dedication to making the changes needed to warrant continued sovereign state regulation.

The NAIC already has made some significant progress with different aspects of the producer licensing process. At least 32 states and the District of Columbia, for example, have adopted the uniform application developed by the NAIC Uniform Producer Licensing Initiatives Working Group (formerly known as the Producer Information Network Working Group). Twenty-six states use the Producer Database, which links participating departments into a common system establishing a repository of producer information.

Fifteen states can file reports with the Producer Information Network (PIN), that uploads licensing records into a centralized repository, where other regulators, insurers and producers can check on licensed producers. The database can handle routine functions such as letters of clearance, information on any producer administrative actions, and letters of appointment, although this is an optional requirement in the new model.

Producer licensing needs to be given the highest priority this year. Any outstanding process issues, such as further simplifying the uniform application or encouraging more states to use the centralized database, must be resolved. At the same time, regulators need to recognize that even if they compromise on some state-specific requirement, they are not relinquishing their ultimate authority to deny a license or revoke it if the producer fails to meet the uniform standards.

The regulators and industry also need to begin working together on a legislative strategy that not only satisfies NARAB, but also promotes the adoption of uniform national standards in each state. These standards will protect consumers as well as benefit them by easing entry barriers, increasing competition, access, and quality of service and lowering costs.

COMPANY LICENSING

NAMIC fully supports the work of the NAIC Accelerated Licensure Evaluation and Review Techniques (ALERT) Working Group in developing a Uniform Certificate of Authority Application (UCAA) process that allows insurers to use a simplified form in their state of domicile and a uniform expansion application in other states.

While each state still performs its own, independent review of each application, the need to file different applications, in different formats, has been eliminated. So far, 21 states and the District of Columbia accept the uniform application.

Uniform applications, however, are only part of the process. To achieve needed efficiencies, state insurance regulators also should adopt a standardized timeline for reviewing applications. The ALERT Working Group has recommended 90 days. This is a reasonable timeline. It allows for a thorough review of insurer licensing applications, while preventing unnecessary delays and costs that impede the entry of insurers to serve consumer needs.

RATE AND FORM REQUIREMENTS

NAMIC believes that any discussion of rate and form filing regulations should focus on three elements:

The standards or requirements for rates and forms (i.e., what constitutes “excessive” or “unfair”);
The filing and approval requirements (i.e., prior approval, file and use, etc.); and,
Specific filing procedures (i.e., transmittal forms, required information and format, etc.).

In many states, legislatures over the years have enacted standards that reflect individual state preferences or circumstances, such as compulsory insurance requirements or mandated benefits.

NAMIC recognizes that while it may not be politically feasible to standardize some of these requirements, the states should take a hard look to see where reforms could be made and would be supported politically. Because these requirements ultimately restrict consumer choice, such restrictions should be confined to areas where there is a public interest or where consumers are vulnerable to purchasing inadequate insurance. Special interests should not be allowed to dictate certain terms of insurance contracts that are not in the best interest of consumers and the general public.

As for the filing and regulatory approval process, the need for state differences is not obvious. If competitive rating works in many states for personal and commercial lines, it should work in all states. The prior approval systems still retained by some states are an outmoded legacy of a time when insurers were required to adhere to uniform rates filed by a rating bureau.

The situation has changed dramatically with intense price and product competition among insurers. Economists who have examined property/casualty insurance markets have concluded that they are structurally competitive and that there are no apparent benefits to prior approval rate regulation, although there is the potential for significant harm from politically pressured rate suppression.

This view was reaffirmed by the NAIC 25 years ago when it published its landmark study advocating competitive rating.

It is important to note that a competitive rating system does not preclude an insurance commissioner from taking action if competition fails for some reason in a particular market. States can reallocate resources away from unnecessary prior review of all rates to competition monitoring and market analysis.

Prior approval of personal lines policy forms may be justified, but prior approval is not needed for commercial lines policy forms. Business Owners Policies (BOP) might be the only arguable exception as these are typically purchased by small businesses.

Other commercial insurance buyers are sufficiently knowledgeable, particularly with the assistance of agents and brokers, to discern policies that meet their risk management needs and any statutory requirements. The varying circumstances of commercial buyers also warrants a more flexible approach in tailoring insurance contracts to meet their needs.

Finally, the need for different state filing procedures for a similar approval/filing system is the least obvious. These state differences have evolved over time mainly as a matter of the personal preferences of the regulatory personnel that fashioned them and do not provide any measurable benefits to consumers, but significantly increase the cost and time delays of rate and form filings, which ultimately hurt consumers.

Surely, market regulators, if motivated to do so, can develop reasonable uniform filing and review procedures for the regulatory systems that remain in place.

Specific filing procedures can be made more uniform. For example, a uniform national standard should be implemented for transmittal forms. Such uniformity can enhance the System for Electronic Rate and Form Filings (SERFF) initiative.

COMMERCIAL RATE DEREGULATION

NAMIC supports the notion that certain commercial buyers should be exempt from rate and form filing requirements.

Since 1998, at least 17 states have enacted exemptions for certain commercial lines policyholders.

The rationale for this effort generally has fallen into three broad categories:

Commercial policyholders are sophisticated consumers who should be able to purchase insurance products that fit their particular business needs with little or no regulatory oversight;
Competitive underwriting and rating will allow domestic carriers to more fairly compete with off-shore entities who have captured some large commercial accounts in recent years because they are not subject to the same regulatory scrutiny; and,
Deregulation will create greater efficiencies for regulators and allow them to focus their limited resources on solvency and market regulation issues.

NAMIC encourages other states to consider deregulating their laws for commercial buyers.

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Posted: Tuesday, April 18, 2000 12:00:00 AM. Modified: Friday, September 23, 2005 3:20:52 PM.

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