The majority of legislatures around the country have closed upshop for the year, and, for the most part, the property-casualtyinsurance industry fared pretty well. This year saw more than 1,000new state legislators finding their ways around state capitols, andeducating this influx of freshmen on insurance matters wasparamount to the industry. Perhaps a benefit reaped from the changein state legislative landscape this year was that theproperty-casualty insurance industry celebrated some fairlysignificant victories on the issues of rate modernization, tortreform and underwriting freedom.

While budget deficits and social issues received much of theattention of statewide media, the biggest news coming out of thestates this year for property-casualty insurers concerned theDodd-Frank Wall Street Reform and Consumer Protection Act—and asection within it known as the Nonadmitted and Reinsurance ReformAct (NRRA).

NRRA streamlines surplus lines insurance regulation by creatinga system where taxation, regulatory authority and licensingauthority would be controlled by the insured's domiciled state. Itwasn't shocking that states balked at the thought of federal lawtaking control of not only a state's authority but its surpluslines taxes. So out of the NRRA, two state-based options werespawned: the Surplus Lines Insurance Multistate Compact, or“SLIMPACT Lite,” supported by the National Conference of InsuranceLegislators, and the Nonadmitted Insurance Multistate Agreement orNIMA, a system backed by the National Assn. of InsuranceCommissioners.

Related: Read Ted Besesparis' article “Old Issues, NewCongress”.

SLIMPACT Lite establishes an interstate compact that includes astate-chosen commission of members chosen that sets formulas fornational eligibility standards, collecting and allocating premiumtaxes, and establishing uniform payment and reporting requirements.To date, nine states—Alabama, Indiana, Kansas, Kentucky, NewMexico, North Dakota, Rhode Island, Tennessee and Vermont—haveenacted SLIMPACT Lite legislation. These states have conducted ahandful of teleconferences in the past month to establish a set ofby-laws for the compact.

NIMA takes a more bare-bones approach in that it does notaddress the issue of regulatory reform, but establishes aclearinghouse of state authorities to work cooperatively toconsolidate reporting and collect and allocate premium taxes formulti-state surplus lines insurance transactions. To date, threestates—Florida, Hawaii, and Mississippi—have entered into such anarrangement.

What remains unclear is what additional states will join one ofthe two competing entities. In enacting their respective surpluslines reforms, a majority of the states left the question open,generally giving their insurance commissioner the authority to makethat ultimate decision.

Perennial issues

As has been the case in the past, rate modernization, thekeystone to reforming state regulation, was a high priority. Whilemomentum for rate reform slowed in the aftermath of the financialcrisis, the midterm elections brought renewed interest fromlawmakers. Nine states saw some form of action on ratemodernization in 2011. The biggest wins occurred in Tennessee,Connecticut and Florida.

Tennessee lawmakers passed legislation allowing for a 15 percentflex band—the largest spread in terms of plus and minus rateincreases of any flex rating bill in the country—without seekingthe Dept. of Insurance's approval. This measure will also allowinsurers to implement the new rate on the day it is filed.

Legislation extending the 2-year sunset provision inConnecticut's personal lines flex-rating statute was a positivehighlight of that state's legislative session. This measure allowsinsurers to continue to use for the next 2 years periodic ratechanges on a file-and-use basis, as long as the rate falls withinthe 6 percent flex band. Complete removal of the sunset provisionwould likely make the statute more effective, and the industrystarted the legislative session with that as a goal, but ultimatelythe legislature did not entertain the industry's request.

Related: Read “New Faces in Legislation” by Paul Tetrault.

Florida legislators introduced a bill to implement flex ratingon the personal lines side, but any prospect for it died early inthe session; however, some allowances to increase Citizens PropertyInsurance Corp.'s—the state's insurer of last resort—glide path“angle of incline” were included in the extensive property packagethat was signed by the governor. The legislature also passed HB 99that expands a 2010 law exempting other lines of commercialinsurance from rate excessiveness regulation to include commercialauto and commercial property-casualty lines. It also includescommercial auto lines for fleets with fewer than 20 vehicles.

In competitive markets, prior approval of rates serves littlepurpose other than to prevent companies from making new productsavailable to consumers and to impede insurers' ability to respondquickly to changing market conditions. Passage of these bills willenhance competition in the relevant states, which, in turn, willbenefit consumers.

More than half of the states plus the District of Columbiaconsidered some form of tort reform. Significant strides were madeto improve the business climate in Pennsylvania when Gov. TomCorbett signed into law the “Fair Share Act” that reforms theprocess of how damages are allocated in civil lawsuits. Under theAct, each defendant will now pay only his/her share of the judgmentas opposed to having joint responsibility for the full amount.

In Oklahoma, four tort reform billssuccessfully made their way through the legislative process. Thestate now has a $350,000 cap on non-economic damages, which bringsthe state in line with 30 other states with similar caps. Mostinstances of joint and several liability have been eliminated, andawardees in personal injury or wrongful death lawsuits are nowexempt from having to pay federal or state income tax on theiraward. Oklahoma also joins a growing list of states takingproactive steps to bolster fairness and provide incentive to reducethe number of uninsured motorists by prohibiting uninsured driversfrom collecting non-economic damages when they sue after a motorvehicle accident. A similar “no pay/no play” law was enacted inKansas.

In Wisconsin, first-term Gov. Scott Walker signed the OmnibusTort Reform Act, which, among other things, limits punitivedamages, raises standards for expert testimony, and toughens staterules relating to damages for frivolous claims. South Carolina'sgovernor also signed a bill that provides limits and certainprocedures on awarding of punitive damages.

Twenty-three states introduced no fewer than 50 bills to ban orseverely restrict insurers' use of credit-based insurance scoring.Only two of those bills passed—Nevada, where a bill established aset of extraordinary life events that applicants or policyholderscan use to ask insurers for exception; and Montana, where thelegislature included military deployment as an extraordinary eventin underwriting or rating. Although some state legislators continueto introduce proposals to ban or restrict the use of this valuableunderwriting tool, when educated, most legislators come to realizethat insurance scoring benefits the vast majority of insuranceconsumers.

Concerns about misrepresenting terms and conditions in insurancepolicies have prompted lawmakers and regulators to moveaggressively on the issue of certificates of insurance thisyear.

Related: Read “Civil Justice Reforms” by David Golden.

At this writing, eight states—Georgia, Maryland, Missouri, NorthCarolina, North Dakota, New Hampshire, Oklahoma and Utah—haveenacted laws during their legislative sessions to specify howinsurers and producers are to treat issuing certificates goingforward. Two other states, New York and Oregon, had billspending.

In the past year, another dozenstates—Arkansas, Arizona, Connecticut, Hawaii, Iowa, Kansas,Massachusetts, Montana, Nebraska, New Mexico, Rhode Island andVirginia—have issued bulletins on this issue.

Rhode Island's Bulletin Number 2011-1,1 issued on March 4, 2011,is typical of the language found in the bulletins. The bulletinbegins by noting that some third parties may request insuranceproducers to issue certificates of insurance that evidence terms orconditions of coverage that may be inconsistent with the underlyinginsurance policy or contract. The bulletin continues by noting thatmisrepresenting policy terms or conditions violates state law andsubjects the insurance producer to penalties that may includesuspension or revocation of the producer's license.

A legislative trend that emerged this year was portableelectronics insurance, which typically covers loss, theft,mechanical failure, malfunction, damage or other applicable peril.The NAIC's ongoing debate about whether to draft a model law didn'tstop a dozen states from moving forward and enacting their ownlegislation this year. The states are: Arkansas, Illinois, Kansas,Maine, Minnesota, Missouri, North Carolina, Nebraska, New Mexico,Oklahoma, Tennessee and Virginia.

These states' laws are similar in that they require vendors thatsell portable electronics insurance to hold limited-lines licenses.It remains to be seen how effective regulators will be able inmonitoring this requirement because of the high number of vendorsthat sell electronic products.

While the lack of passage of troubling legislation as well asthe passage of insurance industry-supported legislation could givethe industry a sense of security, the industry will have to step upits game for the upcoming legislative season as freshmenpolicymakers graduate to their sophomore year when they are alittle more experienced and a little more confident to introducetheir own bills.

As usual, the industry faced many challenges but the real storyis that we at NAMIC are hopeful that an era of reform of stateregulation has begun. That's good news for insurers and even betternews for consumers who will ultimately benefit from an efficient,effective regulatory system.