The majority of legislatures around the country have closed up shop for the year, and, for the most part, the property-casualty insurance industry fared pretty well. This year saw more than 1,000 new state legislators finding their ways around state capitols, and educating this influx of freshmen on insurance matters was paramount to the industry. Perhaps a benefit reaped from the change in state legislative landscape this year was that the property-casualty insurance industry celebrated some fairly significant victories on the issues of rate modernization, tort reform and underwriting freedom.
While budget deficits and social issues received much of the attention of statewide media, the biggest news coming out of the states this year for property-casualty insurers concerned the Dodd-Frank Wall Street Reform and Consumer Protection Act—and a section within it known as the Nonadmitted and Reinsurance Reform Act (NRRA).
NRRA streamlines surplus lines insurance regulation by creating a system where taxation, regulatory authority and licensing authority would be controlled by the insured’s domiciled state. It wasn’t shocking that states balked at the thought of federal law taking control of not only a state’s authority but its surplus lines taxes. So out of the NRRA, two state-based options were spawned: the Surplus Lines Insurance Multistate Compact, or "SLIMPACT Lite," supported by the National Conference of Insurance Legislators, and the Nonadmitted Insurance Multistate Agreement or NIMA, a system backed by the National Assn. of Insurance Commissioners.
SLIMPACT Lite establishes an interstate compact that includes a state-chosen commission of members chosen that sets formulas for national eligibility standards, collecting and allocating premium taxes, and establishing uniform payment and reporting requirements. To date, nine states—Alabama, Indiana, Kansas, Kentucky, New Mexico, North Dakota, Rhode Island, Tennessee and Vermont—have enacted SLIMPACT Lite legislation. These states have conducted a handful of teleconferences in the past month to establish a set of by-laws for the compact.
NIMA takes a more bare-bones approach in that it does not address the issue of regulatory reform, but establishes a clearinghouse of state authorities to work cooperatively to consolidate reporting and collect and allocate premium taxes for multi-state surplus lines insurance transactions. To date, three states—Florida, Hawaii, and Mississippi—have entered into such an arrangement.
What remains unclear is what additional states will join one of the two competing entities. In enacting their respective surplus lines reforms, a majority of the states left the question open, generally giving their insurance commissioner the authority to make that ultimate decision.
As has been the case in the past, rate modernization, the keystone to reforming state regulation, was a high priority. While momentum for rate reform slowed in the aftermath of the financial crisis, the midterm elections brought renewed interest from lawmakers. Nine states saw some form of action on rate modernization in 2011. The biggest wins occurred in Tennessee, Connecticut and Florida.
Tennessee lawmakers passed legislation allowing for a 15 percent flex band—the largest spread in terms of plus and minus rate increases of any flex rating bill in the country—without seeking the Dept. of Insurance’s approval. This measure will also allow insurers to implement the new rate on the day it is filed.
Legislation extending the 2-year sunset provision in Connecticut’s personal lines flex-rating statute was a positive highlight of that state’s legislative session. This measure allows insurers to continue to use for the next 2 years periodic rate changes on a file-and-use basis, as long as the rate falls within the 6 percent flex band. Complete removal of the sunset provision would likely make the statute more effective, and the industry started the legislative session with that as a goal, but ultimately the legislature did not entertain the industry’s request.
Florida legislators introduced a bill to implement flex rating on the personal lines side, but any prospect for it died early in the session; however, some allowances to increase Citizens Property Insurance Corp.’s—the state’s insurer of last resort—glide path "angle of incline" were included in the extensive property package that was signed by the governor. The legislature also passed HB 99 that expands a 2010 law exempting other lines of commercial insurance from rate excessiveness regulation to include commercial auto and commercial property-casualty lines. It also includes commercial auto lines for fleets with fewer than 20 vehicles.
In competitive markets, prior approval of rates serves little purpose other than to prevent companies from making new products available to consumers and to impede insurers’ ability to respond quickly to changing market conditions. Passage of these bills will enhance competition in the relevant states, which, in turn, will benefit consumers.
More than half of the states plus the District of Columbia considered some form of tort reform. Significant strides were made to improve the business climate in Pennsylvania when Gov. Tom Corbett signed into law the "Fair Share Act" that reforms the process of how damages are allocated in civil lawsuits. Under the Act, each defendant will now pay only his/her share of the judgment as opposed to having joint responsibility for the full amount.
In Oklahoma, four tort reform bills successfully made their way through the legislative process. The state now has a $350,000 cap on non-economic damages, which brings the state in line with 30 other states with similar caps. Most instances of joint and several liability have been eliminated, and awardees in personal injury or wrongful death lawsuits are now exempt from having to pay federal or state income tax on their award. Oklahoma also joins a growing list of states taking proactive steps to bolster fairness and provide incentive to reduce the number of uninsured motorists by prohibiting uninsured drivers from collecting non-economic damages when they sue after a motor vehicle accident. A similar "no pay/no play" law was enacted in Kansas.
In Wisconsin, first-term Gov. Scott Walker signed the Omnibus Tort Reform Act, which, among other things, limits punitive damages, raises standards for expert testimony, and toughens state rules relating to damages for frivolous claims. South Carolina’s governor also signed a bill that provides limits and certain procedures on awarding of punitive damages.
Twenty-three states introduced no fewer than 50 bills to ban or severely restrict insurers’ use of credit-based insurance scoring. Only two of those bills passed—Nevada, where a bill established a set of extraordinary life events that applicants or policyholders can use to ask insurers for exception; and Montana, where the legislature included military deployment as an extraordinary event in underwriting or rating. Although some state legislators continue to introduce proposals to ban or restrict the use of this valuable underwriting tool, when educated, most legislators come to realize that insurance scoring benefits the vast majority of insurance consumers.
Concerns about misrepresenting terms and conditions in insurance policies have prompted lawmakers and regulators to move aggressively on the issue of certificates of insurance this year.
At this writing, eight states—Georgia, Maryland, Missouri, North Carolina, North Dakota, New Hampshire, Oklahoma and Utah—have enacted laws during their legislative sessions to specify how insurers and producers are to treat issuing certificates going forward. Two other states, New York and Oregon, had bills pending.
In the past year, another dozen states—Arkansas, Arizona, Connecticut, Hawaii, Iowa, Kansas, Massachusetts, Montana, Nebraska, New Mexico, Rhode Island and Virginia—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 bulletin begins by noting that some third parties may request insurance producers to issue certificates of insurance that evidence terms or conditions of coverage that may be inconsistent with the underlying insurance policy or contract. The bulletin continues by noting that misrepresenting policy terms or conditions violates state law and subjects the insurance producer to penalties that may include suspension or revocation of the producer’s license.
A legislative trend that emerged this year was portable electronics 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’t stop a dozen states from moving forward and enacting their own legislation 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 that sell portable electronics insurance to hold limited-lines licenses. It remains to be seen how effective regulators will be able in monitoring this requirement because of the high number of vendors that sell electronic products.
While the lack of passage of troubling legislation as well as the passage of insurance industry-supported legislation could give the industry a sense of security, the industry will have to step up its game for the upcoming legislative season as freshmen policymakers graduate to their sophomore year when they are a little more experienced and a little more confident to introduce their own bills.
As usual, the industry faced many challenges but the real story is that we at NAMIC are hopeful that an era of reform of state regulation has begun. That’s good news for insurers and even better news for consumers who will ultimately benefit from an efficient, effective regulatory system.