NAIC Stands Pat On Broker Disclosure

As a result of last week's vote here by the special Broker Compensation Committee, there will be no effort to expand the model to require disclosure by all producers, or even ban certain kinds of compensation.

Committee Chair Joel Ario, Oregon's insurance administrator, said that in the past few months, 17 bills have been introduced in 32 states on the issue, but so far only four states have passed bills. In addition, regulations on the issue are pending in a number of states, including California and New York.

"What has passed has been generally more limited than the NAIC [model]," Mr. Ario noted.

Meanwhile, the NAIC will continue to monitor both department and criminal investigations going on in the states regarding the issue of conflicts arising from double compensation of brokers.

The issue first came to the fore as a result of investigations by New York Attorney General Eliot Spitzer into allegations of bid-rigging by the top commercial brokerage firms–particularly the largest player, New York-based Marsh.

Since that time, four major commercial brokers have settled with their respective states and have discontinued the practice of Market Service Agreement compensation from the major insurers, in which brokers are rewarded for delivering more volume to certain carriers.

Such arrangements led to allegations of steering of accounts to carriers paying MSAs, as well as bid-rigging to make it appear the carriers selected were offering the best market rates.

Finite Re Regulation

In other developments at the NAIC conference last week, the regulator association addressed a second controversial area by giving preliminary approval to new requirements for annual statement disclosure and attestation aimed at ferreting out finite reinsurance abuse.

The changes will add new interrogatories to ensure that finite re agreements transfer enough risk to merit the favorable accounting treatment companies accrue from them.

After the approval by the Property Casualty Reinsurance Study Group at the opening session of the NAIC summer meeting here, the measure goes to other committees before final approval by the full NAIC in time for the distribution of the 2005 annual statement.

Recent allegations concerning American International Group's use of reinsurance in an accounting transaction that the company now admits improperly bolstered its reserve picture flashed a spotlight on the possible misuse of such reinsurance products.

A number of states are looking at disclosure requirements similar to the NAIC proposal, which has concerned the insurance industry.

"We hope the regulators take a consistent approach and avoid creating a crazy quilt of confusing and conflicting investigative practices and compliance rules," said Steve Broadie, vice president of financial legislation and regulation for the Property Casualty Insurers Association of America.

In addition, the revised annual statement will require attestation from both the chief executive and chief financial officers as to the risk-transfer validity of their company's reinsurance agreements, and to the fact there are no side agreements that would negate them.

Phil Carson, senior counsel to the American Insurance Association, called the attestation requirement "overly broad and vague." He also asserted that it should be incorporated into the existing overall attestation requirement in the annual statement.

"Creating a separate attestation requirement would have the effect of weakening the current attestation, which some regulators have stated is already stronger than the certification required in [the] Sarbanes-Oxley [Act]," he said.

Claims History Debate

In other news, an NAIC working group looking into regulating the controversial use of claims history in personal lines underwriting has taken no action after hearing insurance industry and consumer representatives square off on the issue.

The panel put off any decision on whether to create a model law or regulation, or develop something like a "statement of principles" to help guide the states in legislating on this issue.

Use of loss history in databases such as ChoicePoint's Comprehensive Loss Underwriting Exchange has been questioned by opponents, who contend the data can be flawed and consumers can be unfairly penalized when a claim inquiry is recorded as an actual claim.

Consumer representative Birny Birnbaum, of the Center for Economic Justice, urged the regulators at the NAIC session not to shrink from their responsibility to address the issue. "You don't want to do what you did with [consumer background] credit scoring and sit on the sidelines while [the National Council of Insurance Legislators] ran with the ball and created its own model," he said.

Texas State Rep. Craig Eiland, D-Galveston, president of NCOIL, told the panelists his group expects to pass a model law regulating the practice at its summer meeting next month. However, Mr. Birnbaum said the NCOIL model contained no meaningful consumer protections, "and what is worse, it has a bunch of pretend protections."

Don Cleasby, regional manager and general counsel of PCI, said that using claims loss history refines underwriting to the point where it expands the availability of coverage by better matching risk to pricing.

But District of Columbia Insurance Commissioner Larry Mirel said that it could have the effect of limiting coverage if it makes insureds wary of making claims for fear of having to pay for them down the line with rate increases.

Mr. Birnbaum said insurers will always look for ever more sophisticated underwriting tools to find the most profitable customer, and there comes a point when such a practice is against the interest of good public policy.

Jeff Skelton, whose ChoicePoint company operates CLUE, said his company is constantly making refinements to meet both consumer and insurer complaints to provide the most equitable system of providing loss history data.

However, seemingly simple issues such as ensuring that mere inquiries do not count against a policyholder become complicated when the point at which a claim file is actually opened is unclear, he explained.

After grilling the speakers on their position on the NCOIL model, the committee's chair–Roseanne Mead, assistant commissioner in the Iowa Insurance Division–indicated the NAIC may take the approach they took on credit scoring and leave the model law crafting to state legislators.

PCI's Mr. Cleasby spoke for much of the industry when he said he hopes the NAIC will take a go-slow approach to whatever they do. "I have had this issue come up in a number of states I am familiar with, and no one has said, 'Let's wait and see what the NAIC says we should do,'" he said.

Receivership Model

The NAIC put off approving its controversial Insurance Receivership Model Act (IRMA) to give insurance industry representatives one last chance to suggest revisions.

The Financial Condition Committee will continue to receive comments over the next few weeks in time for another interim meeting in August before its expected final approval at the September NAIC fall meeting.

At a hearing last week at the NAIC summer meeting here, industry representatives were unanimous in their criticism of the model act that will address the priority of interests of all stakeholders in insurance company insolvency such as the state guaranty fund, creditors, estates and policyholders.

Debra Hall, senior vice president for the Reinsurance Association of America, said the proposed legislation "failed the fundamental test of fairness."

"In many instances the model grants the receiver unfettered discretion without judicial or regulatory oversight," she said.

Specifically, her reinsurance concerns centered on the fact that receivers could seek not only reported claims but also those that have been incurred but not reported. "The provision treats these fundamentally different categories of loss reserves as though they were the same," she said.

Michael Koziol, assistant general counsel for PCI, said the intent of IRMA is to ease the administrator's burden of the estate and protect the receiver. "The model loses sight of accountability by granting immunity to receivers and contractors," he said.

Mr. Koziol also asserted that the model grants liquidators powers "that a bankruptcy judge would marvel at in the way it allows them to circumvent the priority regime."

The proposed act would replace the current receivership model that in its nearly 20 years of existence has yet to be adopted in its entirety in any state.

Flag: The Skinny

Head: What Did NAIC Do?

At its quarterly meeting last week, regulators addressed a number of key issues, including the following:

o Broker Compensation–declined to expand its model law to require disclosure by all producers or even ban some practices.

o Finite Reinsurance–gave preliminary approval to new mandates for annual statement disclosure and attestation aimed at ferreting out finite re abuse to artificially bolster insurer balance sheets.

o Claims History–held off on a decision on whether to create a model law or regulation, or a "statement of principles" to help guide states in legislating the use of claims history in personal lines underwriting.

o Receiverships–put off approving its controversial Insurance Receivership Model Act to give insurance industry representatives one last chance to suggest revisions.