Ever since the Gramm-Leach-Bliley Act of 1999 removed barriers between insurance companies, banks and securities firms, insurers have been pushing states for regulatory reform. If insurers are to remain competitive, they argue, insurance companies must get products to market faster. But they are stymied by redundant and cumbersome filing, licensing and reporting requirements across the 50 states. What's needed? Uniform laws and streamlined filing and approvals, according to industry sources."The NAIC (National Association of Insurance Commissioners) needs to focus on the bread-and-butter issues of regulatory reform," says Lenore Marema, vice president of industry and regulatory affairs for the Property Casualty Insurers Association of America (PCI), Des Plaines, Ill. Chief among those issues is speed to market.

"There are a lot of delays in getting rate and form approvals from the states," she says. "It just takes too long to validate a filing." A lot of states have a prior-approval requirement for new products, when it would be a lot easier for insurers to compete if they could bring their products to market without prior approval, she says. "The states can address any issues (that arise) with market conduct (reviews). Competition works as a regulator. They need to trust it."

That's the free market philosophy behind the State Modernization and Regulatory Transparency (SMART) Act, which U.S. Rep. Mike Oxley (R, Ohio) and U.S. Rep. Richard Baker (R, La.) proposed in September. Unlike the optional federal charter option, which has been debated for several years and is supported by the American Council of Life Insurers (ACLI), SMART would not establish a federal insurance regulator. Instead, the legislation attempts to improve speed to market for insurers by pre-empting state rating laws, creating "nationwide competitive insurance pricing" (see "Reps Propose SMART Reforms," right).

That approach is more appealing to many opponents of a federal regulator, but many insurers remain leery of Congressional involvement. "When you look at what happened when the federal government got involved with TRIA (the Terrorism Risk Insurance Act), you have to wonder if the devil you know isn't better than the devil you may be getting," says one regional director of the Association of Insurance Compliance Professionals (AICP) who declined to be identified. "Sure. I want rate reform, but I don't know if it can be mandated," he says. "And, if it were mandated, I don't know what the repercussions would be." Other federally mandated laws, such as the Risk Retention Act, only created an additional reporting burden and expense for insurers, he notes.

Because of the industry's skepticism toward Congressional action, it's not surprising that reaction (at press time) to the proposed SMART bill was mixed.

  • The Independent Insurance Agents & Brokers of America (IIABA) supported the bill.
  • The National Association of Professional Insurance Agents (PIA) had not issued a blanket endorsement, but was pleased that the bill did not call for an optional federal charter or regulator.
  • The National Association of Mutual Insurance Cos. (NAMIC) is interested in eliminating price controls, but had not endorsed the bill.
  • The National Conference of Insurance Legislators (NCOIL) did not support the bill because it could undermine the role of state legislatures and state insurance commissioners.
  • And, the NAIC was carefully reviewing the SMART Act and preparing its comments for Congress.

It's too early for the NAIC to state any position on SMART, said Jim Poolman, North Dakota insurance commissioner at a speed-to-market seminar hosted in January by PCI, the NAIC and InSystems Corp., Markam, Ont. "But I can say the NAIC certainly appreciates that Congress is holding our feet to the fire to move forward with insurance regulatory reform."
NAIC's plan

In fact, the Gramm-Leach-Bliley Act prompted the NAIC five years ago to hasten its regulatory reform efforts. As a result, in 2000, the organization issued its "Statement of Intent: The Future of Insurance Regulation." In 2003, it reinforced that commitment with its "Insurance Regulatory Modernization Plan." Then, in 2004, the NAIC issued its "Framework for a National System of State-Based Insurance Regulation."

The NAIC plans to improve speed to market by further developing and promoting its System for Electronic Rate and Form Filing (SERFF), which was designed in the late 1990s to streamline insurers' rate and form filing with the states. The NAIC blueprint also includes development and implementation of an interstate compact for uniform national product standards and a central point of filing.

"Speed to market is a top priority for the NAIC," Commissioner Poolman told the audience of 100 insurance compliance professionals at the January seminar. "Our goal is to protect the consumer-as well as to enable insurance companies to get their products to market quickly." To that end, he advises, "insurers need to continue to communicate their support for SERFF to state regulators."

At this point, most states don't need much more coaxing. All states use it, with the exception of Rhode Island. And Florida has its own electronic filing system called I-File. But all states don't use SERFF for all lines. By 2003, 49 states accepted P&C filings through SERFF, 48 accepted life insurance filings, and 41 accepted health insurance filings, according to the NAIC.

Insurers' use of SERFF is also on the rise. Companies li-censed to use SERFF grew to 1,500 last year--32% of all li-censed insurers. By last year, insurers submitted 151,000 filings through SERFF-up from 5,000 in 2001 when the Web-based version was released.

"When SERFF was first introduced (in the late 1990s), it required a high investment in hardware, and not many states were using it. So it really wasn't worth it," says an insurance compliance manager who declined to be identified. "But now, at $6 to $15 per filing, it's very affordable."

Cost savings

Indeed, although some insurers don't use SERFF because they say it's not cost-effective (25% according to a recent PCI member survey), 30.5% of PCI members do use SERFF--and eight out of 10 of those who use it say it's very or somewhat effective (see "Why Insurers Don't Use SERFF).

At Liberty Mutual Insurance Co., where the average savings per filing is about $85 using SERFF, the company saved $257,000 in 2003 when it submitted 30% of its filings electronically, according to Lucinda Woods, director of regulatory affairs at the Boston-based carrier. Last year, Liberty Mutual submitted 80% of its filings through SERFF, for an estimated savings of $435,000 in filing costs.

Lowering costs is crucial for insurers to justify the switch to electronic filing, but when it comes to speed-to-market concerns, turnaround time is a key factor. The average time it takes states to approve a filing using SERFF is now 23 days, according to the NAIC.

"When the NAIC began its reform efforts, insurers initially said they'd be happy with a 90-day response from regulators," says Mike Pickens, former Arkansas insurance commissioner. Some states-such as South Dakota-have approved filings in less than an hour, notes Sonja Rodebaugh, director of compliance at TransGuard Insurance Co. of America, Westmont, Ill.

"No mailed filing can be turned around in a matter of minutes-or even 24 hours," notes Liberty Mutual's Woods. "SERFF is probably one of the best initiatives we've ever undertaken. It has sped up the process. It makes the process work more smoothly. And we maintain all our filings sent electronically via SERFF. We're now pretty much down to a paperless filing system."

Eliminating paper will go a long way to speed product time to market for Allstate Insurance Co., according to Bonnie Whitman, associate director of state property/casualty filings at the Northbrook, Ill.-based company. This month, Allstate is implementing the latest version of InSystems' filing software, which is integrated with SERFF to enable automated end-to-end rate and form filing. "Our goal is to make state filing paperless," Whitman says. "We'll have all our files on our server."

Indeed, eliminating paper and electronically tracking requirements, actions, changes and approvals are main benefits of electronic filing. But the majority of insurers are not yet licensed to use SERFF. Why not? PCI survey respondents indicate several reasons: They don't have time to research the benefits; SERFF is cumbersome and difficult to learn; e-mail filing is just as quick and effective; and the states have not fully implemented SERFF for all lines.

In fact, the lack of uniform laws and requirements across states is a common complaint about any NAIC initiative to improve insurers' speed to market. For example, no matter how much faster or cheaper SERFF is than mailing paper, states continue to have their own filing requirements. And insurers still have to spend a lot of time and money complying with them.

"Ever since the NAIC was founded in 1871, it has faced the same problem: the need for standardization-for uniform laws and procedures across state boundaries," says Gary Gummig, vice president of e-government at Sircon Corp., an Okemos, Mich.-based provider of electronic producer license filing technology. "The insurance industry would like a system similar to the system for drivers' licenses," he says. "If you get a driver's license in one state, you can drive anywhere in the country."

Interstate compact

In fact, that's the impetus behind the NAIC's Interstate Insurance Product Regulation Compact, which would establish uniform national product standards for life insurance, annuities, disability and long-term care products.

"Driver's licenses are recognized across the states as the result of an interstate compact," notes Pickens. "And since life, health and annuities are fairly uniform across the country, the NAIC chose to focus on these lines initially for the interstate compact. But I believe the concept will be expanded to include many P&C lines once its proved to work."

Currently, nine states have enacted the interstate compact (Colorado, Hawaii, Iowa, Maine, New Hampshire, Rhode Island, Utah, Virginia and West Virginia) and 22 are considering it this year. The compact establishes a commission staffed by experienced insurance professionals who will review and approve products filed through a single point-which is SERFF.

The commission will become operational if 26 states or states representing 40% of premium volume join, but commission review and approval will be optional. "This will not create another level of bureaucracy, says Pickens. "Companies can still file in individual states if they choose, but standards will be the same for those states. Our goal is to create a national system-not a federal system-for filing approval," he says.

Meanwhile, New York Attorney General Eliot Spitzer is making the case for more federal oversight over the insurance industry, which is factoring into reform efforts. "There's a lot of focus on producer compensation and other issues," says Sircon's Gummig. "So there will be a lot of regulatory cycle time diverted to those issues rather than to speed to market reform."

"SMART won't get any legs in Congress this year because of Spitzer," says one insurance commissioner who declined to be identified. "Plus, Demo-crats are not going to support it because of the rate deregulation component in the bill. And if you take that out, you lose P&C industry support."

Deborah Smallwood, vice president, at TowerGroup Inc., agrees. "Final action on SMART is unlikely in 2005," she says. "But the focus on insurance regulatory reform will continue.

In fact, the Needham, Mass.-based financial services advisory firm recommends that carriers implement technologies that will help them compete in a deregulated market.

Those include: business intelligence and analytics to capture operational data and assess market opportunities and risk; product management tools with reusable components to bring products to market faster; flexible rating and quoting systems that eliminate duplicate entry and errors; and straight-through processing to distribute products quickly.

The bottom line is: "Insurers have to prepare for a more transparent, more efficient, and more competitive marketplace," says Smallwood.

Reps propose SMART reforms

In September, U.S. Rep. Mike Oxley (R, Ohio) and U.S. Rep. Richard Baker (R, La.) introduced draft legislation to reform insurance regulation. Titled the "State Modernization and Regulatory Transparency" (SMART) Act, the bill contains two main components aimed at improving insurers' ability to get products to market faster:

Rate Deregulation: Under SMART, federal authorities would pre-empt state rating laws to create nationwide competitive insurance pricing. This provision of the legislation calls for deregulation of personal lines, phasing in over a two-year period. In the first year, rates could move within a band of plus or minus 7%. In the second year, the band would increase to plus or minus 12%. In the third year, rating would be deregulated.

A State-National Insurance Coordination Partnership: The legislation would establish a seven-member panel, lacking any regulatory or supervisory authority. The panel would consist of three members from the National Association of Insurance Commissioners (NAIC)-one from a small, a medium and a large state; one member from the U.S. Treasury, one from the SEC and one from the Federal Reserve. The President would appoint a chairperson nominated by the NAIC. The panel also would have a liaison for the international insurance industry and a liaison to analyze the effects of national financial policy on the insurance market.

Source: TowerGroup Inc., "State Modernization and Regulatory Transparency Act: To Be Or Not To Be," 2004.

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