During the sturm and drang of the health care debate, it might have been easy to assume that the regulatory fate of the insurance industry is determined in Washington.
While federal regulation no doubt has a profound ability to alter the way insurers conduct business, the more immediate legislative concerns for the industry are playing out in state houses across the country. Many of the legislative battles, such as efforts to restrict the use of credit scoring in underwriting by insurers, are familiar.
However, this year, new conflicts borne out of the economic crisis arose, and the industry found itself defending the sanctity of its solvency funds as cash-strapped states looked to replenish their coffers by any available means.
With the stakes so high and so much in flux, insurers can ill afford to regard these battles are far from a spectator sport.
If federal efforts to reformthe way the insurance industry is regulated unfurl with a pace and grace reminiscent of a lumbering elephant, then efforts at state levels are more akin to swarm of bees. Much of the attention this year has centered on the health care debate in the nation's capitol, yet profound and immediate changes also are happening across the country as state legislative sessions come to a close.
While much of the action at the state level revolved around issues that gestated for many years, such as efforts to restrict the use of credit scoring in underwriting, a new issue pushed itself to the fore this year. As cash-strapped state governments looked for any available source of revenue, workers' compensation funds and other pools intended to ensure the solvency of insurance companies became tempting targets, notes Neil Alldredge, SVP, state & policy affairs for the National Association of Mutual Insurance Companies. "This is a dance we're having to do in many different states," he says.
So far, efforts to defend insurance funds from depredation have been largely successful. In Maryland, efforts to transfer $20 million in surplus funds from the State's Injured Workers' Compensation Fund to help fill a budget deficit were defeated. "The legislature correctly recognized that IWIF's surplus belongs to its policyholders and not the state," says Tammy Velasquez, VP and director of State Affairs at the American Insurance Association (AIA). "We fight those battles because it's policyholder money; it's not the state's money to take."
Raids on funds are not the only way in which states are looking to the relatively resilient insurance industry as a financial lifeline. Velasquez says the industry has also been fighting against rising premium taxes. "Where this really hit the insurance industry is in those areas where we've seen increased premium taxes," she says. "We've been battling those across the country in states from Virginia to New Mexico."
Oddly, Velasquez says the weak economy has helped in the sense that it has stalled some other regulations that would have been more feasible in boon times. "A few years ago we saw a proliferation of bad-faith bills," she says. "We really haven't seen those this year. Most legislatures this year were faced with huge state budget deficits. So you saw some states dealing with nothing but their budgets."
Kevin Ryan, president of the Professional Insurance Agents of New York State Inc., agrees that now is not an easy time to get the ear of state legislators. "Financial problems at the state level are going to overshadow everything else going on," Ryan says.
VICTORIES AND SETBACKS
However, some states, such as Kansas, managed to pass legislation with profound implications for the insurance industry. In April, the Kansas Legislature passed HB 2501, which affords consumers additional protections regarding the use of credit information. The bill was crafted with considerable input from the insurance industry, which opposed a bill in the previous legislative session that would have banned the use of credit scoring altogether.
"Kansas took their insurance scoring law and improved it by adding protections for individuals experiencing extraordinary life circumstances," says Joe Woods, VP of state government affairs for the Property Casualty Insurers Association of America (PCI), noting that the legislature chose to adopt guidelines from the National Conference of Insurance Legislators regarding the extraordinary life circumstance model in lieu of banning the use of credit scores.
"The use of the (NCOIL) model language for extraordinary life circumstances was instrumental in overcoming many of the concerns regarding the use of credit-based insurance scores," Woods says.
Yet, the outcome in Kansas may not be indicative for the nation as a whole. Election-year politics may be temporarily tamping down the push to restrict the use of credit scoring as politicians duck controversial issues in order to focus on reelection. "There's really been no overall push to restrict credit scoring," says Velasquez. "Part of me thinks it's due to the fact that it's an election year and politicians don't want to go down that road."
Occasionally, an issue arises that seems to transcend normal political calculus. Take, for example, legislation passed in South Dakota that prohibited subrogation until the injured party was made whole.
Despite industry opposition, the measure passed both houses of the state legislature before being vetoed by the governor in March. Velasquez says the situation exemplifies just how unpredictable the legislative process can be, and how hard the industry must work to educate lawmakers about the complexities of the industry.
"You see crazy things come up, like what happened in South Dakota," she says. "Who would have thought that with both the Governor and Insurance Commissioner opposing it, the bill would pass out of both chambers? Try explaining subrogation in a sound bite to a legislator."
Likewise, an issue such as the move by the New York State Insurance Department to outlaw performance-based compensation for producers, came in response to specific events, and thus seemed to possess an inertia all its own.
The new rules, slated to go into effect in January 2011, established minimum disclosure requirements relating to the role of insurance producers and the compensation paid to insurance producers. The Independent Insurance Agents & Brokers of America has vowed to challenge the rules in court.
To the contrary, issues exist that the insurance industry must engage in time and again, state to state. "There are things that are perennial - labor law reform, workers compensation - they are going to be with us a long time," Ryan says.
BACK TO THE STATES
One issue that originated at the federal level but will increasingly become a battleground at the state level is health care reform. For example, proposals in Arizona to block the individual mandate contained in the Affordable Health Care for America Act signed into law by President Obama has passed both legislative chambers in the state.
The uncertainty surrounding the law will impact the insurance industry, says Howard Olderman, president of the Professional Insurance Agents of Connecticut. "Health care reform is the true unknown," he says. "Nobody knows exactly how this thing is going to be put together. That's what's truly on the mind of people in Connecticut. You are facing a trillion-dollar program without a true understanding of what it entails. Everything else is now on the backburner."
The gravity of the health care reform was such that it occluded many other areas of debate around the industry. Velasquez says property/casualty insurers can be thankful in that sense for the debate. "Health insurers drew most of the fire," she says.
Moreover, Velasquez says she does not expect that property/casualty insurers will be subjected to the same scrutiny and criticism as health insurers during the raucous health care reform debate. "Personal lines is a very competitive marketplace, so you don't see an outcry from the public for reform like you do with health care," she says.
