NAIC Gets Earful Over Data Collection Proposal

Insurance industry and consumer groups remain bitterly at odds over a controversial proposal to collect market conduct data as part of the annual statement process, and house it in a centralized data bank.

The issue pits those in the industry raising concern over the confidentiality of the data, as well as how it would be treated if released, against consumer advocates who say such data should be public because it will benefit consumers and even keep the insurance market healthy.

The proposal was the subject of a conference call yesterday that drew over 100 participants, including both industry and consumer group representatives. The May 28 call was arranged by the Executive Committee of the National Association of Insurance Commissioners.

The proposal must be approved by the executive committee and then the NAIC’s plenary before it becomes NAIC policy.

NAIC President Sandy Praeger, who is the Kansas insurance commissioner, started the call by saying regulators would not take action during the call itself, and possibly do nothing definitive during the NAIC’s summer meeting this week in San Francisco, which starts on May 30.

She noted that because of work with vendors on annual statement filings, if action is not taken by July 1, the recommendations would not be implemented in 2009, but would then be considered for 2010.

The proposal was adopted by the NAIC’s Market Conduct “D” Committee on April 17, noted the committee’s chair, Montana Insurance Commissioner John Morrison. Among the elements of the proposal that Mr. Morrison detailed are:

• A centrally-stored facility.
• A collection of data through a supplemental filing.
• A May 1 deadline rather than a March filing required for financial information.
• A recommendation not to proactively sell data unless the NAIC membership directed the group to do so.

Mr. Morrison also noted that the data elements in the proposal are currently public, but any additional data elements would require a review before they could be added.

The proposal was suggested, he said, because it would streamline a system of market data analysis that started on a trial basis in 2002 and became permanent in 2004. Twenty-four states collected market-conduct data for 2007, and 29 will collect 2008 data, he said. Rather than providing data to individual states, a company could make one filing, he explained.

State Rep. Robert Damron, D-Nicholasville, Ky., who is president-elect of the National Conference of Insurance Legislators, said states need more time to look at the issue before they could decide if it is a policy they would support.

In an unusual move, Frank Keating, president and CEO of the American Council of Life Insurers, participated on the call. He commended regulators for their efforts to modernize the way data is collected, but also noted privacy laws and the possibility that companies could be made vulnerable to lawsuits if the information is made public.

The exposure to additional litigation, the way data could be used by class-action attorneys and perhaps other companies, and even the reason the data needed to be collected were raised by industry trade groups, including the American Insurance Association, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America.

Companies testifying included Farmers Insurance, Liberty Mutual, Mass Mutual, Principal Financial Group and Travelers Group.

The AIA issued a statement noting it will continue voicing strong opposition to the data collection proposal during the NAIC’s national meeting.

"The NAIC is a non-profit, non-governmental entity. As such, it should not collect proprietary market data for which no guarantee of confidentiality can be provided,” according to AIA President Marc Racicot.

“This information is extremely sensitive, and if it were to be compromised, there would be needlessly harmful ramifications for both consumers and insurance companies,” he added. “In the states where insurers file market conduct annual statements, there are clear statutory requirements governing their confidentiality, and regulators must take appropriate steps to ensure this information remains confidential."

Mr. Racicot added that "insurers already operate in a highly-regulated environment. The annual financial statement filed every year by insurers--which contains financial, and not proprietary market information--is a key tool for regulators, consumers and investors to monitor the financial health and solvency of an insurance company."

Deirdre Manna, a PCI representative, noted that in an NAIC meeting in Washington on May 20-21, PCI President David Sampson urged regulators not to proceed with the proposal because the NAIC authority over preserving and protecting such information was still unclear.

Additionally, she raised the question of why the data was being collected in the first place. Originally, she said, the goal was to collect data so there would be fewer market conduct examinations. However, five years later, Ms. Manna added, insurers had not been shown specific tangible benefits.

The use of publicly available data by competitors and class-action lawyers was mentioned by several who spoke. However, these speakers also said that efforts to streamline the process are a good thing.

Meanwhile, a trio of NAIC-funded consumer representatives asserted the importance of having such data available to the public, and urged that the project be fully adopted.

The three were Birny Birnbaum, executive director for the Center for Economic Justice; Brendan Bridgeland, executive director of the Center For Insurance Research; and Gregory Squires, a professor of sociology, public policy and public administration at George Washington University in Washington.

Mr. Birnbaum said the only way there could be true regulatory modernization is if there is data that could be analyzed so improvements can be made. Consequently, he argued, market conduct analysis and data is needed and should be culled by regulators.

He called the argument that data would be misused “incredibly disheartening,” and added, “I don’t need insurers to tell me and other consumers what information I need to know.”

In addition, Mr. Birnbaum called the idea of insurers waiting over a year to access competitive information in other companies’ data “absurd,” because at that point competitive advantages would already be incorporated into company strategy.

Mr. Bridgeland argued that available data was actually good for the whole market, because if there is a general impression of denial of claims, it could drive down the perceived value of insurance policies.

In addition, Mr. Squires suggested that rather than just the choice of no data or abused data, there is in fact a third choice--“conclusive and accurate and informative data.”

Supreme Court Retaliation Ruling Could Expose Employers

A Supreme Court ruling allowing employees to file suit under a Reconstruction Era civil rights law claims retaliation by employers may expose those employers to more severe judgments, according to employment practices attorneys.

“The cost of being found to have retaliated for claims of race discrimination may just have gone up,” said Paul Mickey, a partner in the Washington office of Steptoe and Johnson LLP.

In a 7-2 ruling on the case of CBOCS West Inc. vs. Humphries, case no. 06-1431, the high court upheld an appellate court ruling that the Civil Rights Act of 1866, also known as a “Section 1981” claim for the law's place in the U.S. Code, should be interpreted to include retaliation claims, despite no language specifically relating to retaliation existing in the law.

“We agree with CBOCS that the statute’s language does not expressly refer to the claim of an individual (black or white) who suffers retaliation because he has tried to help a different individual, suffering direct racial discrimination, secure his Section 1981 rights,” wrote Justice Stephen Breyer in the court’s ruling. “But that fact alone is not sufficient to carry the day,” he added, citing precedent as the basis for the court’s decision.

What the decision does, said Russell Adler, an associate in the New York office of the law firm WolfBlock, is broaden an avenue for filing suit.

In filing a complaint under Title VII of the Civil Rights Act of 1964, which is more common, he said, an employee was required to first go through an Equal Employment Opportunity Commission administrative procedure and obtain a “right to sue” letter before filing the case in federal court.

Additionally, the complaint would have to be brought within 180 or 300 days of the action, depending on the state where the employee resides, with most states using the 300-day rule.

At the same time, however, a case could be brought under the older statute allowing all citizens of any color the right to enter into contracts and enforce them, and the court’s ruling asserted that retaliation claims could be filed under this statue.

The decision “puts another arrow in the quiver of the employee,” Mr. Mickey said.

Mr. Adler, however, noted that the court didn’t change anything and that Section 1981 has always been an option.

“A good lawyer would sue under all these statutes,” he said, adding that an attorney would also likely include any state or local laws to the complaint as well.

Although many lawyers would not have filed the Section 1981 claim as well, he said, “they’re more likely to do it now because it’s in their minds” in the wake of the court’s decision.

Mr. Mickey agreed that it is “less common, but not uncommon” for complaints citing both statutes to be filed simultaneously, depending on the circumstances of the case at hand.

From an insurance perspective, an increase in claims filed under the older law could also mean more exposure in terms of severity. Both Mr. Mickey and Mr. Adler noted that while Title VII caps punitive damages, no such caps exist under Section 1981, meaning the court’s ruling “creates a more powerful economic weapon” for plaintiffs, Mr. Mickey said.

However, Mr. Adler argued that employers “should not change how they go about their business” in the wake of the decisions, as it doesn’t make any changes to the law that might make them more vulnerable to a retaliation claim, just the circumstances under which an employee alleging retaliation can file suit.

“It’s a warning for employers to be very careful when dealing with situations where reprisal might be charged,” Mr. Mickey said.

Both Mr. Adler and Mr. Mickey noted that retaliation claims can be problematic for employers, and that fact-finders, be they judge or jury, would naturally make an assumption of causation should an adverse act, such as an unusually bad review, follow a complaint of bias by an employee.

Mr. Adler also noted, however, that since the court only broadened the avenue for plaintiffs somewhat, rather than creating new liability, the ruling’s effect would not be as earth-moving as it has been depicted.

“I don’t think this decision is as significant as the press is making it out to be,” he said. “People could always sue for retaliation.”

Obama Backs National Cat Fund

Democratic presidential candidate Barack Obama offered his support to a proposed national catastrophe fund, provided it does not also encourage risky development.

“I think that we need a national catastrophe fund,” Sen. Obama said in an interview with the Palm Beach Post. “The key is to make sure that it's run efficiently, that it’s adequately funded, and that we build in smart incentives to assure that developers are mitigating risk when they're making decisions on where to locate homes or businesses.”

Sen. Obama referred to legislation passed by the House to implement a national catastrophe fund as a “good start.” The legislation, the Homeowners Defense Act, or HR 3355, is currently awaiting action by the Senate Banking Committee.

He added that there are “a number of ways” to encourage developers to mitigate their risks as much as possible, and that “the key is to make sure you're not setting up a fund where developers don't have to have any regard as to whether they're building in a flood plain or whether they're creating more risky situations.”

The national catastrophe fund is one seen as favorable to Floridians, and the legislation passed by the House was sponsored by two Florida representatives. Sen. Obama compared the situation facing homeowners in the sunshine state to those living in other parts of the country.

“The bottom line for the residents of Florida is they need protection in the same way that people in the Midwest need protection from tornadoes or other natural disasters,” he said. “And I think its important for us to make sure the federal government is playing a role as a backstop in that process.”

Edward Collins, national director of Protectingamerica.org, a group lobby for the national catastrophe fund concept, hailed Sen. Obama’s support for the proposal.

“There is urgency as we are reminded by the recent forecast that major catastrophes are, unfortunately, inevitable,” he said. “Fortunately, however, a growing number of leaders are calling for reforms. Senator Obama rightfully realizes that catastrophe preparation and protection must be a nationwide priority and that action should be taken immediately, before the next catastrophe strikes.”

ProtectingAmerica.org has called for a national catastrophe fund to be established as a backstop for state guaranty pools and funded using mandatory contributions from insurance companies.

Opponents of the concept have argued that the bill would effectively force homeowners in low-risk areas to subsidize those in coastal regions prone to hurricanes and other storms.

During the House debate on the legislation, Rep. Shelley Moore-Capito, R-W.Va., said the bill “could put the taxpayers at risk for bailing out” state insurance pools, pointing to Florida’s state-run Citizens Property Insurance Corp. as an example.

Market Discipline? You’re Kidding, Say Actuaries

While there are differences between the current soft market and previous periods of rate declines, some destructive insurer behavior never seems to change, a group of reinsurance actuaries suggested here.

Listing market pressures for reinsurers that distinguish the current soft market, Elizabeth Mitchell, president, Platinum Underwriters Reinsurance in New York, noted that ceding companies are increasing retentions and that the reinsurance market, while soft, seems harder than the primary market.

That’s “not typical of previous soft markets,” she said, referring to a more typical earlier slide in the discipline of reinsurers.

“Historically, we’ve seen ceding companies use reinsurance more in soft markets, and we aren’t seeing that today,” she added, also noting that reverse phenomenon—in which “ceding companies are perfectly willing to retain more”—has actually accelerated since Jan. 1.

“You’ll hear things like, ‘We’ll keep it net unless you’re willing to pay some really high and egregious ceding commission for the right to write my reinsurance,’ to which many of us are saying, ‘Thank you very kindly, but we’ll pass.’”

The “disconnect” between the reinsurance and primary markets “has gotten so bad that there are still contracts from May 1 that are not placed,” she said. “There is increasing pressure on brokers to get deals done at terms that the reinsurance markets are simply not willing to accept.”

Commenting on conditions in the primary market, she said that since January 1, the ceding companies are more confident that their margins are good, which is leading them to be willing to decrease rates.

“It’s also leading to the phenomenon where they’re starting something new,” she said, referring to ventures into areas of insurance they haven’t written before.

“Everyone argues that they’re going to exercise…discipline, but when you have five or 10 new markets in someone else’s backyard, you cannot help but have extreme competition on rates and terms and conditions,” she said.

Ms. Mitchell said that primary market competition—particularly on large capacity risks on both the property and casualty side, as well as excess and surplus lines risks—has “really started to accelerate.”

Rate drops for these risks were in the mid-to-high single digits through the end of January, but now they’re “hovering around minus-20 percent—and everyone can point out the minus-50 or minus-60 percent risk.”

“In addition, we are just starting to see the softening of terms…something that actuaries struggle with how to reflect, but can nevertheless be much more painful when they slip—and much more effective when they tighten” in terms of how the impact loss costs, she said.

Steve Kelner, managing director, casualty for Swiss Re in Armonk, N.Y., said primary rate levels are now reminiscent of levels at the end of 2001 and early in 2002 for most casualty risks.

“If pricing is at those levels, we’ve got an issue about maybe having inflation on the loss side,” he said, noting that “simple fundamentals” of actuarial work would suggest that pricing should keep pace with inflation.

The cycle “feels like the same cycle but with a different story behind it this time,” he said. “There’s always a new era—a new reason why there’s not irrational behavior,” he said, noting that commentators point to Sarbanes-Oxley (and its impact on reserving practices, perhaps making them more adequate), better systems and better data as factors distinguishing the current cycle.

“I don’t buy it. We’ve got the same cycle. We’ve got the same double-digit rate decreases since the second half of 2004. And each time we’ve gone through the cycle, we understate the impact of rate decreases.”

“We talk about discipline, but I don’t think we actually see discipline to the degree we should yet,” he said, noting that industry forecasters “tend to converge toward means—and to estimate toward a nice staid number” of overall profit.

While there are many public messages suggesting that “that this is a sensible market,” Mr. Kelner said, “I also see a lot of finger pointing,” referring to the conversations he has with primary companies he visits on underwriting audits.

“Our rate change is minus-small number. But when we lose business, it’s minus-big number,” they say, he reported, noting that he challenges them on this because they can’t be winning new business at “minus-small.”

They respond, “Yes, but our underwriting is better,” he said.

Mr. Kelner said, “We had 160 underwriting audits last year, and nobody said their underwriting was worse.”

“Everybody said their rate change is minus-small number. But somebody is writing minus-big number business, and it’s not getting into the rate changes being reported,” he said.

John F. Rathgeber, president and chief executive officer of Arch Reinsurance Company in Morristown, N.J., joined the drumbeat of negative commentary.

“We’re in a pretty bad place right now. Ironically, it’s because good results of the last two years [brought us here]. Capital in the industry is about 80 percent above where it was in year-end 2001,” he noted.

Like Ms. Mitchell, he reviewed the shrinking reinsurance pool, supplying some numbers to underscore the impact of increasing primary company cessions.

Florida Moving More Insureds From Citizens

The Florida Office of Insurance Regulation said today that it has approved the plans of six insurance companies to remove another 100,000 homeowners policies next month from the state’s insurer of last resort.

An announcement from Florida Insurance Commissioner Kevin McCarty said some of the companies already began taking out policies earlier this year from Citizens Property Insurance Corp., and others will begin with the June take-out.

Florida law allows Citizens' policyholders to refuse offers from the private companies and stay in Citizens. All of the take-out companies have agreed to offer the same or better coverage than the policyholder had with Citizens, and at the same or lower price, the OIR said.

"Every company removing these policyholders into the private market has met Florida’s rigorous licensing standards, and most of the newer companies were licensed with double or triple the statutorily required start-up capital of $5 million," Mr. McCarty said in a statement. "We monitor the removal process very carefully to ensure policyholder protection."

OIR said that, to date, it has approved plans to remove up to 500,000 policies in 2008 from the state-created insurance company and place them in the private market.

The six companies that have just been approved to remove Citizens policies are:

• American Integrity Insurance Co. of Florida: up to 75,000 policies total; 42,000 removed to date.
• Argus Fire & Casualty Insurance Co.: up to 18,000 policies total; 12,360 removed to date.
• Avatar Property and Casualty Insurance Co.: up to 10,000 policies total in June.
• Homeowners Choice Property & Casualty Insurance Co.: up to 30,000 policies total; 20,000 removed to date.
• Magnolia Insurance Co.: up to 60,000 policies total in June.
• Southern Oak Insurance Co.: up to 75,000 policies total; 6,678 removed to date.