Appeals Court Says Fla. Can Suspend Allstate; Carrier Releases McKinsey Report

BY MATT BRADY
NU Online News Service

A Florida appeals court lifted a stay today that had prevented the state’s Office of Insurance Regulation from suspending the license of Allstate Companies to write new business in the state.

In its ruling, the First District Court of Appeal in Tallahassee concluded that the regulators did not have to navigate the court system before suspending the company.

Florida Insurance Commissioner Kevin McCarty had issued the suspension in the midst of a battle with the insurer to secure information about the process it used to determine it needed a large rate increase. He also sought data about the company’s alleged questionable claims handling methods.

Allstate, following the court ruling, agreed to release the controversial McKinsey & Company consultant’s report concerning its claims handling practices.

The company link to the material on the Internet requires viewers to agree not to alter any of the 150,000 pages of linked documents, and to view them for informational and news media purposes only--not commerce.

The documents can be viewed at: http://media.allstate.com/categories/52/releases/4390.

In Missouri, a judge had held Allstate in contempt for refusing to release the McKinsey report.

The Florida court, in a ruling written by Judge Paul Hawkes, said that, “OIR was not required to pursue enforcement of its subpoenas in circuit court.”

“Suspension of Allstate’s Certificates of Authority is one of OIR’s available enforcement options,” the decision added, and the suspension order complied with the requirements for issuing such an order as dictated by state law.

Speaking with reporters, Commissioner McCarty said “it is hard for me to contain my enthusiasm” in the wake of the ruling, which he called “good news” for both consumers and “law-abiding insurance companies.”

OIR had argued that Allstate’s failure to supply information constituted a “willful failure” to comply with the subpoena. Mr. McCarty said the company “did not take this process seriously,” and added that Allstate has submitted 196 pages worth of objections claiming that some documents are privileged. “There’s still a significant amount of information to be had,” Mr. McCarty said.

Allstate said in a statement that it was “very disappointed” with the ruling. The company said it has worked with the OIR, noting that it has produced 400,000 pages of requested documents.

One issue that remains unresolved for the moment, however, is when exactly the suspension order will take effect. The court ruling notes that it is not final until the time allowed for Allstate to file a motion for a rehearing has expired, or the disposition of that motion if it is filed.

Mr. McCarty said the company had 15 days to seek a new hearing, but also noted OIR would be filing a motion seeking clarification on the exact timeframe.

For its part, Allstate noted that “since the court’s ruling is not yet final, we believe the stay is still in effect and continue to write new business.”

The OIR initially issued its subpoena for the documents as part of a challenge to Allstate’s rate increase filing, and according to the OIR, the company was initially supposed to provide all witnesses and documents for a January 15 hearing. The company raised objections to parts of the subpoena but delivered some documents. The OIR was not satisfied with the response, however, and on Jan. 17, Mr. McCarty issued an order suspending the company from writing any new business.

Allstate contended that the OIR exceeded its authority and challenged the suspension, winning a temporary stay of the suspension order that was the subject of Friday’s ruling.

The Association of Insurance and Financial Advisors reacted to the court ruling with a statement saying its “concern is with the hundreds of small-business people and employees in the Allstate agencies—on Main Streets all over Florida—who have been shown no regard in this matter.

“The confusion this will cause their customers should have been avoided. State records clearly show that the claims handling practices of the company and these agents over the past five years—including two brutal hurricane seasons—has been exemplary.

“This office had the legal tools at its disposal to deal with this matter as a regulatory body but resorted to political theater instead…The negative message being sent to the entire insurance community will not be helpful going forward.”

In releasing the McKinsey report, Allstate put out a press release that said in part the company “is aggressive in fighting fraud to protect our customers and reduce the cost of insurance. The company employs a special investigative unit (SIU) that is specifically charged with identifying and combating fraud.

"We became the largest publicly held personal lines insurance company in the United States in no small part because we built a reputation of being there for our customers in their time of need by resolving claims fairly, accurately and in a timely manner," said Allstate spokesperson Rich Halberg. "The fact that we have added millions of new customers over the past 15 years speaks to the outstanding claim service we provide."

Regulators Discuss Action On Paulson Plan

BY JIM CONNOLLY
NU Online News Service

Reacting to the U.S. Treasury Department financial reform blueprint calling for an optional federal charter for insurers, one state insurance commissioner said she would be contacting every member of her legislature for feedback.

Iowa Insurance Commissioner Susan Voss, who was critical of the Treasury plan which also envisions a national insurance office, made her comments as members of the National Association of Insurance Commissioners criticized the Treasury report during the last day of their meeting here.

NAIC members were furnished with an advance draft of the Treasury proposal which they discussed after its official unveiling Monday.

Before reacting during their plenary session, commissioners and attendees watched a televised debate over the Treasury blueprint that included NAIC President Sandy Praeger, who is Kansas insurance commissioner, as well as Marc Racicot, president of the American Insurance Association, Washington, and former Montana governor.

Commissioner Voss said she has sent a letter to all 150 Iowa state legislators about the report and the issue. The report is a “stepping stone” to discuss the issue of state insurance regulation, she said.

Ms. Voss remarked that in the report, “nobody is talking about the consumer,” and she wondered whether members of the public who had an insurance problem in their state would want to call a toll-free number located in Washington, D.C.

She said state legislators should know that if the Treasury plan went into effect, in many cases, when a consumer calls their office seeking assistance on an insurance matter, they will have to respond, “Talk to your congressman.”

Commissioner Voss said that while there are certainly improvements that can be made to a state insurance regulatory system, “there is no need to implode a system to make sure there are improvements.”

Joel Ario, Pennsylvania insurance commissioner, said problems that have arisen in regulating financial services have “originated from federal regulatory issues and not state issues. To drag the state system into the federal system makes no sense.” The strength of the state system is that it is accessible to the consumer, he said.

When problems surfaced with subprime mortgage market defaults, it was with the banks, said Wisconsin Insurance Commissioner Sean Dilweg. “I don’t see where the federal government stepped in to deal with the problem,” he added.

Mr. Dilweg said federal regulation of Medicare Advantage programs by the Center for Medicare and Medicaid Services, Washington, is just one example of how state regulation could be more effective than federal regulation.

Ohio Insurance Department Director Mary Jo Hudson called the Treasury report “a red herring to hide the failings of the federal system.”

She said that “having two systems will result in a race to the bottom.” Ms. Hudson pointed to state initiatives such as speed-to-market reform, insurance solvency issues and the Interstate Insurance Product Regulation Commission as evidence that state regulation is working.

Mila Kofman, the new Maine superintendent, said that “any effort to federalize the regulation of insurance at the expense of existing state-based oversight and consumer protections is bad public policy.” She said she still needed to review the specifics of the proposal and its impact on specific business lines.

NAIC-funded consumer advocate Kevin Lembo said: “There are many very positive aspects of the Bush administration’s plan for greater oversight and intervention in the financial regulatory system. One element of the report that makes no sense at all, however, is the creation of an optional federal regulator for insurance companies.

“This industry-driven call for an optional federal charter moves regulation and intervention further away from consumers, leaving them with only an ‘800 number’ to protect them from abuses in the insurance market. The only one to benefit from such a move is the insurance industry. The big losers? Consumers.

“Right now, consumers can hold their government accountable because our insurance commissioners are appointed by governors directly elected by the people. Once insurance in lost in the Washington abyss, who will we hold accountable?”

Treasury To Back Optional Federal Charter For Insurers, Brokers

BY ARTHUR D. POSTAL and DANIEL HAYS

WASHINGTON —The Bush administration rocked the insurance world this weekend by reportedly preparing to formally endorse optional federal charters for insurance companies and producers this Monday. Industry reaction was split along the usual fault lines, depending on whether a particular association’s membership supports or opposes the controversial concept.

Support for an OFC is expected to be announced March 31, when Treasury Secretary Henry Paulson unveils the agency’s proposal to overhaul the entire federal regulatory structure for financial services. A copy of Treasury’s draft proposal was published today by the Associated Press and The New York Times.

Treasury’s plan--calling for separate property-casualty and life-disability charters--also includes a proposal to create an interim federal insurance regulator within Treasury to coordinate with state regulatory officials on “pressing” insurance regulatory issues, an acknowledgment that the OFC debate in Congress is likely to be “difficult and ongoing,” the department noted.

Specifically, such “pressing” matters would include international regulatory issues, such as reinsurance collateral. The interim federal regulator would also “serve as an advisor to the Secretary of Treasury on major domestic and international policy issues,” the draft proposal said.

Officials of the National Association of Insurance Commissioners and the National Conference of Insurance Legislators immediately condemned the administration’s move to back an OFC in separate comments from the NAIC’s spring meeting in Orlando, Fla.

Rep. Brian Kennedy, D-R.I., president of NCOIL, said the only silver lining to the proposal is that a new administration will take office in 10 months. “We will have a new Treasury secretary and all of this will be forgotten,” he said.

Sandy Praeger, insurance commissioner of Kansas and president of the NAIC, told National Underwriter that “we will read [the Treasury proposal], review it and respond where it is called for.” Interviewed on Saturday, Ms. Praeger said that NAIC’s leadership had not yet read the report, but noted that “we will emphasize the importance of a state-based system, particularly to consumers.”

In other comments while speaking at various NAIC sessions at Saturday’s spring meeting in Orlando, she said that “just because we’re 55 [jurisdictions] doesn’t mean we can’t work together to effectively regulate.”

Ms. Preager asked why regulatory positions should be recreated on a federal basis, adding that it “would be a foolish duplication of effort.”

Regarding state regulation, she said, “there is no need to pull the plug on something that is clearly working with a dose of federal regulation.”

The Independent Insurance Agents and Brokers of America and the National Association of Mutual Insurance Companies also voiced opposition. Both said they supported regulatory reform for insurance, but not direct federal regulation.

NAMIC President and CEO Charles Chamness said the Treasury proposal “represents a shift in regulatory authority to the federal government. At this time, we urge Congress and Treasury to focus on effective market reforms rather than a consolidation of regulatory authority.”

In criticizing the Treasury blueprint for change, Robert Rusbuldt, president and CEO of the IIABA, said that, “while there may be some merit in the role envisioned for the Fed to identify and facilitate corrections of systemic problems in the financial services industry, the OFC section of the blueprint is clearly swimming upstream.”

He added that it is “hard to see Congress supporting a proposal “that calls for massive deregulation of the industry and a huge new federal bureaucracy.”

However, the American Insurance Association and the Council of Insurance Agents and Brokers—both longtime OFC backers--voiced support.

AIA President Marc Racicot, the former governor of Montana, called the Treasury proposal for an OFC, “a major milestone.”

“Providing insurers with the option of a single regulator for insurance will benefit consumers and will be more efficient, effective and rational given the increasing tension a state-based regulatory system creates,” he said.

Joel Wood, senior vice president for government affairs at the CIAB, said the fact that a conservative Republican administration would embrace the OFC structure “speaks volumes for the slow but steady progress that supporters of an OFC have made in moving toward a rationalized insurance regulatory scheme.”

Eli Lehrer, a senior fellow at the Competitive Enterprise Institute in Washington, who has studied and lectured on the insurance regulatory issue for several years, said his initial reaction is that “Treasury has taken the right approach. This really is a question of international competitiveness as much as anything else.”

He added that, relative to both the insurance systems in other countriesand other sectors of the U.S. economy, “our life and property-casualty insurance sectors are both unproductive and bereft of new ideas, and our burdensome, fragmented regulatory system deserves a lot of the blame for this.”

He said he was “intrigued” by the idea of creating an Office of InsuranceOversight as an interim step and thinks it deserves “serious consideration, but I think it's important that people who support real change realize that it would probably be little more than a half-way measure.”

He added that “as an enthusiastic supporter of OFC and other measures that would result in regulatory competition, I'll be the first to admit that thetype of change Treasury envisions is not going to be easy for every agent and every broker. But, like any other systematic economic modernization, it's likely to leave the great majority of people better off.”

The Treasury’s draft report published today said that “while a state-based regulatory system for insurance may have been appropriate over some portion of U.S. history, changes in the insurance marketplace have increasingly put strains on the system.”

“Much like other financial services, over time the business of providing insurance has moved to a more national focus even within the state-based regulatory structure,” the report says. “The inherent nature of a state-based regulatory system makes the process of developing national products cumbersome and more costly, directly impacting the competitiveness of U.S. insurers.”

Under the Treasury proposal, an OFC structure should provide for a system of federal chartering, licensing, regulation and supervision for insurers, reinsurers and insurance agents and brokers, the draft proposal says.

It adds that such a plan “would also provide that the current state-based regulation of insurance would continue for those not electing to be regulated at the national level.”

States would not have jurisdiction over those electing to be federally regulated, the plan proposes.

However, the Treasury plan would leave insurers holding an OFC still subject to continued compliance with certain state laws--such as on premium taxes as well as compulsory coverage for workers' compensation and individual auto insurance--as well as the requirements to participate in state-mandated residual risk mechanisms and guaranty funds.

An OFC would be issued to specify the lines of insurance that each national insurer would be permitted to sell, solicit, negotiate and underwrite. For example, the report said, an OFC for life insurance could also include annuities, disability income insurance and long-term care insurance.

On the other hand, “an OFC for property and casualty insurance could include liability insurance, surety bonds, automobile insurance, homeowners, and other specified lines of business.”

However, the report will say, “since the nature of the business of life insurers is very different from that of property and casualty insurers, no OFC would authorize an insurer to hold a license as both a life insurer and a property and casualty insurer.”

In his comments in Orlando, NCOIL’s president, Rep. Kennedy, said at a liaison meeting with state regulators that “now that we have seen this huge push for an OFC, we need to be a united front [in opposition] going forward.”

Rep. Kennedy said in an interview later with National Underwriter that “the Treasury’s conclusions were not unexpected” because, in doing its research on financial services oversight, Treasury had asked “leading questions in sending out questionnaires.”

He also said “state legislators and regulators should have a seat at congressional hearings” so that they could head off an OFC.

During her appearances at her group’s Orlando meeting on Saturday, NAIC President Preager recited a catalog of activities that states perform to help consumers and ensure the solvency of insurers. “Now is not the time to rest on our laurels,” she said at one meeting.

She pointed to various activities of the NAIC and noted how quickly--with New York taking the lead--the association had acted to approve a license for a new municipal bond insurer launched by Berkshire Hathaway.

“We took it on ourselves to move it through the process quickly,” she said.

“The NAIC should continue to push ahead with efforts to create reciprocity for the states for producer licensing and also to get more states to join the interstate insurance compact,” she added.

Florida Sues Execs Of Insolvent Insurers

BY DANIEL HAYS
NU Online News Service

Florida is suing the officers, directors and affiliates of three former Florida homeowners insurers, charging in court papers that the defendants bankrupted the companies with a fraudulent scheme that siphoned off assets.

The legal action was announced by Florida Chief Financial Officer Alex Sink on behalf of the Department of Financial Services.

According to her statement, lawyers for DFS—the court-appointed receiver of Atlantic Preferred Insurance Company, Florida Preferred Property Insurance Company and Southern Family Insurance Company (Poe Companies)—have now determined the state has the right to recover additional money.

The DFS lawsuit, filed Friday in the Second Judicial Circuit Court in Tallahassee, seeks damages in excess of $100 million from the officers, directors and affiliates of the now-insolvent carriers.

“Florida’s insurance consumers were forced to foot the bill when the Poe Companies became insolvent so that policyholders could have their claims paid,” said CFO Sink, who oversees DFS. “We will aggressively pursue any opportunity to recoup additional funds to reduce the assessments levied against Florida’s insurance consumers.”

DFS has served as the court-appointed receiver of the Poe Companies since the Second Judicial Circuit Court ordered the carrier into liquidation on May 31, 2006.

As receiver, DFS said it took control of Poe’s operations and liquidated the companies’ assets to pay outstanding claims.

More than 320,000 Floridians held insurance policies from one of the Poe Companies when the companies were ordered to be liquidated, and most policies were automatically transferred into the state’s insurer of last resort—Citizens Property Insurance Corp.—in July 2006.

Ms. Sink’s announcement said the Florida Insurance Guarantee Association (FIGA), which was established by the Florida Legislature to handle the claims of insolvent insurers, has paid $1.2 billion in claims from the three Poe Companies as of Jan. 31.

More than 46,600 policyholder claims have been filed against the Poe Companies, and FIGA expects to pay an additional $123.5 million for claims still outstanding.

As a result of the Poe Companies’ liquidation and need to pay outstanding claims, FIGA assessments could total approximately $790 million on Floridians’ insurance policyholders, the department said.

The court complaint filed by the state charges that after the Poe Companies sustained huge losses from the 2004 and 2005 hurricane seasons, the carriers were “left as empty shells, unable to pay the record volume of claims” as a result of “intentional and fraudulent actions of the officers, directors and/or affiliates of the insurance companies...”

According to the suit, the defendants “engaged in an elaborate scheme to divert the assets of the insurance companies for the purpose of eliminating their personal financial exposure and increasing their personal wealth at the expense of the policyholders, creditors and the people of the state of Florida.”

The complaint alleged that the defendants, who included eight Poe family members, lied to regulators to keep the companies going so that fees could be collected by various affiliated companies resulting in commissions and fees for “insiders whose compensation was based in large part on collected premiums.”

Reinsurers, Consumers Fight Flood Program Windstorm Bill

BY MATT BRADY
NU Online News Service, March 27, 2:30 p.m. EDT

WASHINGTON—In a case of politics making strange bedfellows, J. Robert Hunter of the Consumer Federation of America and the Reinsurance Association of America have joined to oppose legislation expanding the National Flood Insurance Program.

Mr. Hunter, CFA’s insurance director, is a frequent critic of the industry. In this case his organization and the RAA are part of a consortium that urged the Senate Banking Committee today to oppose the Flood Insurance Reform and Modernization Act of 2007 (HR 3121).

The bill, already approved in the House, combined a bill introduced by Rep. Gene Taylor, D-Miss., adding windstorm coverage to the program, with previously introduced flood reforms designed to increase the number of consumers in the program and reduce subsidies for some properties.

Mr. Hunter acknowledged that it is a case of “man bites dog” to see himself and the industry working together.

“I don’t usually align myself with them unless it’s something I feel is important,” he said. “The insurance industry is strong enough. They don’t need me.”

The consortium also includes among its members taxpayer advocacy groups such as the Council for Citizens Against Government Waste and Taxpayers for Common Sense along with environmental organizations like the National Wildlife Federation and Friends of the Earth.

Franklin Nutter, president of the RAA, said the diversity of the consortium’s membership demonstrates that the NFIP bill “is much more than an insurance issue.”

The basis for his opposition to plans to expand the NFIP, Mr. Hunter said, is that while it may sound like something that could help consumers, he believed it would instead likely only aid developers looking to build along the coast.

“I don’t think it’s wise to subsidize” coverage in high risk areas,” he said, adding that proposals such as windstorm coverage expansion “encourages unwise construction” in high wind risk, high flood risk areas.

Mr. Hunter said he was not opposed to the idea of a flood insurance subsidy, but he said it should be something targeted to help consumers and be focused on scaling down the number of people living in flood-prone areas. Such a system, he said, could be based on the policyholder’s income, and should only be applied to existing structures.

The consortium is also opposed to other federal proposals that would establish new federal programs to provide loans to state disaster funds or provide federal government backing for a state’s property and casualty insurance guarantee fund.

The legislation to establish the program, the “Homeowners Defense Act” (HR 3355), was introduced in the House last year by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla. Like the flood program bill, it was passed by the House and is currently awaiting action by the Senate Banking, Housing and Urban Affairs Committee.