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Property and Casualty Advisory Council

Insurance Regulation Law Update William J. Toman

The business and regulatory environment for insurance companies is constantly changing, and part of our client service involves staying on top of those changes. One way we do this is to attend quarterly meetings of the industry-regulator liaison committees sponsored by the Wisconsin Office of the Commissioner of Insurance ("OCI") for life, health, and property and casualty insurance. Following are our reports from the most recent meeting of the Property and Casualty Advisory Council:

John Duwell of West Bend Mutual took over as chair of the Property and Casualty Advisory Council (the "Council"), and started by thanking and presenting a plaque from Governor Scott Walker to longtime chair, Jim Thomas. John Duwell also introduced new Council member, Misha Lee of Sentry Insurance.

Legislative Update

OCI Legislative Liaison Jim Guidry distributed the accompanying list of bills that OCI is following so far this session. He highlighted the following:

  • Auto insurance. A bill has passed both houses to roll back many of the changes passed in the last legislature (other than mandatory insurance).Therefore, the bill is awaiting the governor's signature. OCI will issue a bulletin on the law, which will take effect about six months after it is published.
  • Tort reform. This bill has been signed into law.
  • Regulatory reform. This bill has also passed both houses and is awaiting the governor's signature.
  • More regulatory reform. AB-70 would give the Small Business Regulatory Review Board authority to determine whether a proposed rule significantly affects small business (and thus, must be reviewed by the board).
  • Ban on underwriting by ZIP code. Rep. Young (D-Milwaukee) is circulating a bill.
  • Increase in small claims jurisdiction. Rep. Ballweg (R-Markesan) is circulating a bill to double the $5,000 limit on small claims jurisdiction.

Assistant Deputy Commissioner Eileen Mallow said OCI submitted a no increase budget request to the governor (that cut only one vacant position), and it went to the legislature as is (and was not even the subject of an informational hearing). The transfer of funds collected by OCI to the general fund will continue, but the commissioner wants to see the amount decreased.

In response to a question, Eileen Mallow said that OCI will probably submit a technical bill this session, but there have been no decisions on what it should contain or whether it will be introduced this year or next year. She is accepting suggestions on the bill.

Eileen Mallow also reported that there is not much of interest to the Council on OCI's rulemaking agenda except repeal of the new policy readability requirements.

National Flood Insurance Program

OCI distributed a copy and summary of a bill to extend the program for five years. Copies are available upon request. The bill was introduced April 1, 2011 and would make various consumer friendly changes, including a one-year suspension of the mandatory purchase requirement for newly designated flood plains. The bill does not include wind coverage, which was controversial, and does not deal with the program's deficit. The bill should be out of the House by June, but the Senate has a history of delay in dealing with "must-pass" legislation like this; such legislation is a magnet for unrelated amendments. The program currently expires September 30, 2011.

National Association of Insurance Commissioners ("NAIC") / Federal Issues

Eileen Mallow noted that almost half of the commissioners are new. As a result, last week's  Austin meeting mainly involved trying to figure out how to deal with all of the changes. She explained that NAIC committee assignments generally went to commissioners who had been in office; so, OCI's only major assignment is on the financial committee. She also noted that the NAIC's two main topics were health care reform and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").

One issue with Dodd-Frank is the Financial Stability Oversight Council, which is supposed to deal with systemically significant financial companies. The Council's main activity is drafting rules, which are mainly focused on banks and investment companies (though they could include insurers). The drafts so far do not include any analytical rules;they are mainly subjective, and it is clear that insurance regulators have much better financial tools. With respect to the resolution authority for troubled companies, the Council does not understand how guaranty funds work or that accessing insurance company assets might tip it into insolvency.

Unfortunately, only one of the three insurance representatives to the Council is in place - that is, the NAIC appointee (Director John Huff of the Missouri department). However, the Council has limited his effectiveness by stating that he represents only himself, not the NAIC. A second insurance representative will join the Council in June when Director Michael McRaith of the Illinois department takes over as head of the new Federal Insurance Office. The third insurance representative is to be appointed by President Obama, and that position is the only one with a vote. While there is not a lot of insurance presence on the Council at this point, OCI has weighed in on the issues with the Congressional delegation.

Another Dodd-Frank issue is the treatment of surplus lines under the Nonadmitted and Reinsurance Reform Act (the "Act"), an OCI-distributed summary that is available upon request. To continue taxing surplus lines after this Act goes into effect this July, states must enact a uniform approach based on the insured's home state. The Act also allows only one tax rate per state; Wisconsin will have to choose between its 0.5 percent tax on ocean marine and its 3 percent tax on other nonadmitted insurance (or it will not be able to collect any tax on surplus lines, which currently amounts to $7 million per year).

There are competing models for implementing this Act: The Nonadmitted Insurance Multi-state Act ("NIMA") created by the NAIC and the Surplus Lines Insurance Multi-state Compliance Compact ("SLIMPact") produced by the National Conference of Insurance Legislators ("NCOIL"). OCI also distributed drafts of these models. Copies are available upon request. These models take different approaches to approximately the same goal. NCOIL asked Congress to delay the effective date of the Act for a year to allow more time for states to adopt legislation. A copy of their open letter to Congress is available upon request. OCI is analyzing the differences before deciding which approach to recommend, and it has gotten no input from the industry up to this point.

OCI Financial Examiner Supervisor Peter Medley made a presentation on standardized accounting principles. He explained that each state is authorized to set accounting rules for insurers, but they generally use the statutory accounting principles ("SAP") in the NAIC accounting manual that was codified several years ago. He noted that different companies have different interests in SAP vs. generally accepted accounting principles ("GAAP"): Some use only SAP, some need to use GAAP to roll up to holding companies, some use GAAP only for benchmarks, and some need to use international standards to roll up to their foreign owners.

Peter Medley noted that the April 4, 2011 issue of Best Week includes an article entitled "Milestone Nears for Global Accounting," a copy of which is available upon request. The article describes the efforts of the U.S.-based Financial Accounting Standards Board and the London-based International Accounting Standards Board to "craft a single, global standard for insurance." He explained that these bodies have been working for 10 years or so on a new set of international standards that would not adopt any particular approach (everyone would have to change their accounting). They hope to implement the change in about 2015, though companies would probably want to start using the standards a couple of years before that for comparison purposes. He said international standards sound good at the politician level, but they could be very expensive to implement.

The NAIC will have to decide which part of the new international standards to use. Large-scale adoption would probably make insurer balance sheets more sensitive to interest rates than the current SAP approach. It could also be a big burden on states like Wisconsin, which has a lot of small companies and mutuals. Misha Lee said Sentry Insurance does not see the benefit of a changeover except for companies competing internationally (and, for them, separate SAP and international accounting ought to be a cost of doing business). The Council chair agreed on behalf of small and regional companies, and asked OCI to provide regular updates to the Council on this subject.

For more information on the Insurance Regulation Group, please contact William Toman at (608) 283-2434 / william.toman@quarles.com or your Quarles & Brady attorney.