Credit-Based Scoring Tops AIA Agenda at Spring NAIC Gathering in New York City

March 12, 2004

The issue of credit-based insurance scoring will once again reportedly be the subject of much discussion and attention during the spring meeting of the National Association of Insurance Commissioners (NAIC) in New York, which begins this weekend, the American Insurance Association said this week.

Other topics of importance to be addressed include regulatory modernization through the consideration of NCOIL’s (National Conference of Insurance Legislators) market conduct model law, and the reduction of foreign reinsurance collateral requirements.

Credit-Based Insurance Scoring
The Credit Scoring Working Group (CSWG) meets on Sunday, March 14 from 3:30 p.m. to 5 p.m., and there are several topics of concern to AIA expected to be on the agenda, including the establishment of “best practices,” a report on the group of 10 states pursuing their own studies on credit-based insurance scoring, and the Missouri Insurance Department’s recent study.

“There is no precedent for establishing ‘best practices’ by the NAIC or any subset of its members,” said David Snyder, AIA vice president and assistant general counsel. “The ‘best practices’ that the CSWG is considering will undercut the laws and regulations on this issue that have already been enacted in more than 30 states. Further, this could pose a threat by potentially imposing standards on insurers in litigation that are not found in existing laws and/or regulations.”

“The CSWG began this effort as a process to develop uniform interpretations of existing terminology, where certain similar legislative and regulatory language was used in the states. It has now ballooned into trying to define industry ‘best practices’ without regard for any model or for any particular set of laws. It appears the CSWG is taking a back door approach to developing its own model law and regulation on this issue,” said Snyder.

AIA advised the NAIC that, if this project is to move forward, it should be done as initially described (as uniform interpretations) and should: 1) ascribe similar meanings only to legislative language that is the same; 2) interpret the terms in a manner consistent with the actual legislative language; 3) not encroach on legislative authority; and, 4) not be inconsistent with applicable federal law or the laws of one or more states.

The CSWG is also expected to hear a report on the group of states pursuing their own studies on credit-based insurance scoring. “This group is operating in secret, totally outside the auspices of the NAIC,” noted Snyder. “There is no transparency here and no opportunity for input from insurers or anyone else the group chooses to exclude. As a result, our biggest concern is that this group could inadvertently develop a flawed methodology for studying the use of credit information by insurers,” said Snyder.

“For example, the study recently done by the Missouri Department of Insurance ignores important actuarial concepts, legal standards, and existing research. Using this methodology in other states would only lead to equally flawed results,” said Snyder.

Reportedly, the Missouri study completely fails to take into account the legal and actuarial standards contained in Missouri rating law, as well as a new Missouri law restricting insurer use of credit that took effect July 1, 2003. According to an independent, expert analysis by LLC, an actuarial and financial risk management firm, this study is reportedly biased and deeply flawed.

“In essence, this report is a set of conclusions waiting for a study. The Missouri report delivered highly controversial conclusions and described the results of some statistical analysis. Unfortunately, there is precious little, if any, connection between the conclusions and data analysis,” said Michael Miller, a principal of EPIC Consulting.

AIA, the National Association of Mutual Insurance Companies (NAMIC) and the Property-Casualty Insurance Association of America (PCIAA) commissioned the critique by EPIC.

Market Conduct Model Law
AIA is urging the NAIC to adopt the market conduct model law that NCOIL unanimously adopted during its spring meeting last month.

“This model includes some of the important market conduct reforms that the NAIC has developed, such as market conduct analysis, state coordination and uniformity in procedures. This new model law addressing these three areas will go a long way toward solving many of the problems plaguing the current market conduct system,” said Laura Kersey, assistant vice president, AIA Northeast Region.

“While we support the model as an improvement to the current state market conduct structure, it is important to note that it still needs work in certain areas – most notably, domestic deference – to ensure that the number of state market conduct examinations is held to a minimum. Further, issues such as domestic deference will need to be resolved at the federal level before this model can be seriously considered as a federal standard,” explained Kersey.

“We have pledged to work with our industry colleagues and federal legislators to ensure that any market conduct provisions that are considered provide a workable solution for legislators, regulators, industry, and, most importantly, consumers,” said Kersey.

The NAIC’s Market Regulation & Consumer Affairs (D) Committee met this week via conference call and decided to forward the model for consideration during the NAIC’s Joint Executive Committee / Plenary session during the upcoming New York meeting.
Reduction in Foreign Reinsurance Collateral

One other issue of concern to AIA is a proposal from foreign reinsurers to reduce their collateral requirements, which the NAIC’s Reinsurance Task Force has been considering for some time. In lieu of submitting to the same U.S. regulatory structure imposed upon U.S. reinsurers, foreign reinsurers must deposit assets in domestic institutions to collateralize the liabilities they assume. Cedant insurers can make claims against the collateral if the foreign reinsurer fails to satisfy claims under the reinsurance contract.

“Last summer, AIA joined with several other trade associations to oppose the collateral reduction,” said Phillip Carson, AIA counsel. “At the December 2003 NAIC meeting, domestic insurers were asked to provide examples in which cedant carriers have encountered difficulties in collecting from foreign reinsurers. AIA, along with several other trade organizations, has submitted the requested examples, which we expect to be a topic of discussion at the Task Force’s meeting on Saturday, March 13, from 12:30 p.m. to 2:30 p.m.,” said Carson.

Editor’s note: See IJ’s East news for March 11 for related news item.

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