advocate In an industry currently regulated State OCT 2008

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1 ISSUE 04 OCT 2008 advocate the voice of the property-casualty insurance industry State by state Representing the industry around the Country By Tammy Velasquez, Vice President and Director, State Affairs American Insurance Association In an industry currently regulated by each state, the American Insurance Association (AIA) works to represent the insurance industry and its member companies on issues that arise on the state level. With regional staff and retained counsel throughout the country, the AIA understands the issues. Current themes being repeated around the country revolve around credit-based insurance scores, automobile insurance reform and auto body repair legislation. Other common issues that are less widespread include workers compensation and boiler inspectors. This issue of Advocate takes a look at each of these issues.

2 leader letter credit scoring Give the Credit-based insurance scoring Leading the Way AIA Presence felt on the state level Achieving the insurance sector s public policy goals across all 50 states is no small task. To date, 2008 has been a busy but typical year for the American Insurance Association as we have served as an effective advocate for our member companies on a myriad of issues across the country. The AIA has advocates in all 50 states with capabilities that are unmatched in the property-casualty industry. We support our member companies public policy priorities by spearheading initiatives that include everything from litigation support to public affairs to lobbying. While the AIA is based in Washington, D.C., we maintain six regional offices across the country. In addition, we re the only trade association that retains local counsel in every state. This enables us to set the agenda and respond quickly on matters of local interest, and to provide the necessary local legislative and regulatory support. AIA s local resources allow us to take a fully integrated approach when we tackle a legislative or regulatory issue on behalf of our member companies. Our reputation as a respected industry leader at the state and national level enhances our ability to achieve positive outcomes. We have our work cut out for us as the insurance sector s leading advocate in state capitals around the country, but it s a role we relish and take seriously. AIA is the only trade association that retains local counsel in every state. A credit-based insurance score uses information from a consumer s credit report to predict how often he or she is likely to file claims, and/or how expensive those claims will be. Studies by government insurance regulators, universities, independent auditors and insurance companies all have shown that an individual s credit history is a proven, strong indicator of risk. In July 2007, the Federal Trade Commission (FTC) released its study, Credit-Based Insurance Scores: Impact on Consumers of Automobile Insurance. According to that study, these scores are predictive of the number of claims consumers file and the total cost of those claims, and scores also may make the process of granting and pricing insurance quicker and cheaper, cost savings that may be passed on to consumers in the form of lower premiums. The value of using credit-based scoring was demonstrated again in a report published this year by the Arkansas Insurance Department. Their report showed 30 percent of Arkansas homeowners and motor vehicle owners paid less in insurance premiums in 2007 due to good credit scores and 60 percent paid the same regardless of their credit score. Governor Marc Racicot President, American Insurance Association 2 advocate I october 2008

3 m credit In 2003, the Arkansas General Assembly passed Act 1452 that regulates the use of credit scores in calculating premiums for personal lines of property-casualty coverage. The act includes several consumer safeguards, including requirements that insurers not use credit information as a sole basis for calculating premiums, not use credit scores based on ZIP code, 30 percent of arkansas homeowners and motor vehicle owners paid less in insurance premiums in 2007 due to good credit scores and 60 percent paid the same regardless of their credit score. and notify consumers when their credit scores have been factors contributing to adverse action. The Arkansas report also showed that nearly 40 percent of Arkansas insurers do not use credit information in setting rates. This shows the Arkansas market provides a number of choices for consumers who prefer to buy coverage where credit information is not considered by the insurer. Despite these facts, there are movements across the country attempting to prohibit the use of credit-based insurance scoring. These movements are based primarily on the belief that the use of such models merely leads to an increase in insurance rates for members of certain minority groups; that the scores represent a surrogate for race or ethnicity. The FTC study concluded that credit scores have little, if any, effect as a surrogate for race or ethnicity. AIA has made it a top priority to protect insurers ability to use effective credit-based insurance scoring and to promote the increased benefits passed on to consumers. In 2008, AIA helped to defeat bills in Wisconsin, Wyoming and Colorado that would have prohibited the use of credit-based scoring. Stay connected For more information, visit Tammy Velasquez is a Louisiana native who now makes her home in Northern Virginia. She has worked on insurance issues for nearly 20 years. october 2008 I advocate 3

4 credit scoring auto reform CAr talk Battling antisteering efforts State Breakdown Colorado In January, the Colorado House of Representatives defeated House Bill 1143 that would have banned the use of credit-based insurance scores. The AIA again worked closely with legislators to help them understand that because of a comprehensive law passed in 2004, the state already had strong consumer protection and disclosure laws on insurer credit scoring. That law protects people who have no credit history, debt due to divorce, identity theft and medical collections. Kansas Legislators in Kansas amended a flex-band rating bill to include a ban on the use of credit scoring. Unfamiliar with the consumer benefits of credit scoring, legislators passed the bill. The AIA stepped in and requested the bill be sent back to the House Insurance Committee where it remained. AIA staff then worked to send a new flex-band rating bill to the floor where it passed and was signed. The AIA continues to reach out to Kansas lawmakers to help them more fully understand the issue. Wisconsin In Wisconsin, the AIA s chief expert on credit testified before the Senate committee considering the bill. AIA also mounted a media campaign and grassroots effort with AIA-member companies and Wisconsin-based employers to help legislators understand the value of using credit-based scores and the consumer protections already in place. Wyoming Wyoming House Bill 125, which would have prohibited the use of consumer credit history for the purposes of rating or underwriting property/casualty insurance, was defeated in committee in February. AIA led the effort to organize industry testimony in opposition to HB 125. AIA s testimony and lobbying of committee members focused on the existing academic studies that support the correlation between insurance scores and claims as well as the extensive consumer protections already in place. Auto repair anti-steering legislation continues to be a hot issue across the country. Proponents of the legislation claim it is pro-consumer, but the reality is that it reduces marketplace competition and restricts consumer access to useful information about their auto repairs. Legislation in California would require insurance companies to first determine if a policyholder has selected an auto repair facility prior to providing any information or recommendations. If the policyholder has selected a repair facility, the proposed law would prohibit the insurance company from having any further discussions with their insured about repair options. A proposed measure in Connecticut, Senate Bill 288, would require insurers to pay usual and customary rates for auto repairs. Because insurance companies pay for a large percent of auto repairs, this component of the bill would give auto repair facilities the ability to set prices outside of the dynamics of a competitive marketplace. Usual and customary would be defined by the auto repair facilities and would ultimately result in higher costs for both insurance companies and consumers. In Washington State, House Bill 3053 focuses specifically on auto glass repair. Similar to the legislation in California, this legislation would require any third-party claims administrator to ask the claimant if he or she has already chosen an automobile glass repair or replacement facility. If the consumer 4 advocate I october 2008

5 The Court Stated Similar legislation that restricted communications with consumers was passed in Texas. That law was struck down by the United States Court of Appeals for the Fifth Circuit. Consumers benefit from more, rather than less, information. Attempting to control the outcome of consumer decisions following such communications by restricting lawful commercial speech is not an appropriate way to advance a state interest in protecting consumers. has made a choice, the administrator would be prohibited from recommending an alternative repair facility owned in whole or part by the insurer or the third-party administrator. The California, Connecticut and Washington bills all died in committee. If they had been successful, some of the proposed legislation would have limited a consumer s ability to take full advantage of choices that insurers want to offer, including concierge programs arranged by insurance companies. These programs can reduce repair times, improve convenience, and enhance consumer choice. Similar legislation that restricted communications with consumers was passed in Texas. That law was struck down by the United States Court of Appeals for the Fifth Circuit. The court stated: Consumers benefit from more, rather than less, information. Attempting to control the outcome of consumer decisions following such communications by restricting lawful commercial speech is not an appropriate way to advance a state interest in protecting consumers. Over the past five years, the Rhode Island general assembly passed 14 bills on behalf of the Auto Body Association of Rhode Island. To help change the tide, the AIA joined the Rhode Island Automobile Insurers Coalition. Together, they aimed to stop this trend by focusing on legislative leadership and introducing their own legislative package. The 2008 legislative session concluded in June without passing any bills introduced on behalf of the auto body industry. october 2008 I advocate 5

6 auto reform Reforming the system For decades, Massachusetts auto insurance market was heavily regulated by the state. The state held rate-setting authority that required all auto insurance companies to share the losses associated with high-risk drivers. The antiquated system resulted in higher premiums for all drivers in the state. In 2007, the AIA worked closely with the Massachusetts Insurance Federation and the Fairness for Good Drivers Coalition to bring managed competition to the state. Together with Massachusetts Insurance Commissioner Nonnie Burnes, they were able to establish a new insurance rating system in which insurance companies establish their own competitive rates based on driving records. With the fourth-highest auto insurance rates in the country, consumers welcomed the new system that allows them to shop for the best coverage and prices by choosing their own auto insurers. Now, instead of all drivers paying for the bad claims history of a few, an added benefit of managed competition is a reduction in insurance costs due to fraud. good drivers are enjoying the lower premiums that are more reflective of their own personal driving history. Because the new system of managed competition rewards good drivers, many are hopeful that it will incentivize all drivers to maintain good driving records. An additional benefit of managed competition is a reduction in insurance costs due to fraud. Now that insurers are individually responsible for the cost of fraudulent claims, they more thoroughly investigate suspected fraudulent claims. Auto insurance reform was also successful in Georgia where SB 276, providing for file-and-use auto rates, was passed. The bill also addressed two adverse court decisions regarding uninsured motorist coverage. To facilitate passage of the bill, AIA staff worked to build support within the general assembly and the governor s office. They presented research that demonstrated the positive impact of regulatory modernization on the state s auto insurance market. SB 276 was first introduced in 2007 by the trial bar as an attempt to expand uninsured motorist coverage on private passenger auto insurance policies by providing a mandated stackable uninsured/underinsured policy. The bill did not pass in Subsequently, several hearings were held in the House and Senate on the subject of a more competitive rating system for auto insurance rates. As a result of these hearings, the bill was amended to include a file-and-use procedure for those filing above the minimum auto limits policies. Georgia Insurance Commissioner John Oxendine strongly opposed the bill and asked the governor to veto the bill. Following several meetings between AIA, the governor and his staff, the bill was signed on May 14, boiler inspectors boiling Protection for all boiler In 2008, the AIA supported legislation in Arizona that successfully shields commercial insurers from litigation against their inspectors. Under the former law, public inspectors licensed by the Industrial Commission of Arizona were provided immunity from lawsuits, but private inspectors employed by insurance companies did not enjoy that same immunity. The AIA-supported bill sought to bring fairness into the law by providing both public and private inspectors the same immunity. The bill protects 6 advocate I october 2008

7 over inspectors insurance companies from having to pay a claim following breakage and then also face civil action against the inspector. AIA partnered with Bill Konopnicki, chairman of the House Financial Institution and Insurance Committee, to introduce HB AIA worked with the trial bar to avoid their opposition to the bill, which was passed and signed into law in May. The law took effect August 20, In 2009, the AIA will work to sponsor similar legislation in California. workers compensation Work It OUT privatizing workers compensation Until July of 2008, West Virginia was one of only five states to provide workers compensation insurance exclusively through a state fund. Collaborating with the West Virginia Insurance Commission, the AIA helped the state transition to a private market. The market was also helped by the state s move to a uniform classification system and experience rating, which allowed them to reallocate losses in a more actuarially credible manner. The process of privatizing the market began in 2005 when the state-run fund was transitioned to a private mutual company. In 2006, that mutual company was given state-protected monopoly on offering workers compensation in the state. As of June 30, 2008, any private insurance company that meets state requirements was permitted to compete in the state. As of mid-september, 105 insurers have written policies in the state and 2,041 employers have switched to a private carrier. october 2008 I advocate 7

8 resources Informed Stay Don t miss out on the day s important news. Subscribe to AIA s First Read daily e-newsletter digest of insurance industry news. FIRST READ AMERICAN INSURANCE ASSOCIATION News and Analysis for Insurance Executives and Public Policy Advocates In this age of electronic media and 24-hour news channels, staying informed on the issues affecting the insurance industry can seem like a daunting task. Busy executives don t have time to read and watch everything that s out there, but they certainly don t want to miss out on important information and stories. Recognizing this challenge, the AIA developed First Read in early First Read is an executive summary of noteworthy articles pertaining to current issues and business practices for insurance organizations. Our editorial staff monitors nearly 11,000 newspapers, business publications, Web sites, national and international wire services, and other periodicals, and summarizes significant articles into an easy-to-read summary. First Read is ed to your in box five times a week. Easily organized by topic, readers can quickly review the headlines in each issue, then click those of interest to read more. News and Analysis for Insurance Executives and Public Policy Advocates What First Read subscribers are saying... The first and only thing I look at in the morning! CEO, Fortune 500 company I look forward to it everyday a great service. senior counsel, Fortune 100 company I enjoy the easy-to-read format and the fact I can read it on my Blackberry in under two minutes is very handy. SVP for government affairs, well-known insurance company First Read gives me a good idea of what s going on in the industry. It helps me do my job better. front-line claims representative, major insurance company It s priority reading for me at the start of each day. public affairs director, Fortune 100 company Stay connected Have news delivered directly to your in box. Subscribe to First Read by sending an to firstread@aiadc.org. AMERICAN INSURANCE ASSOCIATION American Insurance Association 1130 Connecticut Avenue NW, Suite 1000 Washington, DC PRSRT STD US Postage Paid American Insurance Association The American Insurance Association (AIA) is the leading propertycasualty insurance trade organization, representing 350 insurers that write more than $123 billion in premiums each year. Phone Fax visit us online at AIA-005