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Leader's Edge NAIC Miracles

Moving quickly to implement surplus lines reform is nothing short of a miracle for the NAIC

By  Scott Sinder and John Fielding

The National Association of Insurance Commissioners gathered in Seattle in mid-August for its second national meeting of 2010, and like all NAIC meetings, there was a lot of talk and not so much action. That may sound ironic since regulators have a great deal on their plates and are diligently plowing through a number of significant issues, such as healthcare reform and surplus lines reform.

Healthcare Reform: The new healthcare law, the Patient Protection and Affordable Care Act, imposes significant responsibilities on state insurance regulators and the NAIC to work with the Department of Health and Human Services and other federal agencies. This has created an explosion of activity at the NAIC (believe it or not). It is advising the federal government and working to prepare states for what they will need to meet the requirements of the new law. For example, the NAIC has already adopted a new rate filing form for carriers so they can comply with new rate reporting requirements.

To date, the most important issue for brokers has been the NAIC’s deliberations on calculating the minimum loss ratios (MLRs). The new law requires that a carrier’s MLR not exceed 80% for small-group plans and 85% for large plans. The NAIC is tasked with determining what goes into the MLR calculation. Their determination will be “certified” by HHS.

There has been significant debate over what is and is not a medical expense. In Seattle, the regulators approved a new “blanks” form to implement the MLR requirement. The blanks form is the form submitted by an insurer to report financial information to state regulators. The regulators will use the data to calculate a company’s MLR and determine if any rebate to clients is required.

The NAIC adopted several blanks form amendments, broadening some definitions of permissible expenses, particularly in connection with expenses to improve healthcare quality. Still, the approved form does not carve out agent and broker commissions, nor does it include them as medical expenses. So they become part of a carrier’s 15%-20% of non-medical expenses.

The regulators did, however, express support for agents and brokers, adopting a resolution affirming the value of the services they provide. They also supported brokers’ involvement in the state-based health insurance exchanges, a major topic of discussion in Seattle. Support for agent and broker involvement at this early juncture is key not only as an expression of the regulators’ intent as they develop exchange guidelines, but also as a marker to the federal policymakers who will be working on this issue.

The Council testified before the NAIC committee working on the exchanges, providing regulators with details about the role of brokers in the small-group marketplace. We explained small businesses’ needs when purchasing health insurance and their reliance on the advice and guidance of brokers.

A number of regulators voiced concern about the role of the “navigators” in the exchanges. These would be unlicensed, untrained persons who could advise consumers. The law explicitly provides for the participation of so-called navigators in the exchanges. State regulators will, no doubt, have a healthy discussion about the extent of their role and what sort of training and qualifications they should have.

Another significant issue is whether a state should have a single market entirely within the exchange or should allow for a market outside. Regulators have voiced strong opinions on both sides of the debate. This means either there will be public debate and wrangling on the issue, with regulators disagreeing and resorting to “my state’s bigger than yours” put-downs, or they will discuss the issue behind closed doors and compromise. The first alternative is the preferred option for those in the NAIC audience, like us, since it is much more entertaining (and allows for public input in the deliberations). But the compromise appears more likely, as the NAIC puts great stock in collegiality.

Surplus Lines: The NAIC has begun discussions on the Dodd-Frank financial services regulatory reform law.Most important to brokers is the law’s surplus lines reform provisions. Beginning next July, only the home state of the insured will have authority to regulate a surplus lines transaction. That includes payment of surplus lines taxes. States that do not participate in a national electronic licensing system (think NIPR) by July 2011 lose their authority to collect non-resident licensing fees.

The requirements of the new law are clear, but the states are concerned about implementation because of the short time frame and, most important to them, the potential loss of tax revenue. States with fewer resident surplus lines insureds believe they will lose tax revenue to the more densely populated states.

The NAIC has established yet another committee to address the implementation issues. It will create model legislation authorizing states to allocate surplus lines taxes they collect to other states. It will also craft a model agreement on a uniform allocation system.Given the tight timelines under the new law, the NAIC has fast-tracked the implementation of surplus lines. Regulators intend to have model legislation approved at this month’s meeting. This is fast action for any organization, but for the NAIC, it would be nothing short of miraculous.

Sinder, a partner at Steptoe & Johnson, is CIAB General Counsel. ssinder@steptoe.com

Fielding is of counsel at Steptoe & Johnson. jfielding@steptoe.com


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