HD63 - Availability and Affordability of Liability Insurance, the Antitrust Exemption Afforded Insurers and the Reinsurance Costs Associated with Liability Insurance

  • Published: 1989
  • Author: General Assembly. Joint Subcommittee
  • Enabling Authority: House Joint Resolution 120 (Regular Session, 1988)

Executive Summary:
The joint subcommittee established pursuant to House Joint Resolution No. 120 of the 1988 General Assembly was charged to study three primary issues: (1) the practices by which insurance companies reinsure all or" part of the risks they insure; (2) the advisability of repealing the insurance industry's exemption from the Commonwealth's antitrust law; and (3) the means of assuring the continued availability and affordability of liability insurance coverage to the citizens of the Commonwealth. The joint subcommittee held eight meetings and at each meeting met for several hours at a time in order to receive testimony from all of the interested parties. The work and deliberations of the joint subcommittee will be discussed in detail later in this report, but for the purposes of this summary it will suffice to say that the joint subcommittee ·considered eight separate recommendations: five of which were agreed to, two of which were not agreed to, and one of which the joint subcommittee decided was not needed at this time. All of those agreed to will require the introduction of legislation at the 1989 General Assembly.

This summary will discuss briefly each recommendation.

RECOMMENDATIONS AGREED TO REQUIRING LEGISLATION

Four of the five recommendations agreed to requiring legislation relate to the issue of availability and affordability. The fifth recommendation is a resolution to continue the study in all three areas that the subcommittee was requested to review under House Joint Resolution No. 120. The following are those recommendations requiring legislation:

1. To amend subsection E of § 38.2-1905.1 of the Code of Virginia to allow the Bureau of Insurance, the Attorney General's Office and other parties more time to review data filed pursuant to 1235 Supplemental Reports before the Commission is required to hold a hearing to determine which of those lines of commercial liability insurance designated as potentially troubled are in fact troubled lines. The amendment to that section establishes September 30 of each year as the date by which the hearing must be held. Under current law, the Commission is required to hold a hearing 60 days after the due date of the 1235 Supplemental Reports. The State Corporation Commission indicated to the subcommittee that the current two-month period contained in this section during which the Bureau is required to complete its review of the data submitted on each potentially noncompetitive or troubled line pursuant to § 38.2-1905.2 was not sufficient. The Office of the Attorney General agreed. The insurance industry, although it had no strong feelings in opposition to this recommendation, pointed out that the more time that there is between the filing of the data and the holding of the hearing the older or staler the information becomes. The joint subcommittee's vote was unanimous to support this recommendation.

2. To amend paragraph 7 of subsection E of § 38.2-1905.1 to eliminate the circular definition of the phrase "pattern of excessive rates" as currently exists between §§ 38.2-1904 and 38.2-1905.1. The recommended change would strike the word "excessive" in paragraph 7 and insert in its place "unreasonably high." At the meetings during the interim there was a significant amount of discussion concerning the interpretation of the wording of the two statutes and how the two statutes relate to each other. The joint subcommittee members found that if one were to apply the S 38.2-1904 subsection A definition of "excessive rate" to the term "pattern of excessive rates" found in § 38.2-1905.1 E.7., it would lead to a circular definition and would make the "pattern of excessive rates" determination meaningless. They found that the pattern of excessive rates is but one factor that the State Corporation Commission may use under § 38.2-1905.1 to determine whether sufficient competition exists to regulate rates in the line effectively. Further, they found that if the two-part definition of "excessive rates" in § 38.2-1904 is used to define "pattern of excessive rates" in § 38.2-1905.1 E.7., then the State Corporation Commission would first have to find that there was not a reasonable degree of competition in the line before it could use the "pattern of excessive rates" factor to determine whether competition was effectively regulating rates in that line. That is, they would have to answer the competition question before they could use the factor. The joint subcommittee found that certainly the General Assembly could not have intended such a circular result. Both the Office of the Attorney General and the Bureau of Insurance agreed to this recommendation. The insurance industry was not in agreement with this change. The joint subcommittee by a seven to three vote agreed to this recommendation.

3. To amend § 38.2-1905.2 to require all insurers to file a supplemental report as established by R.B. 1235 of 1987. Under current law, only those insurers actually writing business in one of the troubled lines or subclassifications are required to submit a report. This change would state that any insurer licensed to write the classes of insurance as defined in §§ 38.2-117 and 38.2-118 shall file such a report, provided, any such insurer that did not actually write any such designated line or subclassification of insurance in the Commonwealth during the reporting period shall be required only to report that it wrote no such insurance. The second change requested by this recommendation would be an amendment to provide that failure to file a substantially complete report shall constitute a failure to file a report. This recommendation was made to clarify a problem that-arose during 1988 in trying to identify which licensed companies were obligated to file supplemental reports but did not. Because the current law only required those actually writing in such designated lines or subclassifications of insurance, it was difficult to tell from the records whether" a company wrote no premiums for that line or subclassification or whether it just failed to file a report. Both the Office of the Attorney General and the Bureau of Insurance agreed to this recommendation, and the insurance industry voiced no strong objection to it. The joint subcommittee unanimously agreed to make this recommendation.

4. To amend § 38.2-2228.1 to establish a date by which the annual reports of all liability claims for personal injury and property damage covered under policies written by insurers must be filed with the Commission. The second change offered under this recommendation would provide that failure to file a report required under this section (which was originally established by H.B. 1234) would constitute a violation of the provisions of Title 38.2 of the Code of Virginia. The subcommittee found that the State Corporation Commission had concern under this closed-claim reporting statute that insurers could effectively argue that if they did not file these reports on time the Commission had no enforcement powers. The joint subcommittee decided that it should be clear that the Commission had the authority not only to set the date but to fine insurers if they did not file by the due date. Both the Commission and the Attorney General's Office agreed to this recommendation and the insurance industry representatives stated that they had no objection. The subcommittee voted unanimously to agree to this recommendation.

5. That a resolution be drafted to continue this study in all three primary areas: the availability and affordability of liability insurance, reinsurance and antitrust. The Office of the Attorney General requested this recommendation to be made by the joint subcommittee. The Bureau of Insurance had no recommendation in this regard and the insurance industry opposed the recommendation. The subcommittee found that many of the questions raised during the interim regarding the insurance industry's exemption from the antitrust laws and in the area of reinsurance cost were not adequately answered during the course of the study. Also, subcommittee members felt a need to continue to study the areas regarding certain services provided by rate service organizations to individual insurers, including the development of loss cost data and trending of that data. They felt that another year of study may provide the forum necessary to permit a more detailed examination of these issues. The joint subcommittee by an eight to two vote agreed to this recommendation.

RECOMMENDATIONS NOT AGREED TO

1. To amend § 38.2-1901, 38.2-1905.1 E.5., 38.2-1906, 38.2-1908, 38.2-1913, 38.2-1916 and 38.2-1923 to prohibit rate service organizations from filing the trending of loss cost data for insurers. The recommendation would have continued to allow rate service organizations to file developed loss cost data for insurers. The changes under this recommendation also would provide that the filing of loss cost data by rate service organizations would subject the line or subclassification of insurance to the "delayed effect" provisions of Chapter 19 of Title 38.2. This recommendation arose out of the antitrust issue and, more specifically, in an effort to balance the industry's legitimate need for development and trending of loss cost data against the potentially anti-competitive effect of such rate service organizations' conduct currently permitted by Title 38.2. This recommendation was an alternative approach to the removal of the industry's current exemption from the Antitrust Act. This approach addressed the prohibition against allowing rate service organizations from filing trending factors regarding loss cost data. A compromise was reached between the Attorney General's Office and the Bureau of Insurance in making this recommendation. The compromise entailed (1) this prohibition against the rate service organizations filing of loss trending factors which are predictions of changes in the frequency and severity of losses over time and (2) continuing to allow rate service organizations to file loss development factors which are adjustments to reserves to unforeseen escalations between the occurrence of a loss and its ultimate resolution. The recommendation, had it been agreed to, would have required each individual company to trend its own loss data independently. The compromise was conditioned upon the fact that the Attorney General would seek a recommendation to continue the study.

This recommendation was made by the Attorney General's Office and the Bureau of Insurance and was objected to by the insurance industry. The joint subcommittee by a nine to one vote decided not to agree to this recommendation.

2. To amend § 38.2-1905.1 to add after paragraph 8 of subsection E of that section a new paragraph which would require that the Commission find that there has been substantial compliance with the supplemental report requirements of § 38.2-1905.2 by insurers writing a troubled line before the Commission finds competition is in effect a regulator of rates for that line. The Attorney General offered this recommendation to the joint subcommittee and testified that the supplemental reports required under § 38.2-1905.2 are essential to enable the State Corporation Commission to determine whether, in fact, competition is effectively regulating rates in a potentially noncompetitive line. The Attorney General pointed out that when there is not substantial compliance with the requirement for complete and timely supplemental reports the Commission is hampered in fulfilling its role under § 38.2-1905.1. The insurance industry observed that the effect of the change offered by this recommendation was a finding that competition does not exist solely on the basis of noncompliance. Industry representatives stated that there can be significant competition but not adequate compliance and therefore the line would be declared noncompetitive. Representatives pointed out that they did not think that this was the way to deal with a violation of § 38.2-1905.2 and that current law already provided penalties for violations of noncompliance with the law. They urged that such noncompliance be dealt with in a manner al ready provided by law. On a five to· five vote this recommendation failed.

3. To amend Paragraph 7 of subsection E of § 38.2-1905 in order to clarify that investment income on surplus may be considered at the competition hearing on a troubled line in order to determine whether a pattern of excessive rates exists. This recommendation was offered as clarifying in nature because there was some discussion concerning and confusion existing whether investment income on surplus may be considered at the competition hearing. Due to the resolution of this issue between the Attorney General and the State Corporation Commission, it was felt by the subcommittee that legislation was not needed in this area. This recommendation was not voted on since it was felt, by all parties involved, that the Commission presently considers this factor in its deliberations and, therefore, the change to the law was not needed.