Springtime for… Compliance

By Kathy Donovan, Wolters Kluwer Financial Services

The insurance industry experienced yet another year of significant legislative and regulatory activity in 2011, with the promise of continued growth in this level of activity this year.

Close to 22,000 statutes, regulations and bulletins impacting the insurance industry were newly created, revised or issued last year, and over 11,000 bills affecting insurers had been introduced into the state legislatures and Congress during that same time period – significant statistics for the industry. And while some may regard this as a time of “high anxiety,” it is most definitely the continuum of insurance industry life as we know it—one that creates the ongoing challenges of identifying proposed changes, managing the adoptions and enactments, and implementing the significant volume of regulatory changes that all this activity produces. And this continuum of change exists in parallel with the enterprise- wide need to identify compliance risks and establish controls.

Looking back at recent changes, with an eye toward anticipated activity during the rest of 2012, we can see that state regulators’ ongoing interest in consumer protection plays a significant role. From underwriting restrictions and mandated benefits to claims processing, insurers face a myriad of issues to contend with on a daily basis. Trade practices, underwriting considerations, claims annuities suitability, retained asset accounts, health care reform and mandated benefits are but a few of the areas in which consumer protection efforts result in perennial legislative and regulatory changes.

Property & Casualty

Some key property and casualty underwriting changes adopted in 2011 include: • Effective Oct. 1, 2011, Maryland established additional underwriting protections for victims of domestic violence. Policy forms must be revised and insurers have until Oct. 1, 2012 to revise the applicable forms.

• Effective Nov. 21, 2011, New Jersey insurers may not cancel or nonrenew an insurance policy covering an owner occupied one-to-four family dwelling solely because of claims or losses due to weather-related damage or a third-party criminal act committed by someone who is not a resident of the insured dwelling.

• Effective Sept. 16, 2011, New York added a new subsection to Ins. 3425 prohibiting an insurer from refusing to issue or renew a covered individually- owned private passenger policy solely on the ground that the motor vehicle to be insured will be used for volunteer firefighting.

• Effective Aug. 1, 2011, North Dakota prohibits insurers from unfairly discriminating against an individual based on their history or status as a subject of domestic abuse when writing policies or contracts.

Effective Jan. 1, 2012, automobile insurers writing in Oregon have an additional prohibited reason for nonrenewal. An owner’s policy may not be nonrenewed solely on the basis that the insured vehicle has been made available for personal vehicle sharing pursuant to a personal vehicle sharing program.

Property and casualty insurers’ claims processes were also affected by 2011 activity, two of which affect total losses and another example affecting insurer reporting. Effective Oct. 1, 2011, insurers must include sales tax in calculations of total loss automobile settlements in Rhode Island and the Maryland Motor Vehicle Administration increased the amount charged for a title fee from $50 to $100 effective July 1, 2011. In Virginia effective July 1, 2011, insurers must report all motor vehicle water damage claim information where the paid claim was $3,500 or more to the Department of Motor Vehicles.

Life Insurance

Life insurers also faced multi-state compliance requirements changes in 2011, as well as state-specific ones. Regulatory requirements governing the determination of suitability in the sale of annuities continued to expand throughout the states. Generally following the provisions set forth in the latest update to the NAIC Model 275, insurers have had to implement supervisory systems and establish productspecific training in many jurisdictions.

Considerable media and regulatory attention was focused on the industry’s use of retained asset accounts, both last year and continuing into 2011. The resulting legislative and regulatory activity requires additional requirements such as prohibiting insurers from using retained asset accounts as a settlement option unless the insurer discloses the use of a retained asset account to the beneficiary or the beneficiary’s legal representative prior to the transfer of life insurance proceeds to a retained asset account.

Generally, states addressing the use of such accounts require insurers to inform the beneficiary, prior to the distribution of any life insurance proceeds, of his or her right to receive a lump-sum payment of life insurance proceeds in the form of a bank check or other form of immediate full payment of benefits. Additional disclosures could include complete listings and clear explanations of all life insurance proceeds settlement payment options available to the beneficiary. As an example of state-specific life insurance activity, Maine established new requirements effective Sept. 28, 2011 for the cancellation, termination or lapse of individual life insurance policies. This was done to minimize the chance that a life insurance policyholder would lose life insurance coverage when the policyholder suffers from cognitive impairment or functional incapacity and the loss of coverage is due to that cognitive impairment or functional incapacity. Now, within 90 days after cancellation, termination or lapse of coverage due to nonpayment of premium, either a policyholder, a person authorized to act on behalf of the policyholder or a dependent of the policyholder covered under a life insurance policy may request that the insurer reinstate the policy on the basis that the loss of coverage was a result of the policyholder’s cognitive impairment or functional incapacity.

Affecting multiple lines of business are, of course, various new statutory revisions recognizing civil unions. States in 2011 with such specific regulatory changes include Delaware, Hawaii, Illinois and Rhode Island. Also, clarification to the industry regarding what types of services are not construed as prohibited rebates or inducements, as well as noted increases in the permitted aggregate value of items that can be provided to insureds or applicants also occurred in 2011. The New Jersey Department of Banking and Insurance (Department) in its Bulletin 11-22 provided insight on examples of services and benefits that aren’t considered to be prohibited rebates or inducements, such as:

• Discounts on gym memberships or wellness programs;

• Claims filing assistance, including group health insurance assistance services;

• COBRA, Health Reimbursement Arrangement, Health Savings Account and Flexible Spending Account administration;

• Risk management services, including loss control; and

• Product audits to assist policyholders to evaluate their current policies.

Health Insurance

While health care reform initiatives continue, health insurers’ policy coverages and claims procedures require regular updating due to increased mandated benefits. Whether it is telehealth coverage mandated in California effective Jan. 1, 2012 or the expansion of clinical trial coverage to include all disabling or life-threatening chronic diseases in Connecticut effective on that same date, health insurers should be aware of and track proposals and adoptions to make sure that the compliant benefit levels are provided to insureds. From a claims perspective, in Connecticut effective Oct. 1, 2011, each insurer utilizing the services of a TPA is responsible for:

• Determining the benefits, premium rates, underwriting criteria and claims payment procedures for the lines, classes or types of insurance such third-party administrator is authorized to administer, and for securing reinsurance; and

• Providing procedures pertaining to the TPA’s administration of benefits, premium rates, underwriting criteria and claims payment.

Additionally, if a third-party administrator administers benefits for more than 100 certificate holders on behalf of an insurer, a review of the operations of the thirdparty administrator needs to be conducted at least semi-annually. At least one of the reviews must be an on-site audit of the operations of the third-party administrator.

Managing Compliance and Risk

Insurers are undoubtedly impacted by a dynamic environment of change. They must not only monitor an extremely high volume of regulatory and legislative changes, but also ensure those changes are implemented across their organizations. This is ultimately the key element to insurers’ success in minimizing compliance risk. From proper routing of regulatory changes through an organization to verifying that implementation occurred, multidirectional communication and reporting assist in maintaining transparency in the process. Ensuring that correct controls are in place help prevent de-implementation of system changes can significantly minimize negative outcomes, while periodic gap analyses can assist in indentifying potential areas of concern for stronger controls. With so many moving parts in the regulatory change implementation process, it is not surprising that market conduct examiners often find that insurers are out of compliance with new requirements. In fact, Wolters Kluwer Financial Services’ annual research of criticisms found on insurance market conduct exams shows a number of key issues continue to dominate the lists of exam criticisms by insurance departments across the U.S. These include claims-handling, licensing and underwriting issues. However, frequent self audits coupled with strong programs that help ensure successful regulatory change management can mitigate these risks.

With more than half of 2012 as yet unwritten, the insurance industry can be sure of significant legislative and regulatory activity. Insurers can be just as sure that managing all of these changes will require sustainable processes that effectively manage the activity. These processes must take into account all of the steps required along the way to achieve timely results and prevent de-implementation of procedural modifications. Compliance risk is one of the many areas within an enterprise risk management program that requires risk identification and controls, as well as transparent reporting. Achievement of those goals goes hand-in-hand with managing the volume of activity.