Rate-control strategy ineffective, some say
Times-Picayune (New Orleans, LA)
Proposals for reforming Louisiana’s insurance industry have called into question the future of a state commission charged with regulating insurance rates.
Comprising five citizens appointed by the governor, the Louisiana Insurance Rating Commission is responsible for considering plans by any insurer to change rates by more than 10 percent. The group was originally established to protect the interests of rate-payers.
But the days of the commission — the only one left in the country — may be numbered. Critics say rating commissions are an ineffective and outdated way of governing insurance premiums. And in recent weeks, calls for reform of the state’s insurance market have repeatedly involved abolition of the commission.
Insurance Commissioner Jim Donelon has made no secret of his disdain for the commission, noting that he and the late Sen. John Hainkel passed a bill when they were in the Legislature that would have scrapped the commission, only to see the bill die on Gov. Mike Foster’s desk. Donelon renewed his call to abolish the commission a few weeks ago — without warning members of his impending announcement.
An association of powerful business groups, the Coalition to Insure Louisiana, has joined the call for the rating commission’s elimination. It would send a powerful signal to insurers that Louisiana is modernizing, the business groups said, and would dissolve an unnecessary bureaucracy that allows insurance rates to be suppressed for political reasons — making insurers loathe to enter the market and making it harder for Louisiana residents to find affordable insurance coverage choices.
While the rating commission may be in charge of rates, some members have expressed growing frustration that they have no power over the deductibles and underwriting guidelines that are key to understanding how much coverage consumers are getting for their money. They’re also frustrated that they’ve been awarding the rate increases that insurance companies said they need to do business in Louisiana, but insurance companies don’t respond by starting to write policies again. Indeed, some rate increases have been followed by the insurance company cutting coverage in Louisiana.
“We have no enforcement capability. All we do is set rates,” said Steven “Rock” Ruiz, the commission’s longest-serving and most vociferous member. “Actuaries deal strictly in statistics. We should be a resource for the commissioner.”
But Bob Hunter, director of insurance at the Consumer Federation of America, said the issue may be overblown. If the rating commission is as irrelevant as its opponents contend, getting rid of it probably won’t have much impact on the insurance market.
Oklahoma, the only other state to have had a rating commission in recent years, phased it out between 1999 and 2005, starting with commercial insurance and moving on to home, auto and workers compensation coverage.
Because the homeowners deregulation just happened in 2004, Marc Young, communications director for the Oklahoma Insurance Department, said it’s too soon to assess the impact on the market. “We’re still waiting to see, ” Young said.
Rather than get distracted by slaying a creature that doesn’t do anything, Hunter said, Louisiana should concentrate on finding more effective ways to regulate insurance and protect consumers. “What would you replace it with? That’s the question.” Hunter said that California would be a good model to consider. California requires insurance companies to file an abundance of information about proposed rate changes and invites the public to constructively evaluate them. California consumers can even hire professional actuaries to review the rate requests and bill insurance companies for their time if the state adjusts the rate proposal based on their input.
Donelon, insurance companies and business groups favor a “file-and-use” system, similar to what Oklahoma chose, where insurers file a rate request and get to use it in 30 days unless the department finds problems with it or denies it.
But rating commission members said that should the Legislature move to abolish the commission, whatever regulatory system follows must include a provision for public hearing or comment.
“If they get rid of the rating commission, they’ve got to put some sort of public oversight mechanism or consumer oversight mechanism in there,” said Barry Busada, a commission member from Shreveport. “How many times have you seen us ask a question that they couldn’t answer because nobody had ever asked them before? It never hurts to have another set of eyes and ears. I can’t imagine everything being done behind closed doors,” he said.
The Louisiana Insurance Rating Commission has been around since at least 1958, according to legal citations. It has six members appointed by the governor, plus one designee of the insurance commissioner who runs the monthly meetings but votes only in the event of a tie. Right now, one spot on the commission is vacant.
Members are paid $50 per meeting day, plus expenses. The Louisiana Department of Insurance said it’s difficult to come up with a meaningful figure for the cost of having a commission because the assessments placed on insurers to pay for insurance regulation also pay for public safety officials’ pensions, and various divisions of the insurance department work to support the commission’s activities.
The group governs insurance rates for things such as homes, cars, boats, golf carts, bonds and property titles. Its job is to make sure that rates are not “excessive” or “unfairly discriminatory” while also keeping them “adequate” enough to make sure that insurers have enough money to pay claims and to weed out fly-by-night companies that might collect money without intending to pay claims.
Those terms essentially mean the group needs to follow the state actuary’s recommendation, but on paper the group appears to have some discretion. The rating commission statute also says that the approvals shall be made “pursuant to the commission’s analysis of the data presented and any other factors relevant to the application.”
There also appears to be some truth to the business concern that the real goal of the commission is to hold down rates, in that the law says the commission can’t approve a rate increase more than once a year, but can approve rate decreases at any time.
Chad Brown, chief of staff at the insurance department and ex-officio chairman of the rating commission, said that, while the current commission behaves professionally and properly defers to actuary Rich Piazza’s analysis, that hasn’t always been the case. Politicians have suppressed rates through their control of the commission, such as in 1996, when the commission approved a State Farm auto insurance increase. Gov. Foster fired the entire commission and replaced it with new members who repealed the rate hike.
Stunts like that, combined with natural disasters such as Hurricane Andrew and the jailing of three corrupt insurance commissioners, turned Louisiana into a state shunned by the insurance industry. The 181 insurers writing homeowner policies in 1992 had dwindled to 10 in 2002, Brown said. After former Insurance Commissioner Robert Wooley was elected in 2002, the department surveyed companies and found that the top reason why they didn’t want to come to Louisiana was the rating commission.
With that, Wooley and the Coalition to Insure Louisiana successfully lobbied to deregulate commercial insurance rates and create the “flex-band” rating system. It allowed companies to make adjustments in homeowners rates of less than 10 percent by simply filing paperwork — an appearance before the commission was no longer required.
Brown said the reforms were working: Between 2004 when flex-band took effect and when Hurricane Katrina hit in August 2005, the number of companies writing homeowner policies in south Louisiana increased from six to 19 before falling off again after the hurricane.
Ruiz, the only member of Gov. Foster’s second commission still serving, said the steady erosion of the commission’s power has allowed insurance companies to operate without sufficient scrutiny, because the insurance department doesn’t ask enough questions or consider whether the company has satisfactorily resolved its claims before approving additional rate increases.
“It’s done nothing but give insurance companies a way to increase rates without getting the tough questions,” said Ruiz, who is from Mandeville.
If the commission were abolished, the insurance department proposes that Louisiana switch to the “file-and-use” system — essentially an expanded version of flex-band. Companies would file paperwork showing the need for a rate change, and would automatically be granted it in 30 days unless the department found problems and took action to block the rate hike.
Even without the rating commission, consumers would be adequately protected, Brown said. Piazza, the state’s actuary, routinely knocks down rate requests if he doesn’t find justification for them. A lone insurance commissioner can regulate insurance more comprehensively than a board, and if voters didn’t like what they see, they can toss the commissioner out of office because it’s an elected position, Brown said.
Louisiana also could opt to require that the insurance commissioner hold a public hearing for any company asking for a rate increase beyond a certain amount or affecting a certain percentage of the market, Brown said.
One commission member, Christine Berry, who teaches insurance classes at the University of Louisiana at Monroe, said the commission should be eliminated because members don’t know enough about insurance to provide a meaningful evaluation in the rate-making process. Forcing companies to come before the commission is pointless, she said.
Berry doesn’t stop there with her pro-business reform ideas. She calls for turning the insurance commissioner’s job from an elective to an appointive position filled by a professional. She further calls for eliminating the state’s consumer-protection statute that makes it difficult for insurers to drop policyholders after three years. The rule deters competition and stymies the market, she said.
The other four commission members are more circumspect. They said they are offended at Donelon’s handling of his announcement to abolish the rating commission and they resent the suggestion that they are political minions when they are working hard to be fair. The only one who’s a politician is Donelon, they said.
“If that’s his concern, talk to the governor and make sure she appoints people who are level-headed and who will be fair,” Busada said.
Members said they perform a valuable function by putting a human face on the rate-setting process. They said they enjoy helping policyholders at time when many are having trouble getting answers, and three south Louisiana members said they take calls daily from consumers, suggesting that the insurance department and private companies aren’t doing enough.
“People are upset and they need someone to talk to,” said Jabari Ragas, a commission member from New Orleans whose big issue is clear communication.
If the Legislature chooses to abolish the commission, members said, it must create another way for policyholders to be considered in the insurance rate-making process.
“Do away with the rating commission? Fine, but have some sort of a watchdog group. If you do away with the rating commission, you put all that power in one person’s hands,” said Joe Godchaux, a member from Opelousas.
Not many homeowners come to rating commission meetings. But those who do said the venue is important to them. Joel Louque, who lives in a fire-resistant steel-frame house in Ascension Parish, is a rate-payer who turned to the rating commission for help in a protracted battle with Allstate. He considers his premium unfairly high and believes it’s because his mailing address is in neighboring Livingston Parish, which doesn’t have as good a fire rating as Ascension.
“That’s the only check and balance we have,” Louque said. “You need more than one person pulling the strings.”
Insurers said consumers have plenty of other forums for grievances, and the whole point of getting rid of the rating commission is to streamline the regulation process to make Louisiana more friendly to insurers.
Because insurance is regulated on a state-by-state basis, insurers compare jurisdictions and pick the best places to go. A state needs to be business-friendly to attract insurers, said Gregory LaCost, regional manager for the Property and Casualty Insurers Association of America.
As a model, LaCost points to Illinois, the nation’s most deregulated market, where insurers are required only to make informational filings about new rates that they’re using. The market in Illinois is so competitive, LaCost said, that the state doesn’t need to worry about rates because companies would go out of business if they raised them.
But the Consumer Federation’s Hunter said that deregulation doesn’t work in coastal states because insurance companies aren’t banging down the doors to operate in hurricane zones the way they are in the safety of the Midwest. Stabilizing coastal insurance markets requires careful and even-handed regulation to make sure that policyholders aren’t being gouged.
“Competition and regulation are not at odds with each other. They both have the same goal: the lowest possible rate for consumers that also grants a fair rate of return to insurance companies,” Hunter said.
Many states have consumer advocates to make sure ratepayers have a seat at the table alongside powerful insurance lobbyists. If Louisiana chooses to create a consumer advocate position, Hunter said, the most important thing is to ensure the advocate’s effectiveness and independence by having adequate financing for investigations.
Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a California group that wrote Proposition 103, the measure that created the state’s rigorous system of insurance regulation, said that effective insurance monitoring is critical because homeowners are spending money on a product they are required to buy to get a mortgage but that can’t be tested until disaster strikes.
Proposition 103 has saved consumers billions on insurance in California since it was enacted in 1988, and competition has flourished, Heller said. The measure holds companies to anti-trust regulation, and prevents them from making excessive profits or passing excessive expenses or legal damages on to consumers. It also commissions outside scrutiny by giving standing to any citizen or group that wants to challenge an insurance rate hike, and allows them to bill insurance companies for the cost of professional services if their analysis changes the rate that the state approves.
LaCost counters that California, the nation’s most populous state and largest insurance market, is in a very different situation than tiny Louisiana, and probably isn’t a good model.
But Heller said that with insurance companies raising rates, limiting coverage and not selling new policies in south Louisiana, the state has got nothing to lose.
“I know the question is: Can we afford to take the risk? I wonder how you can afford not to,” Heller said.
HOMEOWNERS INSURANCE RATE REGULATION TRACK RECORD
Before Hurricanes Katrina and Rita struck in 2005, more insurance companies had started to request rate changes through paperwork under the state’s flex-band rating system rather than going before the rating commission, and the size of rate increases began to shrink.
UNDER RATING COMMISSION
Companies requesting rate change:
Average amount requested:
2002: +10.5 %
2003: +13.9 %
2004: +10.3 %
2005*: +2.0 %
2006: +25.4 %
Average amount approved:
2003: +9 %
2005*: +5 %
*Hurricane Katrina and Rita interrupted department and LIRC proceedings.
UNDER FLEX BAND
Flex band created in 2003, but doesn’t start until 2004
Companies requesting rate change:
Average amount requested:
2004: +6.2 %
2005: +1.1 %
2006: +5.3 %
Average amount approved:
2005: +0.4 %
2006: +5.2 %
STATEWIDE AVERAGE HOMEOWNERS INSURANCE RATE CHANGES
The insurance industry says during stable times, companies take moderate rate increases when they have a flexible, deregulated system and they know they can make rate changes when they need to. Rates had begun to increase at a slower rate after flex-band, but jumped again after Katrina and Rita hit.
14% — 2006: +13.2%
12% — 2003: +12%
10% — 2002: +9.4
4%-6% — 2004** +5.5%
0% -1% — 2005 ***: 0.6%
** /Flex Band takes effect.
***Katrina and Rita hit.
Source: Louisiana Insurance Rating Commission, National Association of Insurance Commissioners, Property and Casualty Insurers Association of America
INSURANCE REGULATION IN OTHER STATES
Most states have deregulated the market in some way.
Prior approval: Insurance department has to sign off on rate changes before they can be implemented: 12
File-and-use: Company files paperwork on rate changes which take effect within 30-45 days unless the insurance department finds a problem: 21
Use-and-file: Company files paperwork as a formality to let the insurance department know what they’re doing as they’re doing it: 8
Other type of regulation: 1
Note: Louisiana is listed under Flex-Band
Rebecca Mowbray can be reached at [email protected] or at (504) 826-3417.