Transitions … from judge to regulator, from regulated to competition

Massachusetts Insurance Commissioner Nonnie Burnes has taken on the minefield of private passenger auto insurance, overseeing a transition from a highly-regulated rating system to one under which insurance companies are to have some flexibility in the prices they charge, a system she refers to as managed competition.

The following interview with Burnes was conducted by Insurance Journal’s Andy Simpson prior to her finalizing regulations for the transition to managed competition in auto insurance. Since the interview, she has issued final regulations that, among other things, ban the use of credit scoring in both rating and underwriting.

In this interview, Burnes discusses that transition, as well as coastal insurance issues, catastrophe models and what it has been like being insurance commissioner in a highly political state. For the complete video interview, visit www.insurancejournal.com/tv.

You’ve issued a draft regulation to transition from a fixed and established system to a managed competition system. You sat through numerous legislative and public hearings both before and after the draft. Have you heard things in this process that are helping you come up with a final regulation?

Burnes: I think we have heard some things that have been helpful. We tried very hard to get it right in the beginning. So there have been some technical changes. We’re combing through the regulation to make sure that we have addressed or at least considered all of the things that people raised.

I think that there will not be very many substantive changes; there may be one or two. Most of them are technical changes that people pointed out to us that we maybe hadn’t thought quite through as thoroughly as we had hoped we had.

But we think that we’ve responded to everything that we’ve heard, either by considering it and saying, “Well, we’re going to deal with that in a different way. I’ll issue a bulletin or something.” Or we have in fact incorporated it into the reg.

Does everything have to be anticipated, or i’s dotted and t’s crossed, before you go ahead, or can you deal with some things as they come up?

Burnes: That is a wonderful question. And I have been trying to explain to people that this is really an iterative process. The regulation establishes sort of the bare bones structure of what managed competition is going to look like, and we have already a process of meeting with the industry, consumers, agents, anyone who is interested in public meetings on various implementation topics. And then I will issue bulletins on those topics.

So, for example, policy forms and endorsements, what we are going to require in terms of consumer information, how we’re going to be handling discounts. Those sort of things, we will be issuing bulletins. And then as we see how this rolls out, we’ll have to adjust, just as we do in other markets.

It’s not different — it’s just because it’s auto it’s different — but not because it’s different in the way that we generally handle insurance markets.

Among the parties with some concerns about the competitive system are independent insurance agents. What do you hear from them? What would you like them to hear about the transition? How do you think it will affect them?

Burnes: I have spoken with them, and I’ve spoken individually with some agents. Some of them are actually eagerly anticipating this. They see it as a real opportunity to be able to offer more and different and better products to their customers. And I hope that people really do see this as an opportunity.

We scouted around and talked to different states’ insurance departments as we were developing this, and one figure really stood out in my mind, and I hope for the agents it will too. In the first year that New Jersey went to a competitive market, they saw something like 1,500 new agent appointments.

Now, that’s not necessarily new people, but agents who got new appointments. And we also are seeing the development of some new appointments of voluntary contracts to our exclusive representative producer agents. And I think that’s a good thing.

What is the department’s budget and how does something like this — a shift in regulatory oversight — affect your budget?

Burnes: Well, our budget is about $11 million. And yes, it certainly will have an impact, because we are going to have to review at least 19 filings, proposed rates from companies. We are shifting around the budget to provide resources for that. I don’t anticipate hiring more actuaries.

I’m hoping that after we sort of start getting this process stabilized, it will become more efficient. But I’m going to be hiring actuarial consultant support, because we want to make sure that we do a thorough review, but we want to do it quickly so the insurers can get their rates to their customers.

You mentioned 19, which is the number of insurers now writing in the marketplace?

Burnes: Correct.

Have you had indications that your plan, if implemented, might encourage other companies, and how many others to come in?

Burnes: We’ve had inquiries from a number of companies. And as I tell everybody, when they show up and file their rates, we’ll announce that they’re there. Because I have no idea what they’ll decide.

What would you expect existing companies in the marketplace to do between October and April when competition really starts? Can you envision what might be going on in this interim, how companies might respond or position themselves?

Burnes: From the questions that we get at the division already, we know that they are looking really hard at their rates. They are also considering what kinds of products to offer. And they’re having to put … As I said to my staff, we have to do a brain transplant here.

We have to think totally differently about this, because I’m not going to be establishing the rates now. And I keep urging the companies and the agents to think that way too. Let’s think about the opportunities that we can provide to consumers, all of us together, because that’s whom we really want to get the benefits to.

So, I think they’re doing that. I’m hearing a lot more advertising … And some of those companies don’t write here, in Massachusetts. Does that mean they’re coming? Maybe they’re testing the water to see what kind of response they get. I don’t know, but I am already seeing it.

Are you seeing an increased interest in group discounts, as one way for companies maybe to position themselves?

Burnes: My instinct is that the group discounts will be less important when the companies can really provide a greater variety of rates. Is it a marketing gimmick? Is it a branding mechanism? It’s certainly those things.

I think in the past it’s been a way of providing premium relief to people that they couldn’t do through a more flexible market. So to the extent that that’s what those discounts were about, I think we’ll see less of them.

Let’s go to the Cape — a nice place I guess unless you’re a homeowner looking for insurance. What’s your assessment of the homeowner’s insurance marketplace for coastal residents?

Burnes: It’s extremely difficult. It’s very difficult. I’m on a legislatively established commission to consider how we can alleviate this problem from the homeowner’s point of view. And we have been on a road show. We went to Fall River, we went to the Cape. We went to Salem in the pouring rain, so we didn’t a big turnout there. But in Fall River and on the Cape, we had a lot of people, a lot of consumers, who are very upset. And I think justifiably so, because they are finding it very difficult to get insurance. Insurers are withdrawing from the market, and insurers are deciding not to renew coverage from long-time customers. They’re raising their rates.

From the insurer’s point of view, this is a response to a real problem in the market, that they need to be able to write the risks appropriately, but it is a huge impact on the consumers.

So we’re thinking of lots of different ways that we can respond to that, only some of them will be able to come out of the division of insurance. So I think there may need to be some legislative fixes. We may be able to provide some assistance from the state for insureds. We’re going to have to really lean on the companies to get the best rates they can to consumers. There are going to be a lot of moving parts here, I think.

Some states have looked at the underwriting criteria, or more incentives for loss mitigation on the part of the homeowner. Are those among the considerations?

Burnes: Absolutely. We are looking at those. The insurers are certainly looking at them. But we’re looking at what they propose in their rates, to how they will respond to consumers who take mitigation steps. But I think we can encourage consumers to do that, they’re sometimes expensive, those mitigation efforts. So maybe we can get the state to respond and help consumers make those changes as well.

One of the related issues … is the use of catastrophe models by insurance companies. The catastrophe models themselves are developed by third-party companies in many cases.

There’s been a debate among state regulators as to whether state commissioners should have access to more of the information that goes into those cat models, or in other ways regulate their use. What do you think about the use of the cat models?

Burnes: I haven’t really had a chance to analyze this, I will say, but I think a cat model in concept is a good idea. The way they’re built is very contentious, obviously. People want to know how those models are built. These are private companies that build them and they don’t want to tell their competitors how they do that.

However, if they’re going to be used for setting rates, then I think there has to be some mechanism for the people who approve those rates to have information about them. The extent to which that information is available and how we get it is something I think we’re going to have to figure out how to do.

You deal with a lot of confidential information as a commissioner, I imagine, in terms of individual companies.

Burnes: Well, I do, but I think that in order for these models and the rates that are built on them to have credibility, that people aren’t just going to trust me to look at them and say they’re right. So there’s going to have to be some publication of the information that is in the so-called “black box.” And how we do that and still protect the companies in their competitive stance, we’ll have to figure that out. And I know Florida basically built its own. It’s expensive. It’s cost them, I’ve heard figures between $5 million and $7 million. I don’t think there’s going to be much appetite in…

There goes your budget, right?

Burnes: Yeah. Certainly I can’t do it, and I’m not sure that there will be much appetite in the Commonwealth to do that, only for Massachusetts. But I do think that the Northeast poses a different risk profile, both because of where it sits in the North Atlantic and also because of the way the storms behave when they get there. So I think that we may, at least as a region, need to have our own model. So, we’ll see.

The House of Representatives recently passed some reforms to the federal flood insurance program. They added the option of windstorm coverage. Do you think that’s a good idea?

Burnes: Let me back up a little bit. What I think consumers want is one policy. And they want to know that the perils that they would like to protect against are all covered in that policy. I’m not sure we can get that to them, in part because of the federal flood insurance program, which have certainly been a benefit to people who have bought that.

Maybe the only way we can deal with that is through consumer education. But there might be a mechanism that we could develop that would incorporate the federal flood benefit into a privately offered policy that would let the consumers just deal with one policy and one adjustor when they had a catastrophe.

That said, wind is certainly a part of that, and what I would like to see is some way that the consumer doesn’t get in a fight between whether it’s wind or water. And it would be nice to be able to offer them one policy and one claims adjustor. I don’t know whether we can get there.

Do you have an opinion on whether a national backstop of some kind of federal catastrophe plan would be a good idea?

Burnes: I think it is a possibility, but what I would see as a likely and efficient backstop would really be to provide liquidity to the global reinsurance market. To just have even the federal government back it up is, I think, it still means that you don’t get that access to the world capital. That’s C-A-P-I-T-A-L.

So it’s a little bit like I’m leery of a state fund that just says the state budget will be the backup. You have to have some kind of pre-funding, and if you can do that and then lay off that pre-funded risk through reinsurance and get access to the global market — which probably the Commonwealth of Massachusetts can’t do very efficiently, but the federal government could — that might be an effective mechanism.

So making that available to the state?

Burnes: Yes. And I think part of the federal proposal, at least part of the legislation that I’ve seen, would provide that.

Back inside the Division of Insurance, you’ve undertaken some streamlining or changes in form filings in how quickly and how efficiently those get dealt with. What’s been done there?

Burnes: We have taken a look at sort of these speed-to-market kinds of processes that we offer to the companies so that they can get their products out to the consumers. And we have looked at all of the little places in the division where it may be us that is holding up that process, and have tried to remove those impediments. And I am hearing, certainly from the life insurance industry — which was the area that was most dissatisfied — that we are really being responsive. So, we are trying to keep the review that happens within the division down to 60 days.

Now, sometimes we make a review and we say to the insurers, “You need to provide us with more information,” when we send it back to them. If they don’t respond for a month or so, we don’t count that on our clock. But we are trying to keep our review under 60 days, and we are getting pretty close.

You’ve been on the job now for several months. Any surprises? Any challenges? Anything catch you off guard?

Burnes: I think the politics has caught me off guard. It wasn’t that I didn’t know that insurance could be a contentious area, it’s one of the interesting things about the job. I’ve always dealt in controversy, from the first day I became a lawyer. But the intensity of the interest and the scrutiny of what I do is, I think, more extreme than I had expected.