Regulating in Good Faith

Maryland Gov. Martin O’Malley in early September named attorney and long-time advisor Ralph S. Tyler to be the state’s insurance commissioner responsible for overseeing the regulation of Maryland’s $26 billion insurance industry.

“Ralph Tyler has been a steadfast advocate for the working families of our state, and there is no one better to lead the Maryland Insurance Administration,” said O’Malley.

Tyler served as one of O’Malley’s closest advisors as chief legal counsel and led the effort to reconstitute Maryland’s Public Service Commission with independent and professional regulators.

Tyler is an attorney with over 30 years of experience as a lawyer, including more than 20 years practicing law in Baltimore City and Maryland. He served as the state’s deputy attorney general from 1991 to 1996, before becoming a partner at the Baltimore office of Hogan & Hartson.

Tyler replaced Peggy Watson, who served as interim commissioner after Steven Orr left.

At the recent meeting of the National Association of Insurance Commissioners in Washington, D.C., Insurance Journal‘s Andrew Simpson asked Tyler about his new job, the state’s new good faith claims process, coastal insurance, medical malpractice and the challenges he faces.

Let’s start with coastal issues to the extent that Maryland has faced any, and what the state is doing about them?
Tyler: Certainly. Yes, we do have concerns. We do have the same problem, perhaps on a smaller scale than, some of the other coastal states, but it’s obviously important to the citizens who live on the coast and the economic development of the state that insurance coverage be available. We’ve had one carrier that’s sought permission to cease writing new policies on coastal shoreline in Maryland. Our agency’s going to have a hearing on that in due course. There’s a state task force looking at this whole subject. What we’re looking for is a solution that is certainly fair to the consumer so that they can continue to have coverage and recognizing that, the risks that the companies face.

What is your regulatory philosophy? You came from the Governor’s office as legal counsel and have had experience representing rate payers in public utility case. Does that experience inform your role as regulator of the insurance industry?
Tyler: Well, I suppose anyone’s experience forms the basis of how they approach problems. I mean, my experience has been, as a practicing lawyer in various forms, now, for about 35 years. I was immediately before taking this job, I was counsel to the Governor. I also spent many years in the Maryland Attorney General’s office and a number of years in private law practice. What I would like to think that my philosophy is, is to try and be fair and balanced. It’s critically important to the state that we have an economically viable insurance industry and, at the same time, obviously a function of an insurance agency is to provide some assistance to consumers because they enter into these transactions in which they are not in an equal bargaining position. It’s our job to try and balance that up a bit.

What role does consumer input play in your regulatory philosophy?
Tyler: What we do now, which I think is a good system which has been in place, which is — I’m sure, like every insurance agency, we receive consumer complaints which we seek to resolve and then, based upon those complaints and analysis of those complaints, we seek to determine, where appropriate, where a broader investigation of practices in a company or in the industry at large is appropriate. That’s what we’ve done in the past, and I expect we will continue to do that. Consumer complaints are an important source of information of how the market is actually operating.

What kind of budget do you have?
Tyler: Well, the agency budget, in round numbers, is about $25 million. But in a way, that doesn’t adequately or fully describe the resources that are available. We have statutory authority, for example, when we do examinations of insurance companies, to charge those costs back … So while, of course, like any government agency or private agency, we have budgetary constraints. But … I don’t view that as an impediment to our doing what we need to do. I think we have sufficient resources and again, we have this vehicle that we do investigations and audits of companies. Those are billable to the company.

In some states, other constitutional officers such as attorneys general may get involved in some insurance issues. Is that the case in Maryland? Do you work with the attorney general’s office?
Tyler: We certainly do. The legal counsel to the Insurance Commissioner and to the insurance agency is the Attorney General. Except in very narrow and specific cases the Attorney General of Maryland does not have independent statutory authority, either in insurance or more generally. Its role is to be the lawyer to the state and the state agencies.

Maryland has a new good faith property/casualty claims law that’s in the process of being implemented. What did that law change and what should people in the property/casualty industry know about it?
Tyler: Well, let’s first begin with, kind of, what animated or led to its enactment. It was enacted in the past session of the General Assembly in response to a sense that consumers were at times not dealt with — and businesses were not dealt with — in good faith in resolution of insurance claims. And that litigation of those claims, in the normal civil litigation way isn’t particularly efficient or effective for most consumers and most small businesses. So the General Assembly put in place a scheme — a statutory scheme which becomes effective on Oct. 1 under which, among other things, claims of failure to settle or resolve claims in good faith will be heard or reviewed in the first instance by the Insurance Administration. It doesn’t preclude people from filing suit and it doesn’t take away any remedies. It just adds a mechanism, which the parties can waive and avoid if they wish. But it provides a forum, which we don’t yet know how many cases it will be but, it’s a forum that will be available to people with or without counsel. And hopefully will be expeditious and efficient and will serve well, both the industry and its customers.

So that’s the first stop for someone with a claim … and then if the Administration makes a determination, the parties are free to go to court still?
Tyler: Well, yes, there are kind of two possible paths you can go … have the agency’s determination reviewed by the Office of Administrative Hearings or alternatively, you can proceed to court.

It sounds like a lot of extra work for the Maryland Insurance Administration.
Tyler: Potentially, it is. Among the questions I asked very early on is, ‘What’s our best judgment of what’s coming in the door?’ I say this without criticism of anyone, but no one really seems to have a good idea of how substantial a case load we are likely to generate. I do know that this is a subject of considerable interest amongst advocacy groups, as well as the insurance industry. We had a training session in Baltimore about 10 days ago. It was attended by over 200 people, so there was a lot of interest in learning about it. So there may well be a substantial case load that’ll build up.

Maryland has had a program to help subsidize the high cost of medical malpractice insurance for a number of years. Related to that, I see that you recently put a halt to a release of a dividend by Medical Mutual to make sure that the money that’s going back is going to the right people because some of it may belong to the state. Could you bring us up to date on that issue and where that whole subsidy program might stand?
Tyler: Now about two years ago, there was a law enacted in Maryland which imposed a tax on HMOs, which tax of course, in most instances, was passed through to its members. That tax provided a revenue source, which was used or has been used to subsidize malpractice insurance rates. The principal malpractice carrier in Maryland is a statutorily created entity called Medical Mutual and, here we are now, a couple of years later and what looked like a large malpractice crisis a couple of years ago, turns out to look now more like just a cyclical phenomenon. And so, the company is sitting on a very substantial amount of surplus and the response to that in early September, the company declared a dividend of approximately $70 million.

It came in and disclosed that it had done so and that it certainly acknowledged that some substantial portion of that is due back to the state, the state having provided a subsidy of malpractice rates through the HMO tax. So the order that was issued, all it did was to say that the dividend program could not be implemented pending a hearing and a determination of the proper allocation of the dividend. So that hearing will be held on Oct. 5.

What do you think that cycle says about the need or not need for tort reform?
Tyler: Well, I’m certainly not an expert on that. I guess what I would say is that if the Chairman of the Senate Judicial Proceedings Committee in our state and others have said, in the aftermath of this declaration of dividend, that they are certainly going to go slow in that area. …

I think right now, it would be pretty difficult in Maryland to make the case that there’s a need for substantial changes in the tort law.

Do you see any issues that aren’t being addressed that you would like to address?
Tyler: Well, in Maryland and across the country, certainly one of the greatest concerns of citizens is health care. So that is an area which I’m working hard to get better educated. We expect to have a special session of our General Assembly, sometime between now and Thanksgiving to address, the state’s $1.7 or $1.8 billion structural deficit. The Governor’s now talking about in the course of trying to resolve those issues, to come up with a program to broaden health care coverage including for people in small businesses. So that’s certainly a major issue.

The coastal issue we talked about earlier is certainly important and one that I intend to be involved in.

The NAIC has been debating catastrophe models and, to what extent, if any, states should get involved in regulating them. Do you have a sense of what state involvement, if any, should be in that issue?
Tyler: I attended that session and I found it really very interesting and informative. I guess what I found perhaps most interesting and, this is somewhat, I guess, reflective of my background as a lawyer and doing litigation, is that, what’s clear is the insurance companies now rely heavily on these models. And the models are developed by private consulting companies and at the end of the day, many of the assumptions upon which the models are based, which then drive the rates, they regard as their confidential intellectual property and therefore, not disclosable.

That makes it all pretty difficult because they want insurance regulators and, more importantly, consumers, to rely upon these predictions but unless you have access to all of the data, to all the assumptions and understand how the model works, even given one’s limited knowledge of mathematics or physics or all these other things, it’s a little hard to judge. So the question of regulation is a difficult one but I think there certainly is going to need to be, as the use of these models grow, more of a consensus and understanding of the kind of information that has to be disclosed.

A little more transparency there maybe?
Tyler: Yes. I think that’s right.