99-02: Recent Legislation on MO Commercial Casualty Insurance

To:           All Missouri Commercial Casualty Insurance Companies

From:      Keith A. Wenzel, Director, Missouri Department of Insurance

Re:          Recent Legislation Regarding Missouri Commercial Casualty Insurance Laws

Date:       May 28, 1999

Background

During its 1998 legislative session, the Missouri General Assembly enacted House Bill 1080, which amended Sections 379.883 and 379.888 of the Revised Statutes of Missouri. These two statutes concern commercial casualty insurance, and were originally adopted in 1987 as part of a legislative reform effort to deal with a particularly hard market for certain types of commercial liability coverage. Section 379.883 required insurers to provide their insureds with a 60-day notice of any pending cancellation or nonrenewal of a commercial casualty insurance policy, except in certain limited situations. Section 379.888 implemented the so-called "flex rating law," under which commercial casualty insurers planning to increase or decrease their rates by more than 25% had to first obtain the prior approval of the Department of Insurance.

Notices of Cancellation or Nonrenewal

The purpose behind Section 379.883's 60-day prior notification requirement was to provide insureds with adequate time to find replacement coverage. While this requirement was simple enough in concept, it often had unintended consequences when coupled with the common industry practice of transferring insureds from one company to another within a holding company group. In such a transfer, one of the parties to the original insurance contract (i.e., the insurer) is changed, which technically makes the transfer a cancellation or nonrenewal of the original contract. And because such transfers were technically cancellations or nonrenewals, the terms of Section 379.883 required that a notice of cancellation or nonrenewal be sent to policyholders, even though the substitution of an affiliated carrier meant there was no need for the insureds to find replacement coverage. As a result, these notifications were unnecessary. They also often led to confusion or irritation, depending on whether or not the policyholder realized coverage was still being provided. House Bill 1080 remedied these problems by adding the following sentence to Section 379.883, RSMo:

An assignment or transfer of a commercial casualty insurance policy among affiliated insurers within an insurance holding company system is not a cancellation or nonrenewal for purposes of sections 379.882 to 379.895.

As a result of this change, where the same coverage will be provided by an affiliated carrier as part of an intra-group transfer, 60-day's notice is no longer required. In addition, the transfer need not be labeled a "cancellation" or "nonrenewal".

(Note: On a related matter, in the past, the Department has been concerned about the possibility that during future hard markets, insurers would attempt to avoid the flex rating law's prior approval requirement. In theory, insurers could do this by transferring insureds to different carriers within a holding company group which had premiums rates more than 25% above the prior group carrier's rates. Any such transfers would effectively circumvent the intent of the flex rating law and were therefore deemed subject to the Department's review under Regulation 20 CSR 500-4.100. The Department will still consider it necessary for insurers to obtain the Department's prior approval for intra-group transfers where the premium impact exceeds +/-25%. Conversely, intra-group transfers at or below the 25% threshold will be allowed without the Department's approval.)

Notice Regarding Schedule Rating Changes

The second change in House Bill 1080 concerns notification by an insurer to policyholders regarding changes to the schedule rating debits and credits applied to individual policies. A new provision added to Section 379.888 by HB 1080 provides:

Any renewal notice of a commercial casualty insurance policy as defined in section 379.882, RSMo, for any Missouri risk or portion thereof which would have the effect of increasing the premium charged to the insured due to a change in any scheduled rating factor applied to the policy during the previous policy period shall contain or be accompanied by a notice to the insured informing the insured that any inquiry by the insured concerning the change may be directed to the agent of record or directly to the insurer. When any insured makes a request for information pursuant to this subsection, the insurer, directly or through the insurer's agent, shall inform the insured in writing in terms sufficiently clear and specific of the basis for any reduction in a scheduled rating credit or increase in a schedule rating debit which is applied to the policy. Evidence supporting the basis for any schedule rating credit or debit shall be retained by the insurer for the policy term plus two calendar years, in accordance with section 374.205, RSMo. The Missouri department of insurance shall notify commercial casualty insurers of the requirements of this section by bulletin. The provisions of this subsection shall become effective on January 1, 1999.

This provision essentially lessens some of the previously-required reporting responsibilities of insurers. Under the provisions of regulation 20 CSR 500-4.100 (promulgated to implement Section 379.888 as it existed prior to HB 1080), insurers were required to "...inform the insured in writing in terms sufficiently clear and specific of the basis for any schedule debit or for any schedule credit which is applied." In other words, insurers were required to explain all schedule rating changes when they occurred. The new language reduces this notification responsibility in several respects. The key elements of the new law are as follows:

1. Initially, an insurer is only required to notify the insured where to direct any inquiries regarding the policy's schedule rating changes. The insurer can have the insured direct such inquiries to either the insurer's agent or the insurer itself, as the insurer so chooses; any specific information about an insured and the rating of his policy which had previously been required is no longer required unless the insured subsequently asks for the information by way of an inquiry. In addition, under the presumption that most insureds do not question schedule rating changes which decrease their premiums, the notice on where to direct any inquiries needs only to be contained in or accompany renewal notices where the schedule rating changes result in a premium increase, (although such notice may be added in premium decrease situations as well, should the insurer so choose). Whether the insurer itself or the agent of record is the appropriate party to receive such questions depends on how the insurer and its agency system are organized. In either case, the appropriate name (or job title), address, telephone number and facsimile number of the party to whom the inquiries should be directed should be listed on or should accompany the renewal notice.

2. Insurers are required to respond to any inquiries regarding schedule rating (whether they be questions regarding premium increases or decreases) again, either on their own or through their agents, as the insurer so chooses. A response must be in writing regarding the basis for the schedule rating change, and should be made within a reasonable period of time after the receipt of the inquiry. The explanation should be clear and specific enough on its own to explain the situation without forcing the insured to make further inquiries. The explanation should inform the insured of the specific elements of the insurer's schedule rating plan which have been evaluated differently than during the prior policy period and it should also indicate why they have been evaluated differently. While insurers are permitted to use a notification form which sets forth the elements of its schedule rating plan in a format similar in appearance to a premium modification worksheet (and on which the re-evaluated elements can be indicated by a check mark, etc.), insurers should also include an explanation of why the re-evaluation has occurred. See the attached example.

3. Evidence supporting the basis for any schedule rating credit or debit must be retained in the insurer's records for the policy term plus two calendar years, in accordance with Section 374.205, RSMo. This supporting evidence should be sufficient to allow the Department's Market Conduct Examiners to reconstruct the rating of the policy and to document that any debits or credits applied to a policy were applied for objective, loss-related reasons, and not for mere marketing purposes.

Prior to House Bill 1080, insurers were required to provide the information required in item "2" as part of the renewal of the policy under Regulation 20 CSR 500-4.100. HB 1080 in part changes the statutory basis of that regulation by requiring such detailed information only after an insured's inquiry. Any insurer in compliance with the prior law will continue to be in compliance with HB 1080's new, less-stringent requirements. However, after January 1, 1999, those commercial casualty insurers* who decide to limit their initial policyholder information to instructions on where policyholders should direct their inquires may now do so.

Finally insurers should be aware that the notifications regarding schedule rating changes discussed above concern renewal notices by insurers to individual policyholders regarding changes to individual policies. Insurers should not confuse these notices with the filings which must be made by insurers to the Department regarding changes to the insurer's base rates, rating plans and manual rules, which concern changes to an insurer's rating system for whole classes of business, and not merely individual policies; these filings are discussed separately in Sections 379.888 to 379.893, RSMo and Regulation 20 CSR 500-4.100.

Questions regarding this Bulletin may be directed to Department's Property and Casualty Section at 573/ 751-3365, (fax: 573/526-4839).

* For a number of reasons, the Department does not believe Section 379.888, RSMo was intended to cover workers' compensation insurance. Nevertheless, the Department will allow carriers who comply with the procedures discussed in this Bulletin to do so in lieu of compliance with Bulletin 97-03's guideline No. 6, which concerns notice to employers of the use of any schedule debits or credits in workers' compensation policies.

Example

[Date]

[insured's Name]
[insured's Address]

Dear Policyholder:

This letter is in response to your inquiry regarding changes to the schedule rating debits and/or credits applied to your policy. Based on a re-evaluation of your business operations, the following elements of our schedule rating plan (denoted by an "x") have been modified for this year's [specify type of policy, such as"CGL"] coverage, for the reasons set forth below:

Risk Characteristic Property CGL Automobile Crime Other
Management: [ X ]
Location:
Building Features:
Premises and Equipment:
Employees:
Attitude: [ X ]
Protection:
Equipment-Auto:
Safety-Auto:

[Note: The above list of risk characteristics is not exhaustive, and is used for purposes of illustration only. Individual insurer schedule rating plans may include different elements.]

Reason for the modification(s): [Example: New management is inexperienced, does not have a safety plan, does not conduct regular safety meetings, is not responsive to loss control suggestions, and does not actively pursue exposure reduction.]

If this explanation for the change to the rating of your policy is not clear, please do not hesitate to contact:

[Contact Person Name or Job Title]
[Contact Person Address]
[Contact Person Telephone Number]
[Contact Person Facsimile Number]

Sincerely,