How to Bulletproof Regulatory Risk

The complexity across literally hundreds of jurisdictions make compliance daunting for even the most seasoned claim professionals.

Compliance has become a top priority for insurers as technology emerges to make the process easier and more cost-effective. Perhaps even more importantly, these solutions have demonstrated the ability to improve operational results while also boosting productivity and staff and policyholder satisfaction. Brief History of Insurance and Regulation For thousands of years, insurance was basically unregulated – until 1945. That year, with a focus on protecting consumers from “unscrupulous” insurers, a U.S. Supreme Court ruling put into motion the regulation of insurance, holding that insurance companies were subject to the Sherman Anti-Trust Act. Shortly thereafter, Congress enacted the McCarran Ferguson Act, creating the regulatory framework that has been guiding the insurance industry ever since and providing for individual states to regulate insurance. Fast Facts about U.S. State Insurance Regulation in 2015
  • Total revenue collected by states from the insurance industry increased 3.4% to $22.6 billion
  • Total projected fiscal year 2017 budgets for all state insurance regulatory agencies total more than $1.4 billion
  • State insurance departments received 299,625 official complaints and nearly 1.9 million inquiries
  • Total full-time insurance department staff was 11,304 (down 7.3% from 2007)
  • Market conduct examiners and analysts numbered 497 and represented 4.4% of total staffing
  • Of 880 market conduct only examinations completed, 714 resulted in administrative orders (fines)
  • Fines and penalties against insurers totaling $224 million represented one-sixth of the total annual budget for all state insurance regulatory agencies
See also: The Coming Changes in Regulation   Top 5 Market Conduct Actions Against P&C Insurers According to research shared by Wolters Kluwer Financial Services, claims handling continues to be among the top areas of market conduct criticism:
  1. Failure to acknowledge, pay, investigate or deny claims within specified timeframes
  2. Using unapproved/unfiled rates and rules or misapplying rating factors
  3. Failure to provide required compliant disclosures in claims processing
  4. Failure to cancel or non-renew policies in accordance with requirements
  5. Failure to process total loss claims properly
Compliance Challenges in Claims Management “Claims management has consistently been one of the top three compliance challenges for insurers over the last several years, and once again was the top compliance challenge in 2014 across all lines of business,” said Kathy Donovan, senior compliance counsel at Wolters Kluwer Financial Services. “Insurance claims professionals have to manage a variety of internal and external factors when processing claims, including claimant communications and mandatory disclosures, all within established timeframes. The targeted end result is providing proper payment in accordance with policy provisions and state law.” Compliance Solutions Software and technology are particularly well-suited to enable carriers to avoid fines and penalties, and total loss claim payments – the fifth most frequent source of market conduct fines – is a prime candidate. The U.S. auto insurance industry manages approximately 3.2 million total loss claims annually and is required to get those complex calculations 100% right every time or face fines of as much as $10,000 per claim. The vast majority of total loss claims payments are based on clearly stated rules, regulations, taxes and fees, but the complexity and frequent changes across literally hundreds of relevant state, municipal and other jurisdictions make the task daunting for even the most seasoned claim professionals, let alone the growing number of newer and less experienced staff. Sophisticated purpose-built software supported by a dedicated, expert research team can not only perform the majority of calculations with 100% accuracy every time but can also maintain an all-important audit trail for use in future market conduct exams and can also provide claim staff with instant access to relevant regulations and references for those few files where interpretation and judgment is required. For example, the issue of whether or not to include sales tax and partial refunds of title and registration fees has vexed claims handlers for years. State departments of insurance regularly cite insurers for failing to include or properly calculate tax on automobile total loss claim payments. Worse yet, a large number of insurance departments have either remained silent or issued ambiguous directions about what amounts must be paid and how they should be calculated. See also: Increasing COI Compliance   While increasing numbers of large, well-established information technology firms and some new early stage entrants offer enterprise solutions broadly defined as risk and compliance management solutions, few are specifically insurance-centric, and fewer yet are focused on specific areas of high exposure. In my practice, I have become familiar with some highly innovative insurance compliance solutions that are focused on solving a significant specific need in a major area of complexity and exposure. One such solution that fits this description is a cloud-based total loss workbook that provides automated settlement calculations on a high percentage of passenger vehicles of all types and sizes, including motorcycles in all jurisdictions. The software has the capability to be integrated with third party claims systems and information providers of total loss valuations and other relevant services to provide a truly bulletproof seamless end-to-end solution supplemented by a complete, up-to-the-minute reference library. I encourage insurance carriers and claim departments to take the time to regularly review all available solutions and, in so doing, refocus on their compliance strategies and results. I am available and glad to answer questions and discuss this topic with interested industry participants.

Stephen Applebaum

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Stephen Applebaum

Stephen Applebaum, managing partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem.


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