The Importance of Jurisdictional Inspection Programs to Insurance Companies
The following presentation was delivered at the 79th General Meeting Monday afternoon session, May 3rd, 2010, by Kenneth Stoller.
Kenneth Stoller is senior counsel for the law department of the American Insurance Association. From 1998 to 2000, Mr. Stoller served as an analyst and editor in AIA's legislative reporting service. Previously he practiced workers' compensation law in Florida where he held a variety of positions in insurance, education and small business. Having earned his J.D. from the University of Florida School of Law and his B.A. from the Brandeis University, Mr. Stoller was admitted to the Florida Bar in 1997.
MR. STOLLER: I'm going to speak to you today about the American Insurance Association, the unique nature of boiler insurance, what I believe to be a true partnership between insurance companies and jurisdictional inspection programs, and cooperative efforts we have undertaken with jurisdictions in the past and hope to continue doing so in the future.
First, about the American Insurance Association (AIA). AIA is a trade association of property and casualty insurers of all lines of property and casualty business. Meaning everything except life and health insurance. Our member company committees are organized by line of businesses, so we have committees for commercial and personal property, commercial and personal auto, workers' compensation, and boiler and machinery insurance. Our companies work cooperatively within these committees on legislative and regulatory issues.
AIA has a home office in Washington, D.C., where I operate out of. We have regional offices around the country but handle lobbying for various regions, and we have retained counsel in all fifty states and the District of Columbia. When we work on issues at the committee level (which are all legislative and regulatory issues, and as well as informal items such as notices, bulletins, or implementation issues), we can act collectively through AIA, and if it needs to get to a lobbying effort, we have lobbying machinery in place. Just as often companies deal individually with jurisdictions, but it's good for a cross-pollination of information amongst the companies.
Companies are represented on various boiler boards and have relationships with the jurisdictions, but not everybody has the same information in the same time frame. So it's very helpful for companies to sit around the table and discuss these issues.
I want to talk a moment about what insurers are able to talk about around the table. Some of you may be aware there are laws governing antitrust for insurers which prohibit insurers from discussing what I would call marketplace activities; that is, issuers cannot discuss policy rates or policy forms or how they would respond to certain developments in the marketplace or whether or not they would write business in a certain marketplace. However, there are exemptions in the antitrust laws allowing insurers to talk about legislative regulatory issues, and certainly boiler inspection procedures and policies fall into this.
In my dozen years at AIA, I have worked on a number of lines of insurance, and boiler insurance is unique in many ways. They are all positive. Unlike other lines of insurance, we deal with a different cast of characters. For other lines of insurance we generally deal with the departments of insurance; for workers' compensation, the departments of labor. But we do not talk with the same individuals as when we deal with boiler insurance. Also, the relationship between insurers and regulators has evolved differently. Frequently with the other lines of insurance we deal with (e.g., antitrust issues) we deal with insurance policy rates and policy forms on an individual company basis. Sometimes we are at loggerheads with regulators because, while regulators feel insurance rates must be regulated and insurance policy forms must be regulated, our view based on free market principles is limited regulatory involvement. Not that there should be no regulatory involvement, but in the other lines of business, involvement should be limited to kind of core functions such as making sure companies stay solvent and assuring no unfair competition.
Here are some examples. First of all, with insurance policy rates, which must in most states be filed prior to being used, some states actually set the rates. And this is really unique in American business. That doesn't happen too often, but sometimes more informally most insurers must file rates and get them approved.
If a rate is disapproved, an insurer has to come back with another rate. That's tantamount to setting a rate. Again, while regulators may feel this provides some form of consumer protection, our experience has been that freedom of rates actually provides more flexibility and better choice for the customer.
For example, the State of Illinois has not regulated auto insurance rates for almost 40 years. And as it turns out, rates are lower in Illinois than in other states and there is more competition; there are more companies operating in the state. And similarly for insurance policy forms, regulators may think it is consumer protection, and I can certainly agree to some extent, but we found it's the consumer – the policyholder – who needs the flexibility of the insurer being able to quickly make a policy form change and bring the product to market.
Currently in the United States, insurance is regulated in 50 different states plus the District of Columbia. So if a large master policyholder wants to make a policy form change – something to allow them to operate in a certain way – they go to the insurer and ask for the change. The insurer cannot in most states automatically make the change. The insurer must go to the regulator, file a new policy form, wait a certain amount of time, and either get the form approved or disapproved. And even when the form is approved, you then have 49 or 50 other jurisdictions to deal with. In the boiler world, uniformity of codes is very important. By the same token, we would like to have uniformity with other lines of insurance, but we don't always have it.
The final way boiler insurance is unique has to do with the surveys insurers perform. While insurers do perform state safety inspections in the boiler world, other lines of insurance performing a survey do it for underwriting purposes. It's not a state-mandated safety inspection. So when an insurer does a survey for a non-boiler line of insurance, basically they are trying to determine whether or not to write the risk or what to charge for the risk.
Regarding boiler laws, I believe there is a true partnership between insurers and jurisdictional programs. I think this mostly arises out of the paramount importance of preserving life and property, and also for the sheer fact that since we are performing the same inspections, we need to be on the same page. Insurers need to know what exactly jurisdictions want – it's so important for us to work together.
It's critical to recognize boiler safety is fundamentally a government oversight issue. Insurers are proud to play an important role. And the reason I express this is during the past few years, there have been efforts in some states, usually arising out of statewide budgetary concerns, to downsize or eliminate boiler safety programs. And some of the arguments you hear in favor of it are that insurers already perform inspections, so there doesn't need to be a state program – there doesn't need to be a law underpinning a state program.
As mentioned earlier in the other lines of insurance, we might actually welcome a reduced or eliminated regulation, but not in the boiler world. In the boiler world, while this is a partnership between insurer and jurisdiction, it is a partnership where both parties play critical roles that should not be altered. The bottom line is you need a boiler safety law and you need an inspection requirement.
If the program goes away, insurers are not regulators; they do not have force of law behind what they do. Insurers cannot require a policyholder to pay a fine or correct a violation or take an object out of service until the violation is corrected. That's why this state law is so important and why we support robust jurisdictional programs. We have strongly advocated for maintenance of programs during the past few years.
We have lobbied directly to governors, legislators, and regulators. It might seem strange to have a regulated industry, in this context the insurance industry, saying we don't want the regulator to go away or to have its power diminished, but that is truly the case. And going forward with economic pressures states are facing, if any of you encounter difficulties in this regard, if you hear of any efforts to downsize or eliminate your program, please let me know either directly or through an AIA member company representative.
We have a lobbying function. We have AIA employees in regions and we retain counsel at the state level where we can work with legislators and regulators to let them know how important insurers feel these programs are. Unfortunately, maybe fortunately for other people looking at other lines of insurance, insurers generally cannot get laws passed on their own. It’s certainly true in the boiler context. We need to have allies in this regard.
I know the National Board is a strong ally and we look to boiler owners and other local entities. It depends on the state where the actors are, but we have done our best and going forward we will do our best to make sure these programs are preserved.
Now, in addition to these efforts to maintain programs, we engage in other cooperative efforts with the states. And I would like to take a moment to thank the chiefs, past and present, many of whom are in the room today, for soliciting and accepting our input on many of these issues. We have helped to refine and ensure passage of laws and regulations whether or not the proposal came from the state or from the insurance industry. We have worked to resolve implementation issues arising out of these laws and regulations. And I would like to think our input is of some value, because given the national operations of most, if not all, of our members, we are able to share perspectives from experience in different jurisdictions. All cooperative efforts over the years have helped us improve our mutual understanding of our respective business models. And by that I mean the insurance world, private business world, and state regulatory world are somewhat different, but over time we have come to appreciate on the insurer side all the pressures chiefs have to deal with day in and day out.
We understand you have budgetary concerns. We understand that you have chain-of-command issues. You have to deal with in-house lawyers— and I can speak ill of lawyers, being one — and you have to deal with very difficult Bizantine legislative and regulatory processes where we understand it's not easy to get a law through.
We know how much advanced work needs to be done, how much lobbying there is, and how arbitrary sometimes legislative actions can be. We'd like to be your ally. We appreciate the chiefs' understanding of the issues unique to insurers. But relating back to boiler inspections, it's the insurance department regulated issues I discussed before, as well as insurer business practices and operating a certain way to gain efficiencies. In my dealings with chiefs over the past few years, I very much appreciate your accepting our input and understanding our business model.
Please feel free to contact me directly or through an AIA member company representative with questions or issues related to the insurance industry or if there is a threat to your program.