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Keystone State Sets Example for Regulatory Relationships

Fraternal leaders in the Keystone State – led by the Pennsylvania Fraternal Congress (soon to become the Pennsylvania Fraternal Alliance!) – set the standard for developing positive relationships with state insurance regulators.  I had the privilege of attending my third PFC meeting this week and the highlight of the session was the three-hour presentation by four representatives from the state Department of Insurance (DOI), including Deputy Insurance Commissioner Steve Johnson and Director of the Bureau of Financial Examinations Dave DelBiondo.  Here are links to the PowerPoint presentations:  Update on Regulatory Topics and Market Analysis – September Series.

Of all the state regulators that NFCA works with, Steve, Dave and the folks from the PA DOI are among the most open, honest, and transparent in their communications with the insurers – fraternal and commercial – that they oversee.  They don’t sugarcoat the problems facing insurers, yet they take a measured approach when forced to require insurers to confront those problems.  They believe that by clearly communicating their goals and the purposes for their actions to insurers, everyone has a better understanding of what they can expect from the DOI.  And their one overarching objective is to make sure consumers are protected. 

Moreover, they understand the characteristics that make fraternals unique.  Their knowledge and appreciation of our “social business model” affords them the credibility needed to regulate our small niche of the financial services industry.  And all of this adds up to an impressive regulatory record: In a state with the largest number of domiciled fraternals in the nation there has not been one insolvency in nearly 30 years.

Don’t get me wrong, the PA DOI doesn’t “coddle” fraternals (or any other insurer, for that matter).  If you’ve ever met Steve or Dave, you know that “coddle” isn’t even in their vocabulary.  And I honestly believe that the members domiciled and doing business in the Keystone State appreciate their no-nonsense approach to regulatory issues.  Here are a few of the highlights from their recent presentation to the PFC:

  • While fraternals are exempt from the state’s Market Conduct Annual Statement regulation (with no plans on the DOI’s part to remove that exemption), regulators want commercial insurers to know what they can expect from the department and what type of statistical changes can trigger a market conduct examination.  (See the PPT for more information on this.)  DOI officials pointed out that fraternals were “exceptionally good at taking care of their own members,” but that an increase in the number of consumer complaints against fraternals could initiate a market conduct exam.
  • As the number of annuities sold by both commercial and fraternal insurers continues to increase, regulators are paying very close attention to uncontrolled growth in this area.  DOI representatives are concerned that some insurers may be “overpromising” on the rate of return that such annuities can be expected to deliver, creating unclear expectations on behalf of consumers.  Regulators are also concerned that smaller insurers may not have enough capital to generate a rate of return necessary to meet consumers’ expectations and earn a profit for the organization.  Finally, regulators are worried that a sudden increase in interest rates could result in consumers cashing in their annuities and moving them to other investment vehicles, leaving some insurers in a very precarious financial position.  The PA DOI – as well and insurance departments in other states – will be much more proactive in the regulation of these products.  Such measure could include additional controls on annuity suitability standards and the imposition of cash flow stress tests on those insurers that regulators perceive as growing too rapidly in this line of business.
  • Pennsylvania is on the cusp of enacting a new regulation that clarifies the fact that fraternals are required to comply with the state’s Hazardous Financial Condition standards.  The DOI has been working with both the PFC and NFCA on this regulation for the past six months.  The new rule means that the DOI can take action against insurers – including fraternal insurers – that meet one of 27 “hazardous financial conditions.”  Actions can range from a market conduct exam to an order of liquidation.  According to Steve Johnson, regulators view the regulation as a tool they can utilize to convince fraternals to improve their business model, not a hammer to put them out of business.  However, Johnson cautioned that the DOI would not hesitate to take action to compel a fraternal to merge if its deteriorating financial condition put the financial security of its members in peril.  He pointed out that in 1969, there were 41 fraternals domiciled in Pennsylvania and that today there are 21.  He expects the consolidation trend to continue, with or without regulatory pressure.
  • Finally, Johnson indicated that the PA DOI intends to move forward with a fraternal RBC bill in 2011, to become effective in 2012.  Again, he pointed out that the RBC ratio has become an accepted method of assessing an insurer’s financial condition within the regulatory community and that it was time to apply the standard to fraternals. 

The bottom line is that it is a brave new regulatory world facing fraternals and those societies that are fully informed about what state insurance departments expect will be best able to manage their businesses in this environment.  Thanks to Steve, Dave, and the folks at the PA DOI, the fraternals domiciled in Pennsylvania have a leg up on their colleagues in other states.

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