5 Key Steps to Improving State Filing Compliance and Controlling Costs

Transcription

1 5 Key Steps to Improving State Filing Compliance and Controlling Costs May 2009 Carol Bondy, CPCU Senior Compliance Analyst Insurance Compliance Solutions Wolters Kluwer Financial Services tel.

2 Table of Contents Executive Summary Key Steps to Improving State Filing Compliance and Controlling Costs... 4 Step 1. Identify the challenges Step 2. Understand Regulatory Activity and Its Effect on Product Filing Step 3. Measure the Financial Impact of Timely Product Approvals... 5 Step 4. Uncover Hidden Cost and Risks of Non-compliant Forms & Rates Step 5. Evaluate a Solution... 8 Hiring additional staff is costly and does not guarantee better results... 9 Solutions developed in-house usually cost more than most insurers think and can increase compliance risks Purchasing a solution presents the most opportunities for improvement and speed to market gains, if evaluated carefully... 9 Key Considerations for Selecting an Ideal Solution Conclusion Key Steps to Improving State Filing Compliance and Controlling Costs 2

3 Executive Summary Not only is today s insurance regulatory environment more active than ever before, but regulations are also becoming more complex. And whether the economy is good or bad, compliance, product development, and state filing managers are increasingly expected to accomplish more with fewer resources. They struggle to maintain compliance because regulatory requirements are seldom simple and almost never static. Their task of keeping track of those requirements and adjusting processes to ensure compliant filings remains daunting, and presents a costly risk to their organizations. This white paper explores the 5 key steps every state filing manager should consider in order to improve compliance results and control costs: Step 1. Identify the challenges. Step 2. Understand regulatory activity and its effect on product filing. Step 3. Measure the financial impact of timely product approvals. Step 4. Uncover the hidden costs and risks of non-compliant forms & rates. Step 5. Evaluate a solution. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 3

4 5 Key Steps to Improving State Filing Compliance and Controlling Costs Step 1. Identify the challenges. Identifying the challenges your organization faces is the key first step in improving results. Our experience working with insurers of all sizes has uncovered some common challenges and demands: Developing more innovative products while managing the increased frequency and complexity of regulatory changes Moving new products, or changes to existing products, to market faster and more efficiently Getting filings right the first time to avoid costly mistakes and delays in the filing process Finding and maintaining up-to-date requirements for each line or sub-line of business in 50 or more filing jurisdictions Eliminating costly market conduct consequences from using unapproved, unfiled and/or noncompliant forms Eliminating costly market conduct consequences from using unapproved, unfiled rates Increasing productivity with reduced resources Each of these challenges represents substantial potential compliance risks and costs, but also opportunity for measureable improvement in the process. This white paper explores these issues and their implications to insurers, and suggests key considerations for evaluating solutions. Step 2. Understand Regulatory Activity and Its Effect on Product Filing. Keeping pace with an increasingly complex, constantly changing insurance regulatory environment is an extremely difficult challenge in any organization. Magnifying that challenge are the demands to develop and market innovative, revenue-generating products in response to regulatory changes and to move them to the marketplace as soon as possible. And, of course, the expectation remains that the organization will always be compliant. In the past two years alone, approximately 16,500 insurance industry-relevant laws and regulations have been introduced in the United States. Approximately 7,000 (42%) of those were enacted during that same period. In addition, Insurance Departments have issued countless Bulletins announcing or providing guidance on many of the changes enacted. Many of those Bulletins included filing requirements. An example of this high activity level can be seen by looking at legislation from early Reacting in part to the economic environment, approximately half of the states proposed 5 Key Steps to Improving State Filing Compliance and Controlling Costs 4

5 additional limitations in the use of credit scoring, three of them proposing a total ban. Other activity during the same time period included changes in regulation of health insurance rates, genetic discrimination, total loss clarity, and non-insurance benefits. Identifying activity such as this and understanding its implications on the filing process are critical to controlling costs and minimizing compliance risks. Figure Credit Scoring Proposals Step 3. Measure the Financial Impact of Timely Product Approvals. Once an organization has made the decision to develop a new product or modify an existing one, it must complete the task as soon as possible. This is true whether the product or change is needed to comply with newly enacted legislation or regulation, or it is needed to successfully compete in the marketplace. More often than not, the business unit responsible for filing the rates/rules and forms associated with that product plays a key role in assuring that it is compliant when made available to customers. Delays in the approval process often result in decreased revenues, increased costs, and lower profit associated with a product line. Thus, compliant initial filings result in not only faster approvals, but also lower costs. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 5

6 The illustration below demonstrates that timely completion of a rate increase project can have a sizeable effect on an insurer s revenue: Figure 2. Cost of Countrywide Rate Increase Project The ability to improve productivity of regulatory research has not only positive resource cost implications, but also a real, measurable impact on bottom-line results. In this example, improving regulatory research tools resulted in a 7-week gain in speed-to-market and a net revenue result of $377,885. Step 4. Uncover Hidden Costs and Risks of Noncompliant Forms & Rates Errors is the use of forms and rates, including those which are unapproved or unfiled are consistently among the top ten market conduct issues. Market conduct issues frequently result in costly and unnecessary fines, which in turn can lead to diminished goodwill or a tarnished image in the market. Uncovering these hidden costs and risks is vital to understanding their potential impact and risk to your organization. For example, a single misstep in failing to submit forms for approval resulted in the following criticism, and accompanying fine of $40,000, in Texas in 2007: 5 Key Steps to Improving State Filing Compliance and Controlling Costs 6

7 {Company} issued group life insurance coverage to members... The master policy, certificates, and riders issued were not filed with and approved by the TDI as required by TEX. INS. CODE ANN To further illustrate this issue, consider the filing-related violations identified in the examination summary below, from a report issued by Virginia in November While the specifics behind each violation vary, and often may have resulted from a failure to properly implement within a company s system approved and filed forms and rates, these examples demonstrate an exposure that can result in substantial costs. Frequently violations include a mixture of misunderstanding of requirements and failed implementations. This examination resulted in a penalty of $59,000 for a single company. Citation Reference Summary of Criticism A The examiners found one violation of A of the Code of Virginia. The company failed to file with the Bureau all rates and supplementary rate information including fees. The company issued a policy using rates that were not filed with the Bureau prior to use D The examiners found 34 violations of D of the Code of Virginia. The company failed to use the rules and/or rates on file with the Bureau. a. In three instances, the company failed to follow its filed minimum premium rule. b. In nine instances, the company failed to use the filed increased limits factors. c. In four instances, the company documented the Individual Risk Premium Modification (IRPM) factors, but failed to apply the documented factor. d. In one instance, the company failed to follow the filed premium determination rule. e. In three instances, the company applied IRPM factors, but failed to document the applicability of the factors in the file. f. In six instances, the company failed to use the filed uninsured motorist premium. g. In eight instances, the company failed to use the filed base and/or final rates A The examiners found one violation of A of the Code of Virginia. The company failed to file with the Bureau all rates and supplementary rate information. The company charged a reinstatement fee that is not on file with the Bureau D The examiners found 46 violations of D of the Code of Virginia. The company failed to use the rules and/or rates on file with the Bureau. a. In three instances, the company failed to follow its filed minimum premium rule. b. In six instances, the company failed to use the filed increased limits factor. c. In one instance, the company failed to use the correct discounts and/or surcharges. d. In three instances, the company documented the IRPM factor, but failed to apply the documented factor. e. In two instances, the company failed to follow the filed premium determination rule. f. In six instances, the company applied IRPM factors, but failed to document the applicability of the factors in the file. g. In four instances, the company failed to use the filed uninsured motorist premium. h. In 14 instances, the company failed to use the filed classification factors. i. In six instances, the 5 Key Steps to Improving State Filing Compliance and Controlling Costs 7

8 company failed to use the correct base and/or final rates. j. In one instance, the company failed to use the filed IRPM factor D The examiners found 14 violations of D of the Code of Virginia. The company failed to use the rules and/or rates on file with the Bureau. The company calculated the return premium using the pro rata method when the policy provisions require the short rate method The examiners found one violation of of the Code of Virginia. The company used a form that was not filed and approved and the form was used to manuscript restrictions to the standard forms The examiners found four violations of of the Code of Virginia. The company used a form that was not filed and approved prior to use. The form was used to manuscript restrictions to the standard forms The examiners found 30 violations of of the Code of Virginia. a. In 22 instances, the company used a form that was not in the precise language of the standard form filed and adopted by the Bureau. b. In one instance, the company failed to use the standard form filed and adopted by the Bureau, Virginia Changes-Business Auto Coverage {#}, when issuing new and/or renewal policies. c. In seven instances, the company used a form that had not been approved for use in Virginia and was more restrictive than the standard forms The examiners found four violations of of the Code of Virginia. The company failed to obtain approval of a form containing additional provisions or coverages more favorable than the standard form prior to using the form. An additional dimension of the examination cost challenge exists when a company is one of a group of companies. If several companies within the group are marketing similar products, it is not uncommon for some or all of them to commit the same violations. In such cases, non-compliance penalties can easily skyrocket, significantly eroding the group s profitability. Step 5. Evaluate a Solution State filing managers have adopted a number of approaches for dealing with compliance and speed-to-market challenges, with mixed results. The three common approaches are: 1. Hire more staff. 2. Develop a solution internally. 3. Purchase a solution. Each of these approaches has benefits and risks to consider. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 8

9 Hiring additional staff is costly and does not guarantee better results. Hiring more staff, particularly in the current economic environment, is most likely not an available option. The salary, employee benefits, and other associated costs of hiring additional staff are not the only arguments against this approach. Training costs are likely to be significant, and the newemployee learning curve, even for new hires with some industry experience, generally does not support speed-to-market goals. Solutions developed in-house usually cost more than most insurers expect and can increase compliance risks. Some insurers will develop their own databases of comprehensive information for each filing jurisdiction. However, they often underestimate the sizeable costs of creating such a database. They may not even consider ongoing maintenance costs. The illustration below depicts the typical initial research and content development costs of creating an internal filing resource. The maintenance of such a system is not only costly, but also prone to the risk of failed updates when resources are diverted over time to competing priorities. Furthermore, unless an organization already has the required expertise to develop a top-notch system and keep it continuously updated, the return on investment may not justify this approach. The cost of such a system is conservatively estimated below. However, the actual cost would most likely be higher because these figures assume that a comprehensive database of regulatory material is readily available. Purchasing a solution presents the most opportunities for improved compliance and speed-to-market gains, if evaluated carefully. Purchasing a comprehensive database or system developed and maintained by a solution provider (preferably a market leader) is often the most economical and desirable approach. Even with upfront costs such as subscription fees, the overall costs are far less than those of developing an equivalent resource in-house. Plus, there are no hidden costs. This option not only enables the organization to achieve its goals of accuracy and efficiency but also facilitates faster product 5 Key Steps to Improving State Filing Compliance and Controlling Costs 9

10 development and marketing of products. It also promotes increased productivity by freeing staff resources to focus on other priorities. Key Considerations for Selecting an Ideal Solution The ideal solution should provide comprehensive product compliance information. It should enable an organization to focus on its business objectives and bring compliant products to market faster and more efficiently. And at a minimum, the ideal solution should include the following features: Relevant and up-to-date regulatory requirements for each line of business Concise summaries of regulatory material by line of business for one or more jurisdictions, prepared by individuals with extensive insurance industry and regulatory expertise Current transmittal documents and other filing forms required by each Insurance Department Automatic notification of regulatory changes, including newly enacted statutes and regulations, that affect the products that the insurer offers The ability to compliment SERFF (System for Electronic Rate and Form Filing) Although cost (including the cost of non-compliance) is a vital factor in evaluating any solution, it is important not to overlook other considerations. The following questions should be asked when evaluating potential solutions: Does the solution have functionality that will improve your productivity? Diligent evaluation of functionality will ensure that users will not only have what they need to complete filings as quickly as possible, but also (and just as important) adopt the solution quickly. Early on, be sure to consult with users to identify their functionality needs up front, help focus your evaluation and promote adoption of the chosen solution. Some common functionality needs to discuss include: Ease of use. To effectively implement a new research tool, users must enthusiastically embrace a change in their daily work methods. If the tools are not easy to use, adoption of the solution will fail. Clear and precisely written filing summaries. State filing professionals can save significant time in the filing process by referencing concise summaries of legal and regulatory requirements, rather than researching and analyzing a vast database of primary content. Intuitive search features. Users must have the ability to locate requirements using terminology they use in their daily work. Preferably, the solution should have multiple options for search techniques and content output display. Ready access to applicable statutes or regulations. It is not enough to provide filing staff with references to legal documents, because there are times when it is necessary to reference full versions of laws and regulations. A comprehensive solution will provide not only summaries of filing issues, but also easy access to legal citations for further review. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 10

11 Transmittal and Filing forms. The state filing approval process depends significantly on access to state filing forms. The ideal solution should provide ready access to all forms required by each jurisdiction. The usability of the forms is critical. The ideal solution would have forms available that are automatically kept up-to-date and ready to simultaneously populate for multiple filing entities. Is the scope of the solution sufficient to meet the needs of your users? Carefully evaluate the type of content and services included in the solution to determine whether users will have access to all the information they need to improve filing compliance and reduce risks. The ideal solution would include: Comprehensive coverage for all lines of business and jurisdictions Supplementary information, including regulator s desk drawer rules Contact information for each jurisdiction Support services, such as supplemental research and contacts with regulators for clarifications Direct access to the content developers for expert assistance Does the solution provider have the experience and expertise to support your goals? Experience and expertise are essential attributes of the ideal solution provider. Ideally, the provider should be a partner that you can rely on for compliance insight as well as accurate and current content resources. Many insurers have failed to realize results because their chosen solution could not deliver on promises made. Be sure to pick a provider that has the experience needed to understand your challenges and the proven expertise to help you achieve desired results. Consider such factors as: Skills and knowledge of the provider. Since your ability to rely on research summaries and analysis is key to achieving desired results, look for a provider that has the knowledge you need on staff, preferably insurance attorneys, former insurance regulators, and experienced industry personnel. Track record of results. It is important to confirm that the solution has been proven in the marketplace. A source for compliance insight. Ideally, you should be able to rely on your solution provider for insight into current regulatory and industry trends and how they may affect your business. Look for providers that are thought leaders on compliance challenges. Will the solution help you stay current in an ever-changing regulatory environment? Current information is critical to maintaining compliance and reducing risks. Evaluate the solution to be sure it keeps you informed of changes: Timely updates. Given the frequency of regulatory changes affecting state filing, it is critical that the solution is always up-to-date. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 11

12 Automatic notification. To ensure that no updates are missed, the ideal solution will automatically notify you when changes occur. Support. Look for a solution provider that offers more than just technical support. For instance, users may need help now and then in understanding a state s application of a requirement. The ideal solution would include content support and access to state filing compliance experts. How will you measure the return on your investment? Quantification of benefits is typically needed to justify the expense of any solution. In evaluating potential solutions it is important to understand their full financial impact. In addition to direct upfront costs, also consider these indirect costs: Resource productivity. The solution should help you realize immediate benefits in resource time savings. Look for solutions that streamline the research process. Ideally, you should be able to compare each solution in a trial phase that allows you to estimate potential productivity gains and quantify results in measurable terms. Speed-to-market. The ability to get products to market quickly is a critical measure of success, affecting competitive advantage, market share, and bottom-line results. Potential solutions should be evaluated closely for their ability to deliver on speed-to-market results. Cost of compliance risks. Compliance risks are considerable in product filing. These risks often lead to substantial direct costs, such as penalties and fines. Indirect costs related to market conduct examinations, brand damage and market risks are often misunderstood and poorly evaluated. A solution provider should be able to help you understand and quantify these risks. Will the solution compliment filings with SERFF? SERFF (System for Electronic Rate and Form Filing) is readily available and accepted by most states. However, there are limitations to its ability to help manage compliance. Consequently, companies are searching for ways to best supplement existing filing preparation and research procedures in order to maximize efficiency and compliance. SERFF facilitates the filing submission process and eliminates the need to make rate/rule and form filings on paper. The SERFF General Instruction information is process-oriented (i.e., instructions for submitting SERFF filings to a jurisdiction) and not product-specific. While some states provide fairly detailed information, most provide limited information (some states provide only a link to their Department of Insurance s website). Although some states mandate the use of SERFF for filing submission, it is only a partial solution. In order to put together a compliant filing, insurers often find they must search not only the general instructions in SERFF, but other sources as well. The ability of a solution to compliment SERFF should be considered. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 12

13 Conclusion Hiring more staff and developing a home-grown information solution are both very costly (and less effective) responses to the compliance, speed-to-market, and profitability challenges of state filing. Relying instead on a state filing solution provider with a proven track record, industry expertise and a solution that meets your needs is the surest approach to quickly developing compliant products and eliminating costly market conduct penalties associated with non-compliant forms and rates and not fully understanding or knowing about requirements. 5 Key Steps to Improving State Filing Compliance and Controlling Costs 13

14 5 Key Steps to Improving State Filing Compliance and Controlling Costs Wolters Kluwer 1 Financial Services