Extends the time within which examination of property/casualty insurers is authorized or required; streamlines financial examinations; repealer

This comprehensive legislation is aimed to ensure that these co-ops continue to have the tools necessary to thrive and provide their unique insurance services to their insureds.

Summary of provisions

Section 1. Amend Insurance Law section 309 (b) to modify the requirement that the Insurance Department shall conduct a financial examination/audit of every domestic property/casualty insurance company every three years or at least once every five years and replace it with a standard whereby such financial examination shall be made at least once in every five years with the Superintendent authorized to extend it to at least once in every eight years.

Section 2. Amend Insurance Law section 310, entitled EXAMINATIONS; HOW CONDUCTED , to streamline the financial examinations process in order for such examination to be more focused on financial matters only and not on extraneous issues.

Section 3. Amend Insurance Law section 6603(a) (5) (E) and (F) to streamline the minimum number of directors required for a co-operative property/casualty insurance company's board of directors from nine to seven. In addition, this proposed amendment to the law would clarify that a majority of the directors must be citizens and residents of both New York and the territory in which the co-operative property/casualty insurance corporation is licensed to do business.

Section 4. Amend Insurance Law section 6611(a)(4)(C) to permit a co-operative property/casualty insurance company's board of directors to authorize a non-officer of the co-op to sign checks.

Section 5. Repeal Insurance Law section 6613, which imposes a limitation on co-operative property/ casualty insurance companies' management expenses of no more than 42.5% of net premiums written for such year.

Section 6. Effective Date.

Justification

Section 1. Insurance Law section 307 already requires annual statements that include audited financial statements. In light of this provision that results in all property/casualty companies undergoing an independent audit every year, it appears redundant and unnecessarily duplicative to retain section 309(b)(1) with its mandate that the Department conduct an audit every three years or, if the Department believes every three years is not needed, at least every five years. Small property/casualty insurance companies find the financial examination process very burdensome with a resulting high cost of the examination. Additionally, the process takes up time and expense for the Department as the agency conducting this examination. This measure would at least alleviate the costs to these small businesses. At the same time, Department oversight of small property/casualty companies' financial situations should not be diminished by this proposal as the Department would still be conducting examinations every five years or eight if they find the five year requirement is not necessary for safeguarding the public or policyholders. Furthermore, the Department still retains ample authority in the law (such as under the rehabilitation/liquidation provisions) to step in and investigate if they see something on the audited annual statements that merits further examination.

Section 2.

Small property/casualty insurance companies in New York State are finding that the financial examinations conducted by the Insurance Department ("Department") are becoming more of an audit process. This proposal contains suggested modifications to the financial examination process to make it more effective and less cumbersome.

The first point to be made with respect to the financial examinations is that they should be focused on financial matters only (such as financial solvency) and not on other matters that are more appropriate for a market conduct examination. Unnecessary requests substantially lengthen the process, costing insurers large sums of money as they must pay for these examinations. An over-arching broad principle for financial examinations should be to keep in mind that the intent behind these exams is to review the reliability of the assets and liabilities reported by the insurance company at the date of examination. For instance, financial examiners have requested and spent substantial time reviewing an insurer's Board minutes, insurance policies purchased by the company, expense classifications (Regulation 30 compliance), employee benefits, privacy compliance, disaster preparedness plans, fraud plan compliance and other non-financial items. These items, it is respectfully submitted, should not be the subjects of inquiry during a financial examination but rather should be looked at in a market conduct exam.

On a related point, Regulation 30(11 New York Code of Rules & Regulations sections 105 109) governs the uniform classification of expenses for rate making purposes and should be updated, streamlined or repealed. Department financial examiners spend a lot of time verifying compliance with regulation 30, a regulation promulgated in 1948 without revisions and accordingly out of state. Statistical organizations such as the Insurance Services Office ("ISO") should determine standards for the uniform classification of expenses which its members should be required to use.

Third, insurers have noticed the financial examination. The purpose behind doing this is unclear since they do not use random sampling in choosing the policies and claims they are going to review and therefore any findings cannot be used in a disciplinary action. Insurance companies report that it has been their experience that the market conduct comments in the financial examiners report are not given much credence. In brief, market conduct reviews should be left to the specialized market conduct examiners. On a small but important note, financial examiners should use the work papers of the insurance company's independent certified public accountant ("CPA") to verify asset balances. Since the CPA obtains confirmation of all bank balances and custodian accounts with the Department's financial examiner repeating this same process, it is unnecessarily redundant for the financial examiner to undergo the same confirmation process as the CPA.

Section 3.

Co-ops are required by current law to always maintain a minimum of nine directors. Given that Chapter 293 of 2009 just modified the minimum number of directors required for noncooperative New York domestic mutual property/casualty insurance companies from thirteen to seven, it only seems fair and equitable to permit the much smaller co-operative companies to have the same number of directors. This reduction in the board size will help co-ops because many small co-ops are having difficulty attracting directors.

This proposal also recommends clarifying that only a majority of co-op directors must be citizens and residents of New York State and also residents in the territory served by the co-op. This is imp011ant because current law appears to require all directors to be residents of the co-op and the reality is as directors' age many are moving to warmer climates on a part time basis while still desiring to serve as directors. Again, the problem of attracting and retaining a sufficient number of qualified, intelligent directors for these small co-ops is exacerbated by the law's residency requirement.

Section 4.

Insurance Law section 6611 (a)(4)(C) stipulates that: "All checks issued shall be signed either by two officers or by one officer upon the written order of another officer, except as otherwise provided by resolution of the corporation's board of directors or in its by-laws for handling of miscellaneous expenses." This law has been problematic for co-ops because they cannot, even with small checks, authorize non-officers to sign checks unless they are for "miscellaneous expenses." Unfortunately, "miscellaneous expenses" has been interpreted very narrowly by the Insurance Department. Therefore, this proposed amendment would help co-ops in their routine operations by alleviating this problem.

Section 5.

This section of law has been in existence since 1909. It appears to arise from a fear that directors of the co-ops who were also agents of the company were the primary, if not the only source, of insurance business produced for the co-op with the concern centering on the possibility of the directors setting excessively high commissions for themselves. This could, of course, lead to the financial impairment of the co-op or unrealistically high premiums for the policyholders. For the following reasons, this is no longer a realistic concern.

First, directors who are also agents are relatively rare on most co-op company boards. Second, and even more importantly, the current very competitive marketplace serves to ensure that commissions are set at a realistic level. Any co-op paying an excessive commission would have to charge policyholders a higher premium and would accordingly not enjoy any success in the marketplace. All successful businesses today, including co-op property/casualty insurance companies, have to carefully monitor their operating expenses.

In addition to the need for this statue no longer existing, the statute presents some real and serious burdens and impediments to co-ops. A major problem with the 42.5% expenses cap is that it severely limits a co-ops ability to upgrade and modernize its technology. This, of course, directly and adversely impacts the co-ops ability to remain competitive in our technology-driven business world. While it is hue that hardware can be capitalized and depreciated over a three year period, software that is purchased has to be expensed in the year in which it is acquired. Since some of these software systems can cost hundreds of thousands of dollars, they can be difficult for co-ops to purchase and install without exceeding the expense cap.

Prior legislative history

This is a new bill.

Fiscal implications

None.

Effective date

This act shall take effect immediately after it shall have become a law.