MINUTES OF THE
SENATE COMMITTEE ON COMMERCE AND LABOR
Sixty-seventh Session
April 21, 1993
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:30 a.m., on Wednesday, April 21, 1993, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Sue Lowden, Vice Chairman
Senator Ann O'Connell
Senator Mike McGinness
Senator Raymond C. Shaffer
Senator Leonard V. Nevin
Senator Lori L. Brown
STAFF MEMBERS PRESENT:
Brian Davie, Senior Research Analyst
Sheri Asay, Committee Secretary
OTHERS PRESENT:
Terry Rankin, Commissioner of Insurance, Department of Insurance, State of Nevada
Glenn Shippey, Associate Actuary, Department of Insurance,
State of Nevada
John Wiles, Advocate for Insurance Customers, Department of Insurance, State of Nevada
John Spears, Chairman, Nevada Insurance Coalition
Senator Townsend opened the meeting, and announced that the committee would focus on auto insurance.
Terry Rankin, Commissioner of Insurance, Department of Insurance, State of Nevada, addressed the committee and introduced two members of the State of Nevada Department of Insurance, John Wiles and Glenn Shippey. She turned the meeting over to them for presentations.
Glenn Shippey, Associate Actuary, Department of Insurance, State of Nevada, said he would speak about the auto insurance market in Nevada, and the rate review process used by the Department of Insurance in handling automobile rate filings. He referred to a handout on rate changes by John Wiles (Exhibit C). It listed the top 10 auto insurers of 1991, which make up more than 71 percent of the market.
Mr. Shippey discussed the rate review process. He stated there are three things the insurance commissioner must look for in rates, when reviewing a rate filing. The first is to analyzye the solvency of a company, and see how the rates affect that. The second is to determine if the rates are excessive, and the third is to decide whether or not the rates are discriminatory. Mr. Shippey spoke about the excessive rate issue and explained rate filings. He said a company has to demonstrate that there is a need for a rate increase, using generally accepted actuarial principles. This is determined by the actual loss experience of an insurance company in the state of Nevada, according to Mr. Shippey.
Senator Shaffer asked how the Department of Insurance would verify insurance company losses. Mr. Shippey responded that the filing contains loss experience data. He explained that his department must first decide whether to accept the methodology of the insurance company, and then make sure they are applying it correctly.
Ms. Rankin stated that the rate review process is intimately tied to the solvency review process.
Mr. Shippey spoke about the actuarial review of the filing. He said, "We apply what we call a profitability model to a rate filing for a particular insurance company." Mr. Shippey explained that, reviewing the methodology, the Department of Insurance looks to see if the insurance company has actually made money in the state. He explained how this is determined.
Senator O'Connell wondered what would be considered "reasonably profitable." Mr. Shippey explained, "What we are attempting to do is project the profitability into the future, of when these rates are going to be effective. So we look at their underwriting results...and the investment income they've actually earned on policyholder funds...if they are positive, then we consider that a reasonable profit."
Ms. Rankin discussed the rate rollback of 1989 in Nevada. She said that as a result of appeals, a standard was adopted by the court, which defined profitability and reasonableness. Ms. Rankin pointed out that the law states a company cannot have rates that are inadequate or excessive. She discussed California's standard for a "reasonable rate of return." Ms. Rankin said that Nevada does not have a percentage they use to establish reasonability, and that it varies from one company to another.
Senator Nevin wondered if the total loss used for rate filings referred only to Nevada. He asked, "Can they bring in some of their losses if they're a nationwide company, and meld them into their filings here?"
Ms. Rankin replied:
The statute says that it has to do within this state, okay? So the rate that we're looking at is based on in this state. But in the rate filings, catastrophic losses the company has incurred elsewhere that affects its overall capital and surplus, depending on the type of company, whether it's a reciprocal or mutual, in other words, do the policyholders own the company, or is it a stock company owned by stockholders, that then needs to project a profit in order to be on the market and keep stockholders, keep investors...
Ms. Rankin stated that the rate filing is not a simple process, and explained how it is further complicated by the statutes. She said that "under competitive rating law" you normally do not have rate review and former [prior] approval by a regulator. The competition of the marketplace is allowed to regulate the rates. "The theory being that if the rate is excessive, the insurer will not be able to compete, and therefore must lower their rate."
Senator Brown asked if the fact that Nevada has mandatory insurance, by law, affects the competition that would normally be needed.
Ms. Rankin replied:
The two statutes were enacted separately...the fact that there's mandatory insurance was not considered in 1971 when the competitive rating law was put in. Over time, the legislature has changed the competitive rating law to "prior approval." It's not file and use, it's full out prior approval. Which means that, for a rate to be used, the commissioner must, within the time limit set in the statute...take an active approval or denial of that rate.
Ms. Rankin added, "If you have a good year nationwide...that's considered in the rate filing also." She stated that insurers were unhappy with the fact that the Department of Insurance looks at overall gains or losses in the rate filing. Ms. Rankin asked John Wiles, Advocate for Insurance Customers, Department of Insurance, State of Nevada, if he wanted to comment on that remark.
Mr. Wiles said, "The prior approval law...is subject to interpretation that may need clarification." He discussed a case involving State Farm Insurance.
Mr. Shippey commented on the profitability model. He explained the exceptions that are made for a smaller company, and pointed out that much more is required of the larger companies in the rate filing process.
Senator Nevin asked what the minimum standard in Nevada would be for small companies. Mr. Shippey said, "We require an insurance company that has 2000 insureds to submit a profitability report to us." He explained that there are many small companies in Nevada, and that they often "write to select groups."
Mr. Shippey referred to a publication by the Nevada Association of Insurance Commissioners (NAIC), which outlines their data base (Exhibit D). He pointed out that page 2 of the exhibit notes that Nevada has the 12th highest premiums in the nation. Mr. Shippey stated he wanted to show why that is the case, using other data from Exhibit D. Referring to page 12, he defined a loss ratio.
Ms. Rankin explained what generates the data base in the NAIC report. She pointed out the data is skewed by variations from one state to another in the type of automobiles driven, i.e., Nevada has a higher percentage of pickup trucks. Ms. Rankin said, "The source of this information is the data collection from the data base information the NAIC collects, rather than some independent services with all the states contributing the information in this report."
Mr. Shippey stated that the underlying driver of all the high premiums costs are the liability losses, not the physical damage losses. Page 12 contains the liability loss ratios, how much out of every premium dollar has to be paid for losses. Mr. Shippey explained where the premium dollar is spent, and said that 24 percent goes to expenses, so the $76 left goes to pay losses.
Mr. Shippey referred again to Exhibit D, page 12, and pointed out that Nevada had the fifth highest loss ratio for liability in 1991 and the sixth highest in 1990.
Senator Townsend noted that Nevada was 17th and 26th for 1988 and 1989 and asked what circumstance moved Nevada up. Mr. Shippey said that was due to the rate rollback. Ms. Rankin added, "Because of a court case in the state, those premiums for 2 years...some companies didn't file a rate filing for 3 years or more, we're just now probably current on everyone's rate filings."
Mr. Shippey referred to page 14 of Exhibit D, and pointed out that Nevada is better than average as far as physical damage loss ratios are concerned. He explained that physical damage is damage to the vehicle.
Senator Brown asked if loss ratios includes profits made by the company in their investments. Mr. Shippey said it does not.
Mr. Shippey stressed that losses on the liability side are extremely high compared to the rest of the country. He discussed losses in terms of frequency and severity. Mr. Shippey explained that liability losses are so high because of the number of bodily injury claims that result from auto accidents in Nevada. He said that out of every 100 accidents, 35 result in bodily injury claims.
Mr. Shippey referred to page 3 of Exhibit D. He pointed out that Nevada overall, in total return on net worth, had the eighth worst profitability. Mr. Shippey said the insurance industry in Nevada in 1991 lost money in auto insurance on total return, but that the total return on physical damage was actually better than the nationwide average. Mr. Shippey reiterated that liability was "driving premiums to be high in this state." He defined liability as bodily injury and property damage coverage.
In response to a question by Senator Brown, Ms. Rankin discussed "bad faith" in relation to insurance coverage premiums.
Senator Townsend stated that he wanted the meeting to focus on the question of why insurance rates are so high. He said that this is what the public wants to know.
Mr. Wiles referred to a handout on vehicle registrations (Exhibit E). He said he compared Nevada to three other states in putting this information together, and explained why he selected these states. Mr. Wiles discussed vehicle theft ratios in Nevada, which are higher than the other three states. He also talked about Nevada's average daily hospital room charge, and the number of bodily injury claims, both illustrated in Exhibit E.
Senator Shaffer asked why Utah is lower in bodily injury claims and higher in hospital costs. Mr. Wiles said they have fewer people making claims, but he was unsure of why they have higher hospital costs.
There was discussion on hospital costs in relation to insurance premiums. Ms. Rankin said that auto insurers do not use preferred provider arrangements, and explained that any benefit the insurer gets is simply a reimbursement cost.
Senator Townsend spoke about, "...the inability of auto insurers to drive the medical costs down, because you buy it individually." He said a group health plan is a "substantially better deal."
There was further discussion on the comparison of group health plan costs and auto insurance health costs.
There was general discussion on the accident cases that go to court. Senator Nevin thought insurance companies would rather settle than go to court. Mr. Wiles stated, "Settlement is the process that ultimately results from an accident over 90 percent of the time." He elaborated on the reasons for that.
Senator Nevin asked, "Do you see any solution to our problem... to what would help drive this down?" Mr. Wiles replied, "If you are going to approach the problem, you have to figure out whether you're going to have one or two approaches. Are you going to tinker with the present system, try to make some adjustments, one is the preferred provider system that some states use, or are you going to overhaul the present system and take out chunks of it? In other words, try to remove some of the costs."
Senator Brown asked about granting attorney fees in a formal offer of judgement in a litigated case. Mr. Wiles said he thought it was not mandatory that attorney fees were granted.
Mr. Wiles referred to another handout (Exhibit F), which deals with Nevada traffic accidents. He spoke about out-of-state residents involved in accidents in Nevada.
In response to a question by Senator Nevin, Mr. Wiles replied that teenagers have a higher percentage of vehicle accidents than drivers who are in their thirties. He attributed traffic fatalities to excessive speed and driving under the influence. Mr. Wiles said that teenagers were prone to drive at excessive rates of speed, and referred to a handout involving those statistics (Exhibit G. Original is in Research Library).
There was further discussion on causes of accidents and the ages of drivers involved.
Ms. Rankin announced the rate hearing on United Services Automobile Association (USAA), set for May 24. She said the hearing would be be "a real exercise in a lot of the discussion we've had here on profitability, on accidents, on individual company, attributes in terms of what they're looking at in the type of person they insure...." Ms. Rankin said that USAA is a specialized company who deals with military officers and retirees or their dependents.
Mr. Wiles referred to a no-fault insurance booklet, published by RAND (Exhibit H. Original is in Research Library). He stated the RAND study was the very latest and most intensive study to date on no-fault insurance.
Ms. Rankin discussed a report from Pennsylvania on insurance reforms in that state, which she said were substantial, "closer to a choice no-fault." Ms. Rankin added that Pennsylvania had previously shown 10-20 percent rate increases, which are now down to 4 percent. She said that when Pennsylvania adopted these reforms they had a rollback, which was quite controversial. Ms. Rankin said they were sued by everyone, "from the physicians, to the attorneys, everyone" as a result, but the reform is now in place.
In response to a question by Senator Shaffer about investment income on page 10 (Exhibit G), Ms. Rankin said:
The investments the insurer must have is defined by statute, for safety, and so they don't have all their assets, say in real estate in Dallas. You want them to have a diverse portfolio...in the rate filing we ask them nationwide what they recover on their portfolio, and then if they have any particular ...break out towards the Nevada investment...On the efficiency of the insurer, what we're looking at is what their costs to pay their taxes, fees, all their overhead, their commissions, and then what we call the actual loss costs per claim, allocated costs per claim, or unallocated, meaning what does it cost them to run a claims department, whether or not a claim walks in the door, to keep the lights on....
All of those come in in rate filing...we can look at how efficient that insurer is, if it costs one company 20 cents to do that and another 35 cents...and then Mr. Wiles has the option of looking at what they pay their top officers, does he want to conduct an examination to go in and look at certain, maybe unallocated, costs that are too high.
Mr. Wiles pointed out that the data the insurance department analyzes in the rate approval process is staggering. He said:
Not only does the filing come in, but there is, generally speaking, a supplemental request for more information to clarify the data that's been provided, there is also access to financial statements that are on file with the Department of Insurance. The commissioner has the right to examine the insurance company at her discretion....
Mr. Wiles concluded that the system provides for a very good review.
Senator Shaffer expressed concern about the ability to review all of the companies. Mr. Wiles responded, "...We are limited in resources." He discussed the available staff, and expressed his opinion that the department does "a very good job with the resources that they have." Ms. Rankin elaborated on the staff and method used for the examinations.
In response to a question by Senator Shaffer, Ms. Rankin discussed the penalties and fines provided throughout the insurance code. She said there is "ultimately a criminal penalty if they [the insurers] file false statements with the regulators."
Senator Lowden expressed concern about getting the insurance rates down. She stated her constituents cared more about this issue than about overhauling the State Industrial Insurance System (SIIS).
Senator Townsend responded that the Senate Commerce and Labor Committee would put as much intensity into the rate issue as they did with SIIS. He informed the committee that he has been in touch with Andrew Tobias, author of Auto Insurance Alert!. According to Senator Townsend, Mr. Tobias said he is willing to waive his speaking fee and address the committee on his next trip to California.
John Spears, Chairman, Nevada Insurance Coalition, testified before the committee. He referred to a handout, Where the Premium Dollar Goes (Exhibit I). He thanked Senator Townsend for his input and efforts regarding automobile insurance.
Mr. Spears discussed Exhibit I, and pointed out that liability coverage is the area driving insurance costs up. He noted that collision costs were lower in Nevada than the nationwide average and concluded, "...it's an indication that the competitive market in repairing cars...is working very well in Nevada."
Mr. Spears discussed the expenses itemized in Exhibit I. He noted there is a financial incentive to lower these costs, because the lower your expenses, the lower your rates, hence, more sales of the product. Mr. Spear said that although Nevada lost more money than the nationwide average, the state would gain in other years, depending on the circumstances.
Senator Townsend wondered if the lower rates for collision could be due, in part, to the fact that there are more older cars driven in Nevada, which are less costly to repair. Mr. Spears said that could very well be true.
Mr. Spears referred to page 2 of Exhibit I, and noted that Nevada had approximately the same number of property damage claims per 100 cars as the nationwide average.
Senator Brown related a theory by Andrew Tobias. He thought that when an accident happens in an urban area, there is usually less bodily harm because things are slower, than when it happens in a rural area. Mr. Spears concurred with that theory, and pointed out that there are more claims in an urban area, but they are not as severe.
Mr. Spears commented on the higher insurance rates, which he said were due to judicial and legislative decisions. He noted that, "The United States has 5 percent of the world population, they have 38 percent of the world premium." Mr. Spears talked about the problem of policyholders not being able to make the decisions that affect insurance rates.
Mr. Spears discussed competition, and noted that, in 1986, when insurance companies were asked "where would you like to market your product" companies in only nine states indicated they would rather do business in a state other than Nevada. He noted that in 1991 the number had risen to 26. He thought that was because of the lack of freedom to manage the market and the ability to price the product.
Mr. Spears discussed the American tort system, and the impact it has on auto insurance rates.
In response to a question by Senator Nevin about "stacking," Mr. Spears responded, "Anytime you are going to expand coverage...it's going to take more money to go in to cover that."
Senator Nevin talked about mandatory insurance, and the problem the insured have with uninsured motorists. Mr. Spears said, "...The bottom line is, if you want to pass mandatory law, which we're not in favor of, we don't think the government should ever tell someone, 'you have to buy a product,' that helps the insurance company to sell it, we don't think that's fair for any product." He noted mandatory insurance has not worked when it comes to enforcing it, and suggested instead, "let's not let uninsured motorists sue."
Senator Nevin stated he proposed a bill last session that did away with mandatory insurance. Although it did not pass, he said it "might be coming around again, may be some of you want to look at it again."
Senator Brown asked if insurance companies have tried to lower their attorney fees by not hiring an attorney unless the injured party has hired one. Mr. Spears responded, "We (State Farm) don't hire an attorney unless...a coverage question, we think there will be some type of a suit down the road, to determine if there is coverage or if there is not coverage." He spoke about alternate dispute resolution, attorney settlement days, and claim litigation counsel, all of which are used by State Farm. Mr. Spears explained, "We usually don't hire an attorney to defend our policyholder, unless there's another attorney."
Senator Nevin discussed alcohol related accidents.
Senator Townsend promised to notify the testifiers when Andrew Tobias would be there to address the committee.
There being no further business, the meeting was adjourned at 10:30 a.m.
RESPECTFULLY SUBMITTED:
Sheri Asay,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE:
??
Senate Committee on Commerce and Labor
April 21, 1993
Page 1