The Spring 2007 issue of Viewpoint introduced a new way for AAIS to expand the amount and nature of its communication with its members, when it provided an edited transcript of an interview with two staff specialists on insurance of community supported agriculture arrangements.

The interview itself was made available as an audio mp3 file that can be accessed at www.AAISonline.com.

In this installment in the AAISinsight series, Larris Larsen, assistant vice president of compliance, discusses why the pace of issuing state-specific bulletins has increased in recent years, and why compliance is increasingly a strategic concern for companies.

Larris is interviewed by Joseph Harrington,
AAIS director of corporate communications. Readers can hear the full interview from an mp3 file by going to www.AAISonline.com and clicking on the home page icon.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Joe Harrington: AAIS is issuing more and more state-specific compliance bulletins. Why is that? How has the nature of state compliance activity changed?

Larris Larsen: There are a number of reasons for the increased compliance activity at AAIS.

One main reason is a change in AAIS’s handling of compliance issues. In the past the compliance function at AAIS was included within the responsibilities of each separate product development area. Since 2000, compliance at AAIS has been a separate function that addresses compliance issues with a broader enterprise-wide perspective.

That functional change has allowed AAIS to focus its approach to compliance issues, and to identify and respond to regulatory demands more quickly. To help with that, AAIS utilizes third-party advisory services that provide timely information on insurance compliance matters. Now with daily emails on compliance issues, as well as immediate access to newly published changes in laws and regulations, AAIS is providing its affiliates with very fast turn-around on almost all compliance issues that impact AAIS products.

Joe Harrington: To what do you attribute these changes? Have there been changes in state policies?

Larris Larsen: States don’t change their insurance regulatory policies very often, but when they do it can result in added compliance activity.

Changes in insurance department policies frequently arise from court opinions. One example of this is the Fleming case in Oregon that caused a major rewrite of some Oregon policy forms in the 1990s.

More recently, litigation in Michigan is leading that department to enforce changes related to three things: First, the time frame for suit against the company in fire insurance policies, second, a requirement related to notice of loss for liability insurance, and third, the prohibition of discretionary clauses in all policies.

States also modify policies in reaction to catastrophic events.

The aftermath of Hurricane Katrina led the Mississippi Department of Insurance to require companies to change provisions for suit against the insurer and for mortgage and loss payable clauses, as well as introducing a policyholder bill of rights.

Other reactions to catastrophes include recent rate filing requirements in Florida, disclosure notices in Louisiana, and flood notice requirements in North Carolina.

In addition, in Florida, Mississippi, and Louisiana, numerous emergency compliance measures were implemented relating to time for loss payment, limitations on cancellation and/or nonrenewal, required acceptance of late premium payments, and other matters.

Joe Harrington: What impact has automation and/or online access to statutes, regulations, and bulletins had on this process?

Larris Larsen: Automation and online access to laws and regulations are really two parts of the same issue. Both have accelerated the pace of regulatory activity. Information on new compliance requirements, which would have taken months to distribute in the past, is now distributed electronically with the touch of a button.

Also, it has become easier to access regulatory information through online sources which have search functions that were previously unavailable. As a result, it is faster for both the regulator and the regulated to locate new statutes and regulations that apply to specific insurance provisions and practices. Regulators make demands at an accelerated pace; companies are expected to comply at an accelerated pace.

Joe Harrington: Have there been other factors?

Larris Larsen: I believe the “Speed-to-Market” movement of the last few years, promoted by the NAIC and some state insurance departments, was the prime mover for a great deal of this activity.

That movement, along with the introduction of the NAIC’s System for Electronic Rate and Form Filings, better known as SERFF, forced states to investigate and document their product review criteria. More issues were identified and placed on each state’s product review checklists. In some states, procedures were instituted whereby the checklists are regularly updated to address new compliance issues.

As a result, I believe states are looking more aggressively at newly passed laws and newly issued regulations for their impact on insurance forms and rates and are asking companies to comply with these requirements at an accelerated pace.

Joe Harrington: Is compliance becoming a strategic concern?

Larris Larsen: Compliance has been a strategic concern for most companies for some time now. Apart from the risk of substantial monetary fines, companies cannot afford to have compliance problems delay product releases in today’s fast-paced, competitive market.

If compliance issues are not addressed when a new product is being developed, addressing them after the filing has been submitted will slow down the process immensely.

Joe Harrington: Do CEOs need to be more aware of compliance issues?

Larris Larsen: Compliance issues can make or break a company’s public image, and its ability to make sure that future losses are handled as intended. Fines are public information in most states, as are complaint data reported to the insurance departments.

Having a bad score card on either of these issues can create an embarrassing public image for companies trying to grow their business. Also, if you do not make sure your programs are compliant with recent court opinions, you have no defense when a loss similar to the one previously litigated occurs to one of your policyholders.

In addition, in this highly regulated industry, when a CEO’s strategic plan includes the introduction of a new product or service, that plan is disadvantaged without knowing how the new product or service is regulated and whether the proposed version will meet the minimum standards of the company’s operational states.

Joe Harrington: Are compliance officers brought “into the loop” earlier on marketing and underwriting strategy?

Larris Larsen: They certainly should be, if they exist at all. Let me explain.

The cost-cutting efforts of the past decade have taken their toll on compliance departments in many companies. Some property/casualty companies no longer have dedicated professional compliance officers. In many companies the senior compliance person is either an underwriter, a state filer, or a product development analyst.

Also, compliance resources in many companies have been reduced to such minimal levels that they can barely manage routine compliance issues. These duties are frequently delegated to someone who is required to manage compliance issues in addition to his or her regular duties.

I correspond regularly with personnel at AAIS member companies who are struggling with compliance issues. They often do not have the time or experience needed to handle the volume or complexity of the required compliance work.

However, I believe that compliance issues have been gaining in importance recently. I now find myself corresponding directly with company presidents or vice presidents on compliance issues. Unfortunately, many of these situations have arisen from long-term neglect of compliance issues, neglect that persisted until a compliance crisis arose.

A professional compliance person should be part of any new product from the time it is first proposed. There are ways to structure products so they can be approved and get to market more quickly. Is the policy structured so that state-variations can be incorporated more quickly? Do claims-made provisions comply with extended reporting requirements?

Also, an experienced compliance officer can provide feedback at the beginning of the process that might prevent a company from making a potentially unprofitable mistake by offering a product or service that would ultimately be unattractive from an ongoing compliance perspective.

Joe Harrington: How can AAIS help companies manage compliance considerations?

Larris Larsen: AAIS continues to provide compliance information as quickly as possible to our member companies. Also, I am available, by e-mail or telephone, to AAIS customers who have questions related to the compliance information AAIS provides.

AAIS recently introduced a new custom service called AAIScompliance. Insurers can use this service to have electronic SERFF filings submitted on their behalf. This applies to adoptions of AAIS materials or company independent products, whether they are based on AAIS programs or not.

In addition, we offer certain compliance consulting services. These services include reviewing a company’s independent programs for potential compliance problems, and development of materials that will allow companies to continue using an older version of AAIS program while remaining in compliance.