The Latest in California Market Conduct Frequent Exam Findings and Emerging Issues

Market Regulation in California: An Overview of our Structure Market Conduct Division (Pam O’Connell, Chief) Field Claims Bureau (Towanda David, Chief) Field Rating and Underwriting Bureau (Andrea Toth, Chief) Market Analysis Unit Pam’s Executive Assistant and Email Answerer(I wish!)

Overview of our Process A combination of analysis, exams, and other regulatory contact with insurers Planning exam schedule and determining exam scope, and best type of exam When would we make that “other regulatory contact”?

Exams and Other Contact: What’s on our Radar? Pam’s Market Reg Radar Screen Emerging Trends Common Underlying Causes Frequent Exam Findings

Emerging Trends Increased use of models for pricing and eligibility decisions Use of predictive models to determine how much underwriting of risk to do. Increased outsourcing of various parts of an insurer’s process to third party vendors Cost of Insurance increases on universal life insurance policies

Common Exam Findings: Personal Auto Insurance Claim-Handling Total Loss Settlements – Failure to properly handle sales tax, and one time and annual DMV fees; failing to secure a guaranteed bid for salvage; unreasonable process for identifying comparable vehicles [CCR §§2695.8(b)(1), (b)(4), (b)(1)(A); 2695.7(g)] Child Restraints – Failing to ask if seat was in car or in use at time of accident. (CIC § 11580.011(e)] Rescission of policy - may violate CIC §§ 790.03(h) and (h)(5).

Personal Auto Insurance Rating, Underwriting, Marketing, Sales Multiple PPA Programs – Not making clear the differences in coverage and rate/premium and allowing insured’s choice of program [CIC §§ 1861.02, 1861.05(a); CCR §§ 2632.14, 2360.3 and 2630.4] Discontinuing one or more PPA programs – Without taking proper regulatory steps [ CIC §§ 1861.02, 1861.05(a), 672, etc.) Electronic transmission – improper opt-in process [CIC § 38.6]

Residential Property Depreciation – not taking into account condition of the item being depreciated, applying to items not normally subject to repair or replacement during useful life, incomplete file notes to justify, not explained fully to claimant [CIC §§ 2051 and 2051.5; CCR § 2695.9(f)] Eligibility Rules – Decisions based on number of losses alone rather than insured’s loss exposure, use of models or scores that cannot be “broken apart”

Commercial Lines – Auto and CMP Stated Value Auto Policies - failure to pay taxes and DMV one-time and annual fees; improperly retaining salvage proceeds [ CCR §§ 2695.8(b) and 2695.7(g)] Rating Documentation – schedule mods/IRPM applied, judgment or range rates selected without adequate documentation. Using schedule rating plan to offset filed and approved rate decrease or increase [CIC §§ 1861.05(a), 1861.01(c), 1857]

Workers’ Compensation Rating Issues – adopting components to rating structure that have not been filed; using schedule rating plan to offset increase or decrease to filed rate level or change in experience mod [CIC §§ 11732.5 and 11735] Claim handling issues – Failure to pay self-imposed penalty and interest on late pays; failure to pay interest on delayed TTD payments; required benefit notices not sent or not sent timely.

Life and Annuities Electronic Transmission – improper opt-in process [CIC § 38.6] Suitability documentation for annuity sales – should be retained by company or agent, and be readily produced for exams (CIC §§ 10509.910 et seq.] CIC §§ 789.8 and 789.10 disclosures – insurer lacks procedures or controls to ensure agents provide these required notices. Payment of proceeds – late payment, failure to include interest or at proper rate, failure to provide written statement regarding interest applied [CIC § 10172.5].

Long-Term Care Failure to provide clear explanation of benefits when payments are made – confusing format, not clearly identifying dates of service, lacking specific reasons when billed amounts are not fully paid [CCR §§ 2695.11(b) and 2695.7(b)] Failure to disclose all applicable benefits – such as for Durable Medical Equipment [CCR § 2695.4(a)] Processes that do not provide adequate and reasonable assistance for the circumstances [CCR § 2695.5(e)]

Disability Income Coverage rescissions – are decisions to rescind fair, and based on appropriate grounds? [CIC § 790.03(h)(5)] Late payment of benefits – benefits not paid timely; interest not included when applicable. [CIC §§ 10111.2(a) and 10111.2(b)] Investigation of claim – failing to adequately investigate job duties and capacity to perform those duties [CCR § 2695.7(d)]

Common Underlying Causes: Tips for Being Proactive Systems issues – Involve business and compliance people in setting requirements for automation projects. Test, re-test, and test again before going to production! Oversee your GAs, TPAs and other vendors – Just contractually obligating them to comply with CA laws isn’t enough. Internal QC Procedures – build programs that focus on the right things; improving on existing systems can help resolve exam issues.

Questions?