1. Emerging Issues and Regulatory Updates Pamic.org Market Regulation Seminar May 17, 2016 Harrisburg, PA

2. Emerging Issues and Regulatory Updates Pamic.org Setting the Stage PID Notices Affecting the P & C Industry Hot Issues Premium Tax Sales Tax Solvency Monitoring/Financial Exams Peak at new legislation: 2014 – present Grassroots Program The “PAC Pitch”

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9. Emerging Issues and Regulatory Updates Pamic.org Arson & Fraud Reporting This notice is issued to advise and remind insurers of their obligations under Commonwealth law in the reporting of suspected arson and insurance fraud, as well as to advise licensees that they are permitted to file reports of suspected arson or insurance fraud electronically with the National Insurance Crime Bureau. Arson and insurance fraud are recognized in this Commonwealth as serious crimes. Commonwealth law explicitly requires insurer reporting of suspected arson (section 3(b)(1) of the Arson Reporting Immunity Act (40 P.S. § 1610.3(b)(1))) and suspected insurance fraud (75 Pa.C.S. § 1817 and 18 Pa.C.S. § 4117 (relating to reporting of insurance fraud; and insurance fraud)) to a law enforcement agency for consideration of criminal investigation and prosecution. Commonwealth law provides immunity to encourage and protect persons in that reporting. Accordingly, the Insurance Department (Department) releases the following guidance to insurers seeking to meet their statutory obligation for reporting of suspected arson and insurance fraud: 1. Each insurer has the burden of determining through investigation when the probable cause of a fire loss is arson or when a reasonable basis exists to believe that insurance fraud has occurred, is occurring or is to occur. 2. Upon reaching a determination, insurers will, within 30 days, make a written report of the suspected arson or insurance fraud to a Federal, State or local criminal law enforcement agency. Intead of making a written report, insurers are authorized to file reports electronically directly to the National Insurance Crime Bureau to satisfy their obligations under the law. 3. An insurer's entry of the suspected arson or suspected insurance fraud matter to a claims database or other information system serving the insurance industry will not in and of itself be viewed by the Department as satisfying that insurer's statutory obligation to report suspected arson or insurance fraud to a criminal law enforcement agency. 4. Examination of insurer fraud control programs will include a review of insurer determination of suspected arson and insurance fraud, and a confirmation of the insurer's written reporting to a criminal law enforcement agency. Questions regarding this notice may be addressed to the Chief, Anti-fraud Compliance Division, Bureau of Enforcement, Insurance Department, 12th Floor, Straw- berry Square, Harrisburg, PA 17120, ra-in-fraud@state.pa.us. This notice supersedes the notice published at 37 Pa.B. 6364 (December 1, 2007).ra-in-fraud@state.pa.us

10. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Manmade Earthquakes Recently, some insurers have asserted that because of an increase in natural gas extraction in Pennsylvania via a process commonly referred to as “fracking,” endorsements should exclude coverage on homeowners policies for earthquakes that are not “naturally occurring.” Determining with certainty that human activity caused an earthquake is very difficult, and insurance claims by homeowners should not go unpaid during a long and arduous investigative process that will likely uncover no definitive proof linking the earthquake to human activity. Insurers and rating organizations are therefore instructed that earthquake endorsements that attach to homeowners insurance policies in Pennsylvania should cover all earthquakes, whether believed to be “naturally occurring” or caused by “human activity.” Insurers with earthquake endorsements already in the marketplace which exclude coverage for earthquakes that are not naturally occurring should not enforce these exclusions, and new endorsements without the exclusionary language should be filed with the Insurance Department no later than July 1, 2015. Questions regarding this notice may be directed to Mark Lersch, Property and Casualty Bureau Director at (717) 783-2103 or via email at mlersch@pa.gov

11. Emerging Issues and Regulatory Updates Pamic.org Price Optimization Recently, the question of whether price optimization techniques may be used by insurance companies has been raised to the Insurance Department (Department). The answer is no and the Department issues this notice to remind insurers about the Department's longstanding prohibition against the use of price optimization techniques in property and casualty insurance rates. It is well-settled that property and casualty insurance rates cannot be excessive, inadequate or unfairly discriminatory. These prohibitions can be found in all of the Commonwealth's property and casualty rate regulatory acts and the Unfair Insurance Practices Act (act) (40 P. S. §§ 1171.1—1171.15). See section 505-A(c)(2)(i) of the Property and Casualty Filing Reform Act (40 P. S. § 710-5(c)(2)(i)), section 5(a)(7)(ii) of the act (40 P. S. § 1171.5(a)(7)(ii)), section 3(d) of The Casualty and Surety Rate Regulatory Act (40 P. S. § 1183(d)) and section 3(a)(2) of The Fire, Marine and Inland Marine Rate Regulatory Act (40 P. S. § 1223(a)(2)). With the advent of sophisticated pricing tools, including computer software and rating models referred to as price optimization, insurers, rating organizations and advisory organizations are reminded that policyholders and applicants with identical risk classification profiles—that is, risks of the same class and essentially the same hazard—must be charged the same premium. Rates that fail to reflect differences in expected losses and expenses with reasonable accuracy are unfairly discriminatory under Commonwealth law and will not be approved by the Department. See 40 P. S. § 1183(d). The Department's Property and Casualty Bureau reviews thousands of rate filings each year to ensure compliance with these standards, and the actuaries that review these filings often identify and object to filings that fail to meet these statutory requirements. Questions regarding this notice may be directed to Mark Lersch, Bureau Director, Property and Casualty, Administration, (717) 783-2103, mlersch@pa.gov.

12. Emerging Issues and Regulatory Updates Pamic.org Widows Penalty Automobile insurance companies are allowed to charge different prices to different groups if they have data showing that one group is higher risk than the other. For example, you probably know that inexperienced teenage drivers pay more than more experienced adults, and drivers with multiple accidents on their records pay more than those who have none. These cost differences exist because there is statistical evidence showing a difference in risk between the two groups. Some insurance companies have been able to show through statistical evidence that single drivers are more risky (or incur higher claims costs on average) than married drivers and therefore charge single drivers more. Some of the companies that use this rating factor have included widows and widowers in the single group, resulting in premium increases following the loss of a spouse. Commissioner Miller recognizes that someone becoming a single driver due to the loss of a spouse is a different circumstance than when someone is a young, single driver who has never been married. Raising auto insurance premiums in this situation is what the commissioner and many other people find unfair. Therefore, we have established a policy calling for a review of insurance company rate filings that propose to charge a widow or widower a higher rate solely based on the change in marital status. If the insurance company cannot provide statistical support for including widows and widowers in the higher single rate, we will not approve the rate change and will require the insurer to continue to use the lower rate. There are two more things consumers should know. First, while we will not allow unjustified rate increases for widows and widowers going forward, you may have a policy that was previously approved using this type of rating. Only some insurance companies have used this type of rating factor, so if you experience a premium increase due to the loss of a spouse, Commissioner Miller encourages you to take advantage of Pennsylvania’s competitive auto insurance market and shop for other options. A cheaper plan may be available to you. Second, rating differences due to marital status are not the only reason auto premiums can change following the loss of a spouse. When a couple is on a policy, their driving records are considered together when determining the premium. If one spouse dies, the premium will change to reflect the risk of the driver remaining on the policy. If that driver has a better driving record than their spouse the premium may go down, but the premium could go up if that driver has a worse driving record with more accident claims filed in the past. Additionally, many companies offer discounts for families combining multiple types of policies, such as a life and auto policy. If one of those policies goes away, like a life policy paid out after the loss of a spouse, that discount may go away as well. If you have questions about why your auto premium is changing, call your insurance company. If you have questions about whether your insurance company is complying with Pennsylvania law and regulation, please contact the Insurance Department at 1-877-881-6388. If you have questions about auto insurance or any other type of coverage, click on “Consumers” or call 1-877-881-6388. We are here to help you.

13. Emerging Issues and Regulatory Updates Pamic.org Governor's FY 2016/2017 Budget reuests a 25% increase in the premium tax from 2% to 2.5% Background The State Fire Commissioner, a former Senator, Tim Solobay, brought the proposal to the Governor’s attention as a way to provide additional funding to Volunteer Fire Departments in December 2015. Premium taxes operate in a “retaliatory” manner on Pennsylvania domestics operating in other States raising additional tax revenue outside of Pennsylvania Erie Insurance Group publicly states an increase in the premium tax would cost Erie policyholders an additional $10.8 million to Pennsylvania and $14.5 million to other States. Solution: Oppose any increase in the Premium tax

14. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Governor’s proposed FY 2016/2017 Budget expands the sales tax base making many items and services taxable. Solution Oppose any increase in the sales tax base. Educate legislators on the impact to policyholders and administrative costs. $

15. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org To work with the PA Insurance Department (PID) to ensure adequate resources are available for solvency monitoring to protect consumers and avert Guarantee Fund assessments. At the same time, we want to guarantee that Pennsylvania's Mutual industry stays competitive and thrives.

16. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Factors Affecting current and prospective Exam Costs Greater Federal scrutiny on financial firms (Sarbanes-Oxley early 1990’s, Dodd-Frank 2010) Greater International intrusion (Solvency I, Solvency II) and FIO Regulators adopting “Enterprise Risk Management” exam protocols following Dodd-Frank Corporate Disclosure Annual Statement (PID drafting legislation)

17. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Historical Look at PID Financials PID Budget dropped from high watermark of $27 million in 2007 to a low of $18 million (2010 through 2014) PID Complement dropped from 320 regulatory staff in 2007 to 222 (2011 through present) Combination forced PID to out- source exams PID recognized challenges with recruiting, retaining, and compensation of PID examiners

18. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Sample Exam Cost PAMIC Survey shows range in increase from 11% to 235% Some companies report exams cost doubling each exam

19. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org 40 bills actively being monitored Committees Being monitored: House Insurance House Appropriations House Transportation House Labor and Industry House Judiciary Senate Banking and Insurance Senate Appropriations Senate Transportation Senate Labor and Industry

20. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org Asbestos Trust Fund Transparency Corporate Governance Annual Disclosure Statement Increase in Auto Minimum Limits Statute of limitations on filing law suits Workers’ Compensation Medical Guidelines Emergency/VFD Reimbursements Self Storage Insurance Service Contracts Flood Insurance Budget (Premium Tax, Sales Tax, Increased Fees) Internal Audit & Audit Committee Regulation

21. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org IROF & Financial Exams Corporate Governance Annual Disclosure Statement Annual Financial Audit Requirements – Internal Audit & Audit Committee PID Personnel Changes Amy Daubert, Chief Counsel Joe DiMemmo, Deputy Commissioner, Corporate & Financial Regulation Missy Greiner, Director, Bureau of Exams Chressinda Bybee, Chief, Company Licensing

22. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org HB 1638 (now Act 13 of 2016): Amends the Motor Vehicle Physical Damage Appraiser Act further providing for compliance with act by adding that an appraiser may prepare a repair estimate obtained by personal inspection or by photographs, videos or telephonic means. An appraiser may not require the owner of a vehicle to submit photographs or videos in order to obtain an appraisal. The appraiser shall furnish a legible copy of his appraisal with the repair shop selected by the consumer to make the repairs and also furnish a copy to the owner of the vehicle. Further provides supplemental repair estimates that become necessary after the repair work is initiated due to discovery of additional damage to the motor vehicle may be made by personal inspection or by photographs, videos or telephonic means, providing that in the case of disputed repairs a personal inspection shall be required.

23. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org SB 494: Now Act 3, 2016: Amends the Flood Insurance Education and Information Act by repealing the required report under the Act. HB 1481: Now Act 78 of 2013: Amends the Insurance Company Law adding an article providing for risk management and own risk solvency assessment to require an insurer or insurance group to maintain a risk management framework and complete an own risk and solvency assessment (ORSA), set forth the requirements for filing an ORSA summary report with the Insurance Department, and provide for the confidential treatment of the ORSA, the ORSA summary report and other ORSA- related information. The legislation allows for a one-year compliance timeframe if certain ORSA standards are required. The bill provides for online filing as laid out in the legislation.

24. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org HB 1846, Now Act 184 of 2014, Amends the Workers Compensation Act further providing for schedule of compensation by adding that the reimbursement for drugs and professional pharmaceutical services shall be limited to 110 percent of the average wholesale price (AWP) of the product, calculated on a per unit basis, as of the date of dispensing. A physician seeking reimbursement for drugs dispensed by a physician shall include the original manufacturer's National Drug Code (NDC) number. In no event may a physician seek reimbursement in excess of 110 percent of the AWP of the drugs dispensed by a physician as determined by reference to the original manufacturer's NDC number. A repackaged NDC number may not be used and will not be considered the original manufacturer's NDC number. If a physician seeking reimbursement for drugs dispensed by a physician does not include the original manufacturer's NDC number, reimbursement shall be limited to 110 percent of the AWP of the least expensive clinically equivalent drug, calculated on a per unit basis. Provides no outpatient provider, other than a state-licensed pharmacy, may seek reimbursement for certain dispensed drugs as provided in the legislation. Further provides no outpatient provider, other than a state-licensed pharmacy, may seek reimbursement for an over-the-counter drug. Also requires the Workers' Compensation Advisory Council to annually conduct a study of the impact of this new subclause including calculation of the savings achieved in the dispensing of pharmaceuticals. Within 18 months, the Pennsylvania Compensation Rating Bureau shall calculate the savings achieved through the implementation of the changes. For calendar year 2016, the amount of the savings shall be used to provide an immediate reduction in rates, equal to the savings, applicable to employers' workers compensation policies.

25. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org SB 914, now Act 46 of 2013, The Insurance Regulation and Oversight Fund Act creates the Insurance Regulation and Oversight Fund as a dedicated funding structure for the Insurance Department. The fund will consist of fifty percent of all fees, reimbursements, funds, money, and other revenues collected, received, or derived by the Insurance Department, as well as 100 percent of all penalties, fines assessments, augmentations, or settlements received by the Insurance Department from persons and entities under the supervision of the Insurance Department.

26. Emerging Issues and Regulatory Updates www.pamicwww.pamic.org SB 1356, now Act 182 of 2014, Amends the Unfair Insurance Practices Act defining "affiliated insurer" and adding affiliated insurers under the definition of "renewal" or "to renew." SB 1357, now Act 183 of 2014, Amends the Insurance Company Law defining "affiliated insurer" and adding affiliated insurers under the definition of "renewal" or "to renew."