1. Insurance Department Update
Financial Management Seminar
September 7, 2017
Joseph DiMemmo, CPA, Deputy Insurance Commissioner, PA Department of Insurance

2. Hot Topics Commissioner and Chief of Staff Health Insurance Life P&C
Protz Decision
LTC
Cybersecurity
CGAD
PBR
Exam Discussions

3. Life and Health Highlights
.Life Insurance Industry remains healthy .Health Insurance Industry is rebounding

5. Health Insurance

6. Health Insurance

7. Key 2016 P&C Highlights
Underwriting loss driven by a variety of factors
- Higher Cat losses but no large-scale loss event
- Auto liability continues to be poor
- Reserve releases have slowed – strengthening in some lines
Net Profit was slightly above 10 year average
Robust growth in Policyholders’ surplus
- Abundant capacity
- Soft market continues

8. 2016 P&C Industry Results

10. Auto 2016 Highlights
U/W Losses in Personal Coverage in Each of the Last Ten Years and Each of Last Six Years in Commercial
2016 Was Most Unprofitable Year for Both Personal and Commercial Markets. Average 7% increase in rates for personal auto. Largest increase since Commercial rates increased an average of 3.4%.
Unfavorable Trend Attributed to Rising Loss Frequency, Claims Severity and to a lesser extent weather related losses. Uptick is largely related to more miles driven, increased distracted drivers and higher maintenance and repair costs.
Modest Rate Increases Have Done Little to Slow Unfavorable Trend in Both Lines

12. Pa. Workers Compensation Protz Decision
Case Overview: This case involves Section 306 (a.2) of the Workers’ Compensation Act that allows employers to demand that a claimant undergo an Impairment Rating Evaluation (IRE) during which a physician selected by Labor & Industry must determine the “degree of impairment” that is due to the claimant’s injury. In order to make this assessment, the Act requires physicians to apply the methodology set forth in “the most recent edition” of the AMA Guides to the Evaluation of Permanent Impairment. This most normally occurs within the first two years of the injury and if the physician assigns an impairment “rating” of less than 50%, the insurer may change the claimant’s disability status from total to partial. Although there can be no reduction in the rate of the benefit paid, the length of time the insurer must pay indemnity and medical benefits is now limited to 500 weeks, thus capping the length of the exposure/liability.
In the Protz case, the claimant was deemed to have a 10% impairment ruling and her disability status changed. She appealed the ruling through the WC appeals level and the Commonwealth Court and then ultimately to the PA Supreme Court on the basis that the portion of the Act which required the use of the “most recent edition” of the AMA Guides was an unconstitutional delegation of legislative authority. Basically, through the wording of the Act, the legislature had delegated “legislative power” to a private entity instead of retaining it in the General Assembly.
The Court ruling of 6/20/17 held that 306 (a.2) is an unconstitutional delegation of legislative authority; the entirety of Section 306 (a.2) is unconstitutional; and the “most recent edition” language violates the constitutional requirement that all legislative power “be vested in a General Assembly”.

13. Protz Decision
Current Status/Issues: This decision has voided the entire impairment rating system which was a valuable cost containment tool for insurers in the WC arena. Unfortunately, the Court did not specify how the new rule should be applied with the larger question involving retroactivity. Should benefits that were previously capped at the 500 week period now be resumed? Should claims that were settled via a Compromise and Release on the premise that benefits were capped and the compromise allowed a lump sum to be invested to continue future payments now be set aside as the premise upon which they were based has now been voided?
Labor & Industry is struggling with these issues. The BWC has suspended all activities related to IRE’s. An influx of Petitions for Review/Reinstatement is expected at the WC judge level and their Help line is experiencing an increase in calls. BWC and the PCRB are currently trying to gather data on how many claims fall in the category that could possibly qualify for reopening/reinstatement of benefits. It is known that several law firms are running ads in large markets advising potential “clients” of the change in the law. The BWC is currently trying to assess the fallout of the matter and is currently gathering data and contemplating judicial and/or legislative changes.

14. Protz Decision
Future Issues/Possible Market Implications: There are concerns as to how this decision will affect the overall insurance marketplace in the Commonwealth. There are only a handful of tools that can be utilized by an insurer to either reduce the rate of compensation benefits or remove an individual from the compensation rolls entirely. This decision eliminates one of the most relied upon tools to control costs on a long term claim. By way of this decision, the insurer must now potentially reserve a long term case to the life expectancy of the claimant instead of 500 weeks.
There were concerns expressed by the group that some insurers may discontinue writing WC lines of business.
It may prompt increased requests by WC insurers for premium increases to offset the anticipated reserve increase amounts. Financial sheet reserve and liability amounts will increase as a result of the additional reserves that are most likely going to be placed on these category of files.

15. Long Term Care Insurance
Penn Treaty and American Network were ordered liquidated
March 1, Estimated deficit between $3-4 B. Has created
Guaranty Fund issues related to policyholder benefit payments.
LTC is still struggling throughout the country. Many writers have withdrawn from the market.
Major focus for NAIC committees. 7 different committees have different charges on LTC issues. Benefit adjustment, Short term LTC, LTC innovation, Actuarial, Pricing, Valuation and Receivership. One new task force was formed the B/E Task Force to coordinate the efforts of the committees.

16. Long Term Care Insurance
Year Premium Claims Margin Lives
$ 9, $ 4, $ 5,
$ 9, $ 4, $ 4,
$ 9, $ 5, $ 4,
$ 10,445 $ 6, $ 3,
$ 10,673 $ 6, $ 3,
$ 11,260 $ 7, $ 3,
$ 11,542 $ 7, $ 3,
$ 11,527 $ 9, $ 1,
$ 11,685 $ 9, $ 1,
$ 11,686 $ 11, $

17. Cybersecurity Model Act
The NAIC Cybersecurity Working Group recently released its sixth and final draft of the Insurance Data Security Model Law, which addresses three core areas of concern with regards to cybersecurity. They include:
-The prevention of breaches by establishing minimum security
requirements
-The investigation of data breaches and notice to consumers.
- Consumer protection following a data breach.
The model was approved by the working group and will likely be presented to Executive Committee for approval at the winter national meeting. It is on the NAIC website and is significantly different from where it started.

18. Cybersecurity Model Act
Looks a lot like New York Regulation 500
Company must perform a risk assessment
Company must adopt a written cybersecurity program or policy
Company must appoint a person responsible for program
Company must develop an incident response plan and mandate notice to the domiciliary commissioner with 72 hours of a breach.
Cybersecurity program is commensurate with size and complexity of licensee. Exemption for 10 or less employees or HIPPA.
Company exercise due diligence in selecting 3rd party providers.

19. Corporate Governance Annual Disclosure
We have drafted a bill and provided it to stakeholders.
Comments received are single state exemptions, limit charges to the company for PID review or use of IROF. Continuing discussions.
Anticipated January 1, 2020 accreditation standard.
Assuming the model is enacted it will need to be accompanied by the CGAD model regulation.
I recommend you take the PAMIC course scheduled for tomorrow.

20. Financial Exam Costs
Department appreciates the concerns about financial exam costs and the impact those costs have on insurers of all sizes.
This is an issue that preceded me and one I am quite sure will continue once I am gone. It’s hard for insurance companies to see the value of these exams. It’s essentially a cost of doing business for them and one that continues to increase. I understand the frustration. This is also an issue that all states face, and one that we will continue to work on.
The Department has been discussing a budget and reporting process that may provide some relief. The relief not necessarily in the bottom line but in understanding the process, having an estimate of costs and expected duration. The Department’s recommended vehicle is a Statement of Policy.

21. Statement of Policy Scheduling Conferences Budgets
Internal/External personnel and travel
Information requests
Bi-weekly Updates
Conferences when significant Changes to Initial Budget occur
Annual Reporting of IROF