If you were inventing the U.S.
property/casualty industry today, would you include statistical
reporting as we know it?
The question is timely, as there is a
possibility the industry may be essentially reinvented.
Congress is considering whether to revisit the
1945 McCarran-Ferguson Act, which delegated insurance regulation
to the states. The law also codified a limited antitrust exemption
allowing insurers to share premium and loss data, thus creating
the foundation for the statistical reporting process as it exists
today.
Among other things, Congress is considering
whether to restrict the ability of states to regulate rates. To
forestall a federal role in insurance regulation, many states are
acting to relax rate regulation on their own.
Yet, in the debates over regulatory
restructuring, the question of how statistical data will be
gathered and reported has been subordinated to concerns over
market access and stability. For example, there has been little
discussion to date if and how carriers would report data if they
become eligible for federal charters.
Technically speaking, “statistical reporting
requirements fall under rating laws,” notes Stuart Yakes, vice
president of the Independent Statistical Service (ISS), an
affiliate of the Property Casualty Insurers Association of America
(PCI).
Theoretically, then, “if the states go down
the path of relaxing rate regulation, there might not be statutory
reporting requirements,” he adds. “If there’s no law
requiring statistical reporting, then it may go away,” at least
among large carriers.
If states reduce rate filing requirements,
small companies may find it more difficult to get information from
insurance departments on competitors’ pricing.
Statistical plans were developed to
standardize the collection of premium and loss data so that
companies of all sizes could have access to credible data for
ratemaking.
AAIS is one of four national property/casualty
statistical agents that maintain statistical plans for collecting
data from insurers for reporting to regulators. It is one of only
two “stat agents” to collect “unit transaction” data--that
is, a separate record for each policy, premium, and claim--used to
support the development of advisory loss costs.
Few insurers can operate without the data
collection carried out by advisory organizations.
“Insurers like to obtain advisory loss costs
and rules for adequate pricing because of the low credibility of
their own data,” says Arun Ahluwalia, assistant vice president
of statistical and data reporting for insurance company operations
at American Re-Insurance, Princeton, N.J.
“On occasion, even the biggest companies use
advisory data provided through statistical reporting to enter new
lines and states,” says Kimberley Ward, AAIS chief actuary.
It’s no secret, however, that many companies
view statistical reporting as a difficult task, and some observers
ask if statistical plans are still relevant.
“Stat plans were more important when it was
so difficult to get data,” says Jeff Kucera, a consultant with
Pinnacle Actuarial Consultants, Mundelein, Ill. “Companies
needed to have a plan in place in order to report information
every year.”
“My concern with statistical reporting is
whether it is really up to date. Are stat reports still what they
were 15 years ago? How much of that data is really being used?
“I think it’s extremely important for
companies to have data of their own,” he adds. “But to
translate and report it in another format? Does it really serve
some purpose?”
Ward responds that uniform data reporting
through statistical plans is essential for establishing credible
loss costs. She says it would be much more costly and
time-consuming for advisory organizations to reconcile data
delivered through a variety of proprietary methods.
“If using a statistical plan forces the data
to come into us more cleanly, the loss costs will be updated more
quickly,” she says.
Even if companies question the value of
statistical reporting, they should understand that regulators are
placing increased emphasis on it, at least for the foreseeable
future.
“Regulators are paying greater attention to
the data that statistical agents collect and compile,” says
Diana Lee, assistant vice president of research at the PCI. “They
expect a greater level of commitment from companies and
statistical agents to ensure high-quality data.”
“There will be an emphasis on better quality
data and more uniform reporting,” says Natalai Hughes,
statistical information manager in the research division of the
National Association of Insurance Commissioners (NAIC).
One indication of the emphasis regulators
place on statistical reporting is the new scrutiny given to
companies that are not contributing data. Statistical agents are
required to report which companies have failed to submit data or
had their data excluded from a report because of poor quality.
“Recently insurance departments have paid
more attention to these reports,” says Larry Thill, AAIS manager
of statistical services. “Large writers are always subject to
more scrutiny than the smaller ones, but the benchmark premium
writings [for scrutiny] seem to be getting lower.”
Another indication of the regulatory demand
for data is the growing number of special data calls by
regulators.
“I have seen more and more special data
calls by insurance departments with each passing year,” says
Thill. “Most companies aren’t even aware of these data calls
because AAIS automatically responds to them at no additional cost
to the companies, as long as the level of detail within the call
can be supplied through existing data fields.”
“Regulators are increasingly asking for
finer detail of insurer data through special data calls,” adds
Ahluwalia of American Re. “[The demands go] well beyond the data
previously required by statistical agents.”
In light of that, Ward at AAIS cautions
against expecting that statistical plans can anticipate every type
of data call.
She emphasizes that there is a critical
distinction between data collected to support ratemaking
activities and data used to assess underwriting practices and
market activities.
“Statistical plans are not going to capture,
say, how a company uses credit information, because companies will
be reluctant to share information they consider to be of
competitive importance,” she says. “If required to do so,
companies would report such data on their own.”
“Regulators are looking for data to test
markets, not build rating databases,” she says. Also, any data
item must be in wide use to justify providing apace and
instruction in a statistical plan.
The prospect that a shift toward less
regulation might require more data reporting was recognized when
the NAIC embraced competitive rating a decade or so ago, according
to Therese Vaughan, former Iowa insurance commissioner and NAIC
president, now a professor of insurance at Drake University.
“Commissioners concluded that the role of a
regulator would shift from prior approval to more market
monitoring,” she says. “There was discussion that regulators
needed better information, which might suggest more statistical
reporting.”
Also, as in the private sector, technology
allows regulators to do more with less, and that may help explain
the growing demand for data.
“Statistical reports used to be so large and
so bulky that it was difficult for regulators to do analysis,”
says Hughes at the NAIC. “The advent of technology has made
reports easier and faster to come by.”
“Thanks to technology, it’s easier to
store and extract data” than it used to be, says Matt Stull,
director of technology for Insurity, Hartford, Conn., and a
provider of business process automation services. “It’s easy
to imagine that, if data reporting makes it easier to coordinate
markets, states are going to require more of it.”
Does it follow that companies will be required
to utilize unit transaction reporting for regulatory compliance?
As stated above, AAIS statistical plans
require unit transaction reporting, which means that premium and
loss records are reported for each policy and endorsement. Other
statistical agents permit summary form reporting, in which certain
transactions can, in essence, be combined.
Summary form reporting is sufficient for
meeting standard regulatory reporting obligations, but unit
transaction reporting is necessary to support ratemaking
applications. Unit transaction reporting can also make it easier
to respond to special data calls and regulatory audits.
“As technology increases the potential for
states to collect and analyze unit transaction data, there may be
more incentive for states to request transaction reporting,”
says Hughes at the NAIC. “Right now, summary reporting is
sufficient for the uses they have.”
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Statistical Reporting, 2005
