No business likes regulation, but it's a reality of the insurance industry. In today's insurance market, state regulators nationwide are addressing a new set of concerns.

	Daniel Marsula/Pittsburgh Post-Gazette

Prices for commercial property and liability coverage have significantly risen; insurance companies are struggling to provide affordable, adequate insurance to cover customers' risks without jeopardizing their own solvency. The questions regulators are grappling with include: 1) How can regulators best insulate businesses from insurance carrier insolvency? 2) Will "commercial deregulation" lead to gouging of small businesses? 3) Should regulators create or accommodate alternative insurance markets? 4) When should a carrier be allowed to terminate coverage or withdraw from a market? 5) How can regulators best insulate businesses from insurance carrier insolvency?

The regulator's goal is to identify troubled companies while they can still turn themselves around and to intervene before the company's customers get hurt. To gauge insurance companies' financial stability, regulators analyze insurance companies' annual statements and audited financial reports. Insurance companies are required to file annual reports on their risk-based capital, the minimum amount of capital that a carrier needs to support its overall business operations. Failure to meet this minimum will set off alarm bells in the regulator's office.

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Other filings that help the regulator evaluate an insurer's financial condition include annual actuarial opinions on reserves and quarterly or more frequent financial updates from the company. Company filings for approval of certain material transactions under insurance holding company law or other state laws also alert the regulator to events that may affect the insurer's finances.

Will "commercial deregulation" lead to gouging of small businesses? In the commercial arena, state regulators have been moving toward less scrutiny at the front end and heavier repercussions at the back end. Many states have passed legislation relieving insurers from having to obtain prior approval of policy forms and rates for many commercial coverages as long as the insured business is of a certain significant size or sophistication. The rationale behind flexible treatment of large commercial risk is that a larger business has some bargaining power vis-?-vis the insurer and can negotiate insurance coverage to meet its requirements.

Consequently, larger businesses do not need the paternalistic approach of the "prior approval" system. Commercial deregulation frequently permits insurers to change rates for small commercial risks by filing a proposed rate change within a certain defined range. Insurers also may introduce policy forms for small commercial risks if they file these forms with the regulator a certain number of days before they begin to use them (known as "file and use"). The state regulator retains the right to reject these rate changes or policy forms before or after they are used in the marketplace.

Commercial deregulation presumes that, in exchange for the ability to market a commercial product quickly without obtaining the state regulator's prior approval, the insurance company assumes responsibility if the product fails to meet state requirements. If a state regulator discovers that a product or a practice related to the handling of the product violates state law, the regulator can then exact a pound of flesh.

How will this new system of commercial deregulation affect the insurance market? Insurance companies might exercise more discretion as they increase rates. They can raise rates sooner to meet cash flow needs. Because this new system usually has limits on how much rates for small commercial risks may increase without the regulator's prior approval, it might prevent an insurer from raising rates too high and making coverage unaffordable.

Will regulators create or accommodate alternative insurance markets? Some regulators are considering developing alternative insurance markets for coverage that certain businesses cannot buy in the voluntary market. A state may have a workers' compensation fund providing coverage to businesses that cannot obtain it. A state also may assume the burden of an insurance fund and establish a residual market for a certain kind of coverage because it mandates that businesses maintain it.

More and more states are opening their doors to captive insurers, i.e., insurance companies established primarily for the benefit of particular insured businesses. Captive insurers provide businesses with greater control over their insurance programs and often improve their bargaining power in negotiating with commercial carriers for other insurance.

When should a carrier be allowed to terminate coverage and withdraw from a market? State laws prohibit an insurer from canceling a commercial policy midterm except for specific reasons, e.g., a change in a business' insurability or misrepresentation of facts or fraud by the insured or if the insurer can no longer bear the risk or obtain reinsurance or the insured failed to pay the premium on time. In the current market there are more cancellations, which can raise red flags with regulators. State laws do not normally restrict reasons for not renewing a commercial policy. An insurer consequently has more flexibility in deciding not to renew a policy than it does in canceling it.

When an insurance company decides to stop providing a particular coverage or to withdraw from a marketplace, the regulator's initial concern is whether the remaining underwriters are capable of covering the policyholders dropped by the company. If not, the policyholder may have to explore alternative markets.

What of the road to future regulation? State regulation had already come under increasing attack even before the hard market developed. The debate surrounding the Gramm-Leach-Bliley Act enacted in 1999 included discussion of the federal government's potential role in insurance regulation. Proposals for federal regulation of at least part of the market have floated through legislators' offices in Washington, D.C. Today, however, the responsibility to govern the insurance industry still rests predominantly in the arms of the state regulators.