NAII VP Takes a Look at California’s State of Insurance

Sam Sorich, vice president with the National Association of Independent Insurers (NAII), says that despite the challenges facing agents and companies in California, the industry is still moving along and meeting its challenges. The NAII is at a record-high with more than 700 member companies and Sorich said it continues to grow. While mold, construction defect litigation and auto issues are just a few of the challenges facing insurers, many in the industry are able to turn a profit. Sorich sat down recently with Insurance Journal to address the issues facing those in the Golden State. Following are excerpts from that discussion.

IJ — With the Ortiz bill (SB 1763) being shelved, where do we go from here with the mold issue in California?

Sorich — It doesn’t appear the Legislature will pass any new legislation on mold this year. I guess the question is whether or not the study of mold issues authorized by SB 732 last year gets sufficient funding from the state and perhaps other interests to get it off the ground. On behalf of our association, we’re hoping that does take place. There is a need to examine whether standards are feasible. The Ortiz bill, perhaps well intentioned, was premature at this point. I think the bill would have put the homeowners and the property markets in great jeopardy. We need a basis of information. I think there is a frenzy and fear of mold probably beyond what the science of mold justifies. Nevertheless, we’re dealing with human beings and human beings have these fears and concerns. More and more companies are limiting their coverage for mold. Something is going on out there that the water damage related claims are increasing at an extremely high level.

IJ — What are the issues right now with auto insurance in California?

Sorich — Legislatively there aren’t any radical bills going on, but there are some that we have concerns about. SB 1427, the low-cost auto bill, definitely improved during the assembly committee. It still has a sunset in it and that’s good. I think it is proper to conclude that these programs are pilot programs. Secondly, it appears the rate levels in the bill are going to be subject to the commissioner’s review and modification and that is good. The third issue is still there and we think it is premature to modify the eligibility criteria to make the policy available to more drivers. The reason is as I recall from the statistics under the bill’s eligibility criteria, a family running in the $40,000 or $45,000 could qualify for purchase of the policy. For a lot of families in that income level, it may not be a good idea because its coverages are below what the normal financial responsibility requirements are and purchase of the policy could expose the families to some financial losses. In that regard, it creates some difficulty for agents selling the policy. Right now, the commission level that’s offered under the program certainly doesn’t appear to meet the effort that the agent goes through to sell the policy. If the eligibility criteria were changed through this bill, more people will come through the agent’s office wanting to purchase this low-cost policy. Any agent will have to take the responsibility to explain to the customer what is best for them. It may entail a little more work for the agent. I think in the market overall, we’re seeing higher losses and the losses are pushing rates up modestly. There is still a good level of competition out there.

IJ — Are you keeping an eye on the Commissioner’s race and how it will turn out?

Sorich — We don’t have a position on it. It doesn’t seem that the race is attracting too much attention at this point.

IJ — Where are we with construction defect litigation in the state right now?

Sorich — I think things improved a bit in 2002. However, there is still a major problem with the amount of litigation going on. The current process in place (Calderon process) that requires the parties in a litigation to meet and confer before a litigation goes forward is generally recognized as having flaws and has not lived up to its potential. The question is how to improve it? There is a bill being negotiated (AB 267) in the Legislature, but prospects for getting a consensus on that bill this year is not real high. This continues to be a very troubling area for builders, subcontractors and apartment owners and not just in California. In Nevada, things are so bad that the Commissioner may actually create a joint underwriting association to provide that coverage. Arizona is another problem area. It seems we in California have been able to export our construct defect litigation problems.

IJ — What are some issues out there in California that are not getting the attention of mold, auto insurance and other current topics?

Sorich — There are a few in the regulatory arena that merit some attention. There are a set of privacy regulations that the Department of Insurance is considering. There was a hearing in February and the Department has amended them since the hearing. The Department has done a good job and been sensitive to the testimony we’ve offered. Nevertheless, I think the current form the regulations are in would impose on insurance companies and agents some California-only notice requirements that are different from what are being given all around the country. One of our continuing concerns about the privacy regulations is that they would impede an agent’s ability to shop for insurance at time of renewal. There is a second set of regulations and there is a revision to the Fair Claims Settlement Practices. We’re opposed to many of these changes because we think they will drive up claims costs and make it difficult for companies to efficiently and economically settle claims. The third set of regulations are generic factors regulations. There was a proposal the Department came up with and there will be a workshop August 22 and 23. Basically they would establish factors that would be used to make determinations on property and casualty rate filings. The proposals that have been offered by the Department we feel are much too restrictive and not flexible enough to take into account individual company differences. One area we see some concerns in is the treatment of companies according to their marketing plans, whether it is an independent agent company, a direct writer or captive writer. There are expense levels imposed generically on all companies without being sensitive to the needs of individual companies. The last set of regulations have to do with agent producer licensing. There is a set in place now on an emergency basis which define what a clerical activity is. The statute says if you sell, solicit or negotiate insurance you must have a license unless you’re doing clerical activities. These regulations define what a clerical activity is. Sometime soon, the Department will hold a formal hearing to adopt them.

IJ — Within the industry or being levied against it, how do you view the fraud problem in California?

Sorich — I think we’re a model for other states. The company SIU units are doing a great job and the Department has a very effective fraud unit. Of course, it does come with some cost that are paid by insurance companies. All things considered, I think the expenses are justified with the results we’ve been getting in California. The other states do look to California for leadership on this problem.

IJ — Are you pleased with how the various associations have come together on different issues?

Sorich — We’re maintaining our identities because we are different to some extent, but there is a recognition that this industry must stand together and cooperate.

IJ — What do you see as the greatest challenges facing the independent agent?

Sorich — I think keeping markets viable. The homeowners market continues to be a challenge for companies and agents trying to find coverage for their customers. There is also some concern of greater federal involvement in insurance regulation. From our standpoint, we’re not ready to go there yet. We feel the states can still regulate insurance properly and effectively. Nevertheless, we do need to modernize some of the procedures in place. We don’t see the involvement of the federal government in insurance regulation to be justified at this point. At the same time, we recognize that unless states modernize their processes in the very near future, the calls for federal regulation are going to increase. We hear from our member companies that in many states, it is very difficult, time consuming and expensive to get an insurance license to do business. Once you’re in the state, the process for rate and form filing and market conduct procedures are again very expensive.

Topics California Agencies Legislation