State Of Ohio DEPARTMENT OF INSURANCE 2100 Stella Court, Columbus, Ohio 43215 (614) 644-2658        www.ohioinsurance.gov	Bob Taft, Governor J. Lee Covington II, Director

Testimony before the House Agriculture &
Development Finance Sub-Committee
By
J. Lee Covington II
Director, Ohio Department of Insurance
February 27, 2001

 

Mr. Chairman and members of the committee, my name is Lee Covington and I am the Director of the Ohio Department of Insurance. I am pleased to appear before you this evening to discuss and ask for your support of the Department's proposed budget.

Tonight, I want to emphasize 3 points:

• First, we are a non-General Revenue Fund supported department; we are fully funded through fees and assessments to the insurance industry;
• Second, our budget allows us to maintain our current level of services to consumers and other stakeholders and provides for implementation of the highest priority items in our information technology plan;
• Third, the resources proposed in this budget are necessary to fulfill our statutory mission.

Before I discuss these three points, please let me share some information with you about who we regulate and the scope of the Department's responsibilities. This will frame our budget request in the appropriate context.

SCOPE OF INSURANCE REGULATION
Insurance affects the lives of all Ohio citizens. Whether it is automobile insurance, homeowners insurance, life insurance, property insurance, or health insurance --- virtually all of Ohio's 11,000,000 citizens use insurance to protect against personal and business loss, to pay for ever increasing health care costs, and to achieve financial security for their families.

Historically, Ohio has one of the best insurance markets for consumers:

• Ohio ranks 2nd in the country for the best homeowner's insurance premiums;
• Ohio ranks 14th in automobile insurance premiums, which is better than any other state with large urban centers. This results in an average savings of $300 for all Ohioans each year.

Insurance, as an industry, is also important to Ohio:

• Ohio ranks 7th in the nation in the number of life insurance companies located in the state;
• Ohio is the 8th largest insurance market in the nation, with over $30 billion in premiums written in the state;
• Ohio is home to 2 of the top 5 auto insurers in the country: Nationwide Enterprises and Progressive Insurance;
• Ohio is home to the 7th largest life insurer: Nationwide Insurance;
  
• Ohio is home to the 15th largest commercial multi-peril insurer: Cincinnati Financial Corporation;
• Over 144,000 licensed agents do business in this state;
• Premium taxes generate $355 million - all going to the General Revenue Fund.

MISSION
As the sole regulator of Ohio's insurance industry, the Department's mission is consumer protection through financial solvency regulation, market conduct regulation and consumer education. I would like to focus on the components of our mission for a few minutes and highlight a few of the Department's accomplishments over the past 2 years.

FINANCIAL SOLVENCY REGULATION
The Department monitors and determines the financial soundness of more than 300 domestic insurance companies and approximately 1,500 foreign and alien insurance companies. The Department is responsible for protecting policyholders and creditors from financial loss due to company insolvency. Insurers are monitored through on-site financial examinations and extensive analysis of annual and quarterly financial statements.

Since my appointment in 1999, I have reorganized and retooled the Department's Office of Financial Regulation.

• The Department is currently accredited by the National Association of Insurance Commissioners and in 2001 we will seek re-accreditation under new and higher standards;
• We have reorganized to decrease our company to analyst ratio from 150 to 1 to 25 to 1, the national standard.
• The Department focused even more resources in 2000 on troubled companies; in 1999 there was 1 insurance company placed in liquidation; in 2000 we placed 6 troubled companies into liquidation and rehabilitation runoff. Because of our proactive approach, losses to policyholders were prevented or minimized;

In addition to our financial surveillance activities, the Department also reviews large corporate transactions to ensure protection of the policyholders. For example,

• The $119 million purchase of Integrity Life Insurance by Western and Southern Life Insurance Company which involved $4.8 billion in managed assets.
• The $1.6 billion purchase of Gartmore, an UK asset manager, by Nationwide Mutual, involving $85 billion in managed assets.

MARKET CONDUCT REGULATION
Market conduct regulation involves examination and monitoring of the non-financial practices of the nearly 1,800 insurers admitted to do business in Ohio. It includes:

• Agent licensing and continuing education for over 144,000 agents;
• Enforcement of the laws pertaining to the business of insurance, such as the prohibition against unfair and deceptive sales practices;
• The review and approval of over 28,000 insurance policies and rates;
• Criminal insurance fraud investigation - insurance fraud costs all Ohio families over $1,000 a year. The total dollar amount of cases investigated in 2000 was approximately $10 million.

CONSUMER SERVICES & EDUCATION
One of the most important services we provide is assistance to Ohio consumers.
Last year, the Department's Office of Consumer Services responded to over 130,000 calls and provided assistance to 8,506 consumers who filed formal complaints with the Department. We answer consumer questions, investigate and resolve complaints, create and distribute 24 consumer shopper's guides (rated "A" by the Consumer Federation of America) and conduct other forms of educational outreach. As a result of these efforts, the Department saved Ohio insurance consumers more than $6 million last year.

The Department also serves older Ohioans and their families through the Ohio Senior Health Insurance Information Program. An in-house bank of phone analysts and over 1,400 volunteers in all 88 counties counsel seniors on problems related to Medicare, Medicaid and other forms of health insurance. Last year, this program educated 343,045 seniors at 7,000 training sessions and speaking events.

INNOVATION AND EFFICIENCY
I want to emphasize my commitment to carrying out our mission in the most efficient and productive manner possible.

For example, in the area of agent licensing, our implementation of a state-of-the art licensing system, including electronic fingerprinting, and outsourcing strategy have reduced the time to become licensed from 4 to 6 months to just 5 to 7 days. The Department now accepts over 50% of our 1.3 million transactions on-line, on a same day basis, without the need for a staff member to be involved - the transactions are completed and entered into our database automatically.

We are using available technology to conduct more efficient desk audits of insurance companies. For example, during our examination of health care claims payment practices at Ohio insurers, we were able to review over 10 million claims through the use of technology. Consumers, agents and insurance companies are receiving most information and forms on-line to help save staff and consumer telephone time and delays from using the mail. We currently have 9,532 visits per week and 495,664 visits per year. As a result of our efforts to implement these and other technological efficiencies, the Department was awarded the National Association of Insurance Commissioners' "Technology of the Year Award" and our web site was awarded an "A" by the Consumer Federation of America.

THE FUTURE OF INSURANCE REGULATION - FEDERAL FINANCIAL MODERNIZATION ACT
In the nearly two years since I last appeared before the Legislature to ask for support of the Department's budget, dramatic changes have taken place in the insurance industry. These changes will set the direction for the future of insurance regulation.

In 1999, the US Congress passed the most comprehensive overhaul in 50 years of the laws governing our nation's financial institutions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 permits the formation of financial holding companies and the convergence of banking, securities and insurance under one corporate organization. This amounts to a total restructuring of the financial services industry. Although Gramm-Leach-Bliley reaffirmed the role of the states as regulators of the insurance industry, the act also requires state insurance departments to work together to implement a new multi-state licensing system. Further, we are required to coordinate the examination of financial holding companies with federal regulators such as the Federal Reserve and the Office of the Controller of the Currency. Based on the requirements of Gramm-Leach-Bliley and realignment in the industry resulting from the law, additional demands will be placed on the Department.

In order to prevent further intrusion by the federal government into the regulation of insurance -- an area traditionally reserved to the states - the Ohio Department of Insurance, together with other state departments of insurance, will continue to develop and implement a plan to modernize the state insurance regulatory system. The Department will need sufficient resources to implement Gramm-Leach-Bliley and our modernization initiatives.

In 2001, the Department will also undergo a re-accreditation review under new and higher standards by the National Association of Insurance Commissioners. Accreditation is important to Ohio consumers because it demonstrates the Department is in compliance with the best financial surveillance regulatory practices. Also, accreditation means that Ohio insurers will not be subject to duplicative regulation because other states can rely on Ohio's regulatory oversight. Maintaining accreditation is essential to the Department's ongoing responsibility to the citizens of Ohio and other member states of the NAIC

During this administration, the Department is giving increased attention to the prompt payment of health care claims. This is a top priority for the Department because of its impact on hospitals, medical professionals and consumers. Compliance with Ohio's prompt payment law is important to maintain the confidence of Ohio consumers in our health care system.

With these and other challenges facing the Department, this is the time to maintain a strong department and to keep steady the course of the Ohio Department of Insurance.

THE DEPARTMENT'S FY 2002 - 2003 BUDGET
The Department's proposed budget is $27.6 million for fiscal year 2002 and $30.3 million for fiscal year 2003. Again, the Department's budget is not supported from the General Revenue Fund. The Department's budget is supported by a variety of fees and assessments paid by the insurance industry.

As mentioned, our budget allows us to maintain our current level of services to consumers, seniors, and other stakeholders and provides for implementation of the highest priority items in our information technology plan. Specifically:

FY 2002 - the 2002 increase represents inflation and mandatory pay raises.

FY 2003

• In addition to inflation and mandatory pay raises, the budget reflects funding to replace existing technology in accordance with industry standards, for maintenance of current systems, and anticipated changes in these systems due to financial modernization.
• The budget for the Ohio Senior Health Insurance Information Program allows this program to continue at current operating levels. Over 1.9 million seniors live in Ohio - approximately 15% of our population. The Department has witnessed a significant increase in activity in the OSHIIP program due to Medicare HMO pullouts, the reduction in federal funding for Medicare, prescription drug cost increases, and other issues affecting Ohio seniors. We have almost doubled the number of seniors counseled one on one and the number of seniors attending our educational forums increased from 6,000 to over 300,000 in 2000. It is important that we are able to continue to provide our vital assistance to senior Ohioans.

In conclusion, I want to re-emphasize the Department's budget is designed to maintain the initiatives I have discussed. As economic conditions change, as new players enter the insurance market, and as increasing responsibilities are placed on the Department, greater pressures and risks also appear in the insurance industry. Again, this is the time to maintain a strong Department and keep steady our course.

Thank you for allowing me to appear this evening to speak in support of the Department's budget.

At this point I would be pleased to answer any questions you may have.