This month, the Pennsylvania legislature is considering measures to shine a bright light on the untold millions of dollars the Pennsylvania Insurance Department (“Department”) is charging Pennsylvania-based insurance companies to pay for the Department’s outside consultants. Under a bill that has passed the House and is awaiting action by the Senate, the Department would be required to disclose how much insurance companies are paying for the Department’s consultants to conduct examinations of the companies. The consultant fees absorbed by the Pennsylvania-based companies are believed to be in excess of tens of millions of dollars each year, but the exact amount remains a mystery because they are paid directly to the consultants and not accounted for in the Insurance Department’s budget or elsewhere. Industry trade groups have been calling for transparency about these exponentially increasing costs, arguing that there is already no cap on them, and without even knowing how much is being charged to the companies for these contracted regulatory functions, there cannot be complete accountability for the costs and efficiencies of the Department’s work. These undisclosed expenses are ultimately passed down to consumers and, to the extent they contribute to a more expensive regulatory system than in other states, may have the effect of making Pennsylvania insurance companies less competitive than their out-of-state neighbors.
According to the bill’s sponsor, Rep. Tina Pickett (R, Bradford, Sullivan and Susquehanna Counties) HB 1335 is “intended to provide greater transparency…of the regulatory costs incurred by the 275 Pennsylvania domiciled insurers competing with the approximately 1,500 non-domestic insurers who are not subject to these costs.” The bill was recently passed by the House of Representatives in a unanimous vote (191-0) and now moves to the Senate for consideration. The Insurance Department has not argued against the measure, and Gov. Wolf seems likely to sign it into law, should it reach his desk. Meanwhile, a related bill (HB 1851) that would also require the Department to meet with companies and establish a budget prior to beginning an examination remains stalled in the House Insurance Committee.
If HB 1335 becomes law, it will require the Insurance Department to account for and publicly report annually: 1) all fees, fines and reimbursements collected from regulated companies for oversight activities; 2) amounts charged to companies for the Department’s third-party consultants performing financial examinations, market conduct examinations, transactional reviews and solvency monitoring; and 3) the identity of the consultants and the amounts paid to them.
Historically, the vast majority of examinations of the financial health and regulatory compliance of Pennsylvania-based insurance companies were undertaken by the Department’s internal staff, paid for in salaries as part of the Department’s staffing budget, and reimbursed directly to the Department by the companies. These costs were accounted for and easily quantifiable in the Department’s public budget. However, under a 2013 law, the funding for the Insurance Department now flows from a dedicated fund that is replenished directly through licensing and filing fees paid by the industry, but no longer requires specific appropriation from the Commonwealth’s General Fund. Without the extra scrutiny that would accompany such appropriation, some of the true costs of regulation, including the fees companies are forced to pay to the Department’s outside consultants no longer appear in the Department’s budget.
Additionally, despite the expansion of regulatory requirements, an increased volume and complexity of filings and an intensified level of financial scrutiny undertaken by regulators in response to the financial crisis and concerns about company insolvencies, the Department has also been asked to do more with less money available for the staffing of qualified professionals. The more modest budget has resulted in substantial contraction of the Department’s staffing complement, which is down from 320 full-time employees in 2007, to the current level of about 190 – a 40% reduction in staff over a that span!
In order to meet the ever-increasing regulatory demands while simultaneously reducing its staff size by 40%, the Insurance Department has been forced to shift many of its more complex examination functions to outside consultants in recent years, as authorized by Pennsylvania laws giving broad discretion to the Department to engage outside professionals such as accountants, actuaries and attorneys for such tasks – all at the companies’ direct expense. But, as trade groups such as the Pennsylvania Association of Mutual Insurance Companies (PAMIC) would argue, doing so has resulted in both a substantial increase in the costs of the examinations as well as the creation of an information gap about how much companies are having to pay in the aggregate. “There is less visibility, less transparency about the true costs of regulation in Pennsylvania, because the fees paid directly to the Department’s consultants are substantial, but now they are pushed out of the public realm,” says PAMIC’s President and former Deputy Insurance Commissioner, Ron Gallagher. The consultants are also not bound by the same limitations on their rates and established per diem amounts that would apply to Department employees undertaking the same functions. Further, since the Department’s use and selection of such consultants is not undertaken through a public bidding process, there is additional mystery surrounding them. Therefore PAMIC, which represents dozens of the Pennsylvania-based insurance companies that are most directly impacted by the Department’s use of consultants, urges the passage of HB 1335 so that information about their costs can be aggregated and brought to light and the Department held publicly accountable for them.
Under the state-based system of insurance regulation in the United States, regulators in each company’s home state have primary responsibility for general oversight of their domestic companies, particularly regarding their financial solvency. Pennsylvania-based insurers are subject to the close oversight and examination by the Pennsylvania Insurance Department, including a mandated, extensive financial examination at least every five years. And Pennsylvania law requires the companies to pay for the regulatory audits and examinations conducted by the Department, which can be complex, intensive, time-consuming and, of course, quite expensive. On the other hand, while foreign companies doing business in the Commonwealth must conduct themselves according to Pennsylvania’s laws, the costs of solvency and market-conduct examinations conducted by their home-state regulators may be quite different than those of their domestic competitors, potentially creating a competitive disadvantage when those companies are competing with Pennsylvania companies for the same business, both here and around the globe. For example, examination costs in our neighboring state of West Virginia are baked into their Insurance Department’s budget and funded through fees and assessments shared by all domestic and foreign companies writing in West Virginia, not just the local companies. When viewed in this light, and considering additional examples from other states, a strong argument can be made that the current cost of regulation puts Pennsylvania companies at a competitive disadvantage.
Although HB 1335 would create no new limits on the use of consultants or the fees they charge, the additional transparency provided under the bill would be a big step towards ensuring that Pennsylvania companies are able to compete on a level field with their foreign competitors.
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