Senate Bill S6950

                                 BILL NUMBER:  S6950

 TITLE OF BILL :

An act to amend the insurance law, in relation to examination of
insurers, incorporation of co-operative property/casualty insurance
companies, the keeping of records by such companies; and to repeal
section 6613 of such law relating to limitation of expenses of
co-operative property/casualty insurance companies


 PURPOSE OR GENERAL IDEA OF BILL :

Co-operative property/casualty insurance companies (co-ops) are
exclusively domiciled here in New York. They write business that tends
not to be offered by the larger national insurers and regional
non-co-ops. They are the major insurance writers of farm owners
coverage and agricultural-related small businesses, small contractors
liability insurance, seasonal businesses, as well as small diners and
taverns.

Co-ops also provide employment for over 2,200 professional and
clerical staff in New York State, with the vast bulk of these jobs
spread throughout Upstate New York.

This comprehensive legislation is aimed to ensure that these co-ops
              

continue to have the tools necessary to thrive and provide their
unique insurance services to their insureds.

 SUMMARY OF PROVISIONS :

Section 1. Amend Insurance Law section 309 (b) to modify the
requirement that the Insurance Department shall conduct a financial
examination/audit of every domestic property/casualty insurance
company every three years or at least once every five years and
replace it with a standard whereby such financial examination shall be
made at least once in every five years with the Superintendent
authorized to extend it to at least once in every eight years.

Section 2. Amend Insurance Law section 310, entitled  EXAMINATIONS;
HOW CONDUCTED , to streamline the financial examinations process in
order for such examination to be more focused on financial matters
only and not on extraneous issues.

Section 3. Amend Insurance Law section 6603(a) (5) (E) and (F) to
streamline the minimum number of directors required for a co-operative
property/casualty insurance company's board of directors from nine to
seven. In addition, this proposed amendment to the law would clarify
that a majority of the directors must be citizens and residents of
both New York and the territory in which the co-operative
property/casualty insurance corporation is licensed to do business.

Section 4. Amend Insurance Law section 6611(a)(4)(C) to permit a
co-operative property/casualty insurance company's board of directors
to authorize a non-officer of the co-op to sign checks.

Section 5. Repeal Insurance Law section 6613, which imposes a
limitation on co-operative property/ casualty insurance companies'
management expenses of no more than 42.5% of net premiums written for
such year.

Section 6. Effective Date.

 JUSTIFICATION :

Section 1.
Insurance Law section 307 already requires annual statements that
include audited financial statements. In light of this provision that
results in all property/casualty companies undergoing an independent
audit every year, it appears redundant and unnecessarily duplicative
to retain section 309(b)(1) with its mandate that the Department
conduct an audit every three years or, if the Department believes
every three years is not needed, at least every five years. Small
property/casualty insurance companies find the financial examination
process very burdensome with a resulting high cost of the examination.
Additionally, the process takes up time and expense for the Department
as the agency conducting this examination. This measure would at least
alleviate the costs to these small businesses.  At the same time,
Department oversight of small property/casualty companies' financial
situations should not be diminished by this proposal as the Department
would still be conducting examinations every five years or eight if
they find the five year requirement is not necessary for safeguarding
the public or policyholders.  Furthermore, the Department still
retains ample authority in the law (such as under the
rehabilitation/liquidation provisions) to step in and investigate if
they see something on the audited annual statements that merits
further examination.

Section 2.

Small property/casualty insurance companies in New York State are
finding that the financial examinations conducted by the Insurance
Department ("Department") are becoming more of an audit process. This
proposal contains suggested modifications to the financial examination
process to make it more effective and less cumbersome.

The first point to be made with respect to the financial examinations
is that they should be focused on financial matters only (such as
financial solvency) and not on other matters that are more appropriate
for a market conduct examination. Unnecessary requests substantially
lengthen the process, costing insurers large sums of money as they
must pay for these examinations. An over-arching broad principle for
financial examinations should be to keep in mind that the intent
behind these exams is to review the reliability of the assets and
liabilities reported by the insurance company at the date of
examination. For instance, financial examiners have requested and
spent substantial time reviewing an insurer's Board minutes, insurance
policies purchased by the company, expense classifications (Regulation
30 compliance), employee benefits, privacy compliance, disaster
preparedness plans, fraud plan compliance and other non-financial
items.  These items, it is respectfully submitted, should not be the
subjects of inquiry during a financial examination but rather should
be looked at in a market conduct exam.

On a related point, Regulation 30(11 New York Code of Rules &
Regulations sections 105 109) governs the uniform classification of
expenses for rate making purposes and should be updated, streamlined
or repealed. Department financial examiners spend a lot of time
verifying compliance with regulation 30, a regulation promulgated in
1948 without revisions and accordingly out of state. Statistical
organizations such as the Insurance Services Office ("ISO") should
determine standards for the uniform classification of expenses which
its members should be required to use.

Third, insurers have noticed the financial examination. The purpose
behind doing this is unclear since they do not use random sampling in
choosing the policies and claims they are going to review and
therefore any findings cannot be used in a disciplinary action.
Insurance companies report that it has been their experience that the
market conduct comments in the financial examiners report are not
given much credence. In brief, market conduct reviews should be left
to the specialized market conduct examiners.
On a small but important note, financial examiners should use the work
papers of the insurance company's independent certified public
accountant ("CPA") to verify asset balances. Since the CPA obtains
confirmation of all bank balances and custodian accounts with the
Department's financial examiner repeating this same process, it is
unnecessarily redundant for the financial examiner to undergo the same
confirmation process as the CPA.

Section 3.

Co-ops are required by current law to always maintain a minimum of
nine directors. Given that Chapter 293 of 2009 just modified the
minimum number of directors required for noncooperative New York
domestic mutual property/casualty insurance companies from thirteen to
seven, it only seems fair and equitable to permit the much smaller
co-operative companies to have the same number of directors. This
reduction in the board size will help co-ops because many small co-ops
are having difficulty attracting directors.

This proposal also recommends clarifying that only a majority of co-op
directors must be citizens and residents of New York State and also
residents in the territory served by the co-op. This is imp011ant
because current law appears to require all directors to be residents
of the co-op and the reality is as directors' age many are moving to
warmer climates on a part time basis while still desiring to serve as
directors. Again, the problem of attracting and retaining a sufficient
number of qualified, intelligent directors for these small co-ops is
exacerbated by the law's residency requirement.

Section 4.

Insurance Law section 6611 (a)(4)(C) stipulates that: "All checks
issued shall be signed either by two officers or by one officer upon
the written order of another officer, except as otherwise provided by
resolution of the corporation's board of directors or in its by-laws
for handling of miscellaneous expenses." This law has been problematic
for co-ops because they cannot, even with small checks, authorize
non-officers to sign checks unless they are for "miscellaneous
expenses." Unfortunately, "miscellaneous expenses" has been
interpreted very narrowly by the Insurance Department.  Therefore,
this proposed amendment would help co-ops in their routine operations
by alleviating this problem.

Section 5.

This section of law has been in existence since 1909. It appears to
arise from a fear that directors of the co-ops who were also agents of
the company were the primary, if not the only source, of insurance
business produced for the co-op with the concern centering on the
possibility of the directors setting excessively high commissions for
themselves. This could, of course, lead to the financial impairment of
the co-op or unrealistically high premiums for the policyholders.  For
the following reasons, this is no longer a realistic concern.

First, directors who are also agents are relatively rare on most co-op
company boards. Second, and even more importantly, the current very
competitive marketplace serves to ensure that commissions are set at a
realistic level. Any co-op paying an excessive commission would have
to charge policyholders a higher premium and would accordingly not
enjoy any success in the marketplace. All successful businesses today,
including co-op property/casualty insurance companies, have to
carefully monitor their operating expenses.

In addition to the need for this statue no longer existing, the
statute presents some real and serious burdens and impediments to
co-ops. A major problem with the 42.5% expenses cap is that it
severely limits a co-ops ability to upgrade and modernize its
technology. This, of course, directly and adversely impacts the co-ops
ability to remain competitive in our technology-driven business world.
While it is hue that hardware can be capitalized and depreciated over
a three year period, software that is purchased has to be expensed in
the year in which it is acquired.  Since some of these software
systems can cost hundreds of thousands of dollars, they can be
difficult for co-ops to purchase and install without exceeding the
expense cap.

 PRIOR LEGISLATIVE HISTORY :

This is a new bill.

 FISCAL IMPLICATIONS :

None.

 EFFECTIVE DATE :
This act shall take effect immediately after it shall have become a
law.