Indicates Matter Stricken
Indicates New Matter

The Senate assembled at 11:00 A.M., the hour to which it stood adjourned and was called to order by the ACTING PRESIDENT, Senator GIESE.

REPORT BY THE JOINT INSURANCE STUDY COMMITTEE PURSUANT TO S.1652, A CONCURRENT RESOLUTION BY THE 1990 GENERAL ASSEMBLY REQUESTING THE COMMITTEE TO STUDY THE SOUTH CAROLINA REINSURANCE FACILITY WITH REGARD TO ITS RATES, LOSSES, OPERATION, AND EFFECTS OF THE CESSION LIMITATION.

INTRODUCTION

The decisions of several private passenger automobile insurance companies to stop writing insurance in this State has created a crisis in the South Carolina automobile insurance market. According to the South Carolina Department of Insurance, in 1990, forty-nine companies have pulled out of South Carolina.

The first impact of these withdrawals will be felt primarily by South Carolinians who obtain their insurance through independent agents, but the withdrawals will impact on all automobile insurance consumers. The withdrawal of these companies from the South Carolina insurance market is one reason the General Assembly directed the committee to undertake its study of the Reinsurance Facility, because the facility mechanism, and the laws associated with it, govern how automobile insurance is sold in this State.

Another reason for the study is the General Assembly's responsibility to satisfy itself that the facility, which is a residual market mechanism created by South Carolina law, and the facility board, whose membership is constituted pursuant to statute, operate efficiently.

The committee wishes to commend Chief Insurance Commissioner John G. Richards, who is by statute chairman of the facility board, Consumer Advocate Steven W. Hamm, by statute a member of the facility board, as well as all other facility board members and staff for their assistance to the committee in undertaking the study mandated by S.1652.

RECOMMENDATIONS

On September 5, 1990, the Joint Insurance Study Committee held its first of two public hearings on this topic. During this meeting the committee heard from Commissioner Richards who explained in detail the history of the South Carolina Reinsurance Facility, and the legislation regarding it since its inception. Donnie Gay, manager of the facility, also presented an overview of the facility operations and the make-up of the facility.

On September 26, 1990, the second public hearing was held. Commissioner Richards introduced to the committee the chairmen of the seven committees of the Reinsurance Facility: Arthur Ivey, Chairman of the Operating Committee; L.E. Fairey, Chairman of the Commercial Risk Committee; Dan Dinwiddie, Chairman of the Designated Agents Committee; Thomas H. Kepley, Chairman of the Investment and Financial Committee; Thomas C. Salane, Chairman of the Legal Committee and Legal Counsel to the Facility Board; Steve Dennis, Chairman of the Claims Committee; and Paul Merriman, Chairman of the Underwriting Audit Committee.

After the above two public hearings the committee makes the following recommendations:
1. The composition of the Reinsurance Facility board, as revised by Act 148 of 1989, provides for a broad range of regulatory, legislative, consumer advocate, gubernatorial consumer appointee, agent, servicing carrier and company representation. The newly constituted board should be given a chance to work before further changes in its composition are considered.
2. Based on testimony by the Chief Insurance Commissioner and the Consumer Advocate, as well as reports by chairs of the various facility committees, the committee concludes that, while the facility must always concentrate on achieving greater efficiencies, any further savings that might result from such efficiencies are relatively insignificant compared to overall facility losses, and that such losses can only be addressed by the statutory changes noted below.
3. Rates charged for business that is ceded to the facility by voluntary companies or written by designated agents are obviously inadequate, as evidenced by facility losses. If the rates were more adequate, facility losses would be substantially reduced, if not eliminated, and recoupment charges paid by every policyholder would be reduced if not eliminated. The difficult public policy issue is how to balance the desirability of reducing facility losses against the desirability of protecting some consumers against unfair classification. The committee concludes that statutory changes are needed to move toward adequate, uniform pricing of business placed in the Reinsurance facility, based on objective standards.
4. To reduce facility losses and encourage more companies to compete in the South Carolina automobile insurance market, the committee concludes that statutory changes are needed to permit insurers to use multiple rate levels, subject to new objective standards and prior approval of those rates by the commissioner. This change can involve introduction of affiliated companies, (i.e. companies that are affiliated with companies already doing business in the South Carolina market). This change would result in more business kept in the voluntary market (as opposed to being put in the facility), thereby depopulating the facility, reducing facility losses, and allowing consumers and agents to benefit by encouraging more companies to compete for business. Objectively determined drivers now subsidized by recoupment charges would pay a higher rate, but objectively determined "clean" drivers would pay a lower rate than they otherwise would pay.
5. The committee believes that the mandate to write physical damage coverages should be further relaxed, building on changes that were introduced by Act 166 of 1987. "Physical Damage Coverages" refer to first-party benefits, collision and comprehensive, as opposed to liability coverages payable to someone other than the insured. South Carolina is the only State that has a take-all-comers law for physical damage coverage. Act 166 of 1987 contained a limited removal of the mandate to write physical damage coverages, based on objective standards, and this change was achieved without undue disruption of the market. If companies are permitted to use affiliated (pup) companies to write non-mandated coverages, there will probably be more companies in the market competing for physical damage coverage business, thus reducing the disruption caused by removing this mandate. According to the South Carolina Department of Insurance, the 1990 physical damage recoupment charge to every South Carolina policyholder eligible for the safe driver discount was $13.63, almost one-third of the total recoupment charge. Given this fact, and realizing that the losses in the facility will increase in 1991, this dollar figure will also increase. The recoupment amount is higher for those drivers with points. This change probably should be phased in over a one-year period.
6. The committee believes that the laws governing prior approval of rates should be amended so as to permit a company to obtain automatic approval of a rate filing that is at, or below, a cost price index comprised of the United States Department of Labor statistics tracking costs related to automobile insurance, including automobile repair costs and health care costs. This change would encourage more companies to compete for business in this State, by offering them the opportunity of adjusting their rates (subject to the index cap) without going through the prior approval process, which can be expensive and time consuming, especially for smaller companies. This change would permit the Insurance Department and the Consumer Affairs Department to focus their attention on rate proposals that exceed the index, and would permit the department to redirect some of its resources toward regulating the solvency of insurance companies doing business in this State.
7. There was disagreement on whether the cession limitation should be changed. A compromise was reached, whereby, for a two-year period, risks ceded to the facility and not eligible for the safe driver discount do not count against cession limitation.

COMMENTS:

The above-recommended changes should not be represented as a means of achieving immediate overall rate reductions for South Carolinians. Nor is there any guarantee that any of the companies that left the State will return immediately, as some have reportedly made business decisions to de-emphasize private passenger automobile insurance. Care should be taken not to raise public expectations of substantial immediate reductions for "clean" drivers because the underlying cost elements of car insurance, such as auto crash parts and medical expenses, will continue to increase. The plan is intended to encourage more companies to compete more aggressively in the South Carolina market, and it relies on the beneficial impact of market competition on rates and service. If changes are not made, and companies continue to withdraw from South Carolina's highly regulated market, we will have an unhealthy situation where automobile insurance is available to consumers only from a handful of companies or from designated agents.

REPORT BY THE JOINT INSURANCE STUDY COMMITTEE PURSUANT TO S.1652, A CONCURRENT RESOLUTION BY THE 1990 GENERAL ASSEMBLY REQUESTING THE COMMITTEE TO STUDY SOUTH CAROLINA REINSURANCE FACILITY WITH REGARD TO ITS RATES, LOSSES, OPERATION, AND EFFECTS OF THE CESSION LIMITATION.

SENATE MEMBERS
/s/Edward E. Saleeby
/s/John C. Land, III
/s/Glenn F. McConnell
/s/Michael F. Mullinax
/s/Thomas C. Pope, III

HOUSE MEMBERS
/s/William D. Boan
/s/Joseph T. McElveen, Jr.

GOVERNOR'S APPOINTEES
/s/Charles M. Potok
/s/Dr. S. Travis Pritchett
/s/Ronald D. Scheetz
/s/Frank S. Smith, Jr.
/s/Roland C. Young

EX OFFICIO MEMBER
/s/John G. Richards
Chief Insurance Commissioner

(By prior motion of Senator SALEEBY, ordered printed in the Journal)

At 11:15 A.M., on motion of Senator WILSON, the Senate adjourned to meet tomorrow at 12:00 Noon.

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