RULES AND REGULATIONS
[31 PA. CODE CH. 118]
Discounting Medical Malpractice Loss Reserves
[31 Pa.B. 3190]
The Insurance Department (Department) amends §§ 118.1--118.3 and 118.6 to read as set forth in Annex A.
The final-form regulations are adopted under the authority of The Insurance Company Law of 1921 (40 P. S. §§ 341--999); The Insurance Department Act of 1921 (40 P. S. §§ 1--321); and sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412).
Comments and Response
Notice of proposed rulemaking was published at 30 Pa.B. 5452 (October 21, 2000) with a 30-day comment period. During the 30-day comment period, comments were received from the Insurance Federation of Pennsylvania, Inc. (IFP) and the Professional Insurance Agents Association of Pennsylvania, Maryland and Delaware, Inc. (PIA). During its regulatory review, the Independent Regulatory Review Commission (IRRC) submitted comments to the Department. The following is a response to those comments.
The IFP supported the rulemaking in its entirety.
The PIA asked how the Department determined that there would be no fiscal impact. The PIA stated that it ''[. . .] has always understood that the Insurance Department has always considered investment income during the rate review process. This consideration thus reduced the ultimate rate approved in accordance with the statutory duty of the Commissioner that rates shall not be excessive, inadequate or unfairly discriminatory. By not permitting loss reserve discounting, it would appear that rates would have to be adjusted upward to compensate in the rate filing. That would produce higher premium rates to policyholders, however, PIA recognizes that premiums may remain the same.''
Discounting is a reflection of investment income, which is one of many factors that insurance companies take into account in setting rates. As a practical matter, the impact that discounting may have on insurance rates is a reflection of a particular insurance company's financial strength. Currently, only one medical malpractice insurer in this Commonwealth discounts its loss reserves. Because this company has more than adequate reserves, the Department does not anticipate that its rates will increase due to the amendments to this rulemaking. The rulemaking should have no impact on the rates of the remaining insurance carriers writing medical malpractice insurance in this Commonwealth because none of these insurers discount their loss reserves.
In addition, in January 2001, the National Association of Insurance Commissioners (NAIC) required all insurers to follow the recently adopted Statements of Statutory Accounting Principles which specifically prohibits discounting of medical malpractice loss reserves unless the insurer is allowed to do so by statute or regulation or requests a permitted practice from the Department (or other regulatory authority). Also, the majority of the states do not permit discounting of loss reserves. Therefore, the phase out of discounting in this Commonwealth should have minimal impact on the insurers engaged in the business of medical malpractice insurance.
During its 30-day review, IRRC questioned whether an effective date of January 1, 2001, was feasible, as that date has passed. IRRC recommended that § 118.3(4) (relating to restrictions on discounting loss reserves) be revised to apply prospectively to policies that become effective after the date of publication of the final-form regulations.
The Department has no objection to making this change. Discounting will not be permitted on policies sold on or after the effective date of the rulemaking.
The rulemaking applies to insurance companies doing the business of medical malpractice insurance in this Commonwealth.
There will be no increase in cost to the Department due to the amendment of Chapter 118 (relating to discounting of medical malpractice loss reserves).
There will be no fiscal impact to the public.
The rulemaking will not impose additional costs on political subdivisions.
The rulemaking will not impose additional costs of insurance companies doing the business of medical malpractice insurance in this Commonwealth.
The adoption of the rulemaking will not impose additional paperwork on the Department or the insurance industry.
This rulemaking becomes effective upon publication in the Pennsylvania Bulletin. No sunset date has been assigned.
Any questions regarding this rulemaking should be directed to Peter J. Salvatore, Regulatory Coordinator, Office of Special Projects, 1326 Strawberry Square, Harrisburg, PA 17120, (717) 787-4429. In addition, questions may be e-mailed to email@example.com or faxed to (717) 772-1969.
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on October 11, 2000, the Department submitted a copy of the notice of proposed rulemaking, published at 30 Pa.B. 5452, to IRRC and to the Chairpersons of the Senate Committee on Banking and Insurance and the House Committee on Insurance. In addition to the submitted regulations, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the agency in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.''
Under section 5(c) of the Regulatory Review Act, the Department also provided IRRC and the Committees with copies of the comments received. A copy of that material is available to the public upon request.
Under section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)), on May 9, 2001, these final-form regulations were deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on May 17, 2001, and approved the final-form regulations.
The Commissioner finds that:
(1) Public notice of intention to adopt this rulemaking as amended by this order has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder 1 Pa. Code §§ 7.1 and 7.2.
(2) The adoption of this rulemaking in the manner provided in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.
The Commissioner, acting under the authorizing statutes, orders that:
(a) The regulations of the Department, 31 Pa. Code Chapter 118, are amended by amending §§ 118.1, 118.2 and 118.6 to read as set forth at 30 Pa.B. 5452 and by amending § 118.3 to read as set forth in Annex A.
(b) The Commissioner shall submit this order, 30 Pa.B. 5452 and Annex A to the Office of General Counsel and Office of Attorney General for approval as to form and legality as required by law.
(c) The Commissioner shall certify this order, 30 Pa.B. 5452 and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) The regulations adopted by this order shall take effect upon final publication in the Pennsylvania Bulletin.
(Editor's Note: For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 31 Pa.B. 2855 (June 2, 2001).)
Fiscal Note: Fiscal Note 11-197 remains valid for the final adoption of the subject regulations.
TITLE 31. INSURANCE
PART VII. PROPERTY, FIRE AND CASUALTY INSURANCE
CHAPTER 118. DISCOUNTING OF MEDICAL MALPRACTICE LOSS RESERVES
§ 118.3. Restrictions on discounting loss reserves.
The discounting of loss reserves is subject to the following limitations:
(1) The loss reserves discounted to present value in accordance with this chapter may not be less than those required in accordance with section 313(b) of the act (40 P. S. § 112(b)).
(2) The maximum rate of interest which an insurer may assume for purposes of discounting is 6%.
(3) An insurer may request an exception to the maximum interest rate in paragraph (2) if the insurer can demonstrate to the satisfaction of the Commissioner that its investment yield justifies a higher interest rate assumption. The Commissioner may require the insurer to submit additional documentation to support its request for approval of a higher interest rate assumption. The Commissioner will act upon requests for exceptions made under this paragraph within 90 days of the date the request is received by the Insurance Department.
(4) An insurer may not discount loss reserves or loss adjustment expense reserves for policies with an effective date on or after June 16, 2001.
(5) An insurer may not discount loss reserves or loss adjustment expense reserves after December 31, 2010.
[Pa.B. Doc. No. 01-1039. Filed for public inspection June 15, 2001, 9:00 a.m.]
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