RULES AND REGULATIONS
Title 31--INSURANCE
INSURANCE DEPARTMENT
[31 PA. CODE CHS. 71 AND 73]
Credit Insurance
[28 Pa.B. 1401] The Insurance Department (Department) hereby deletes Chapter 71 (relating to general provisions) and amends Chapter 73 (relating to credit life insurance and credit accident and health insurance) to read as set forth in Annex A. These final-form regulations are promulgated under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412). The amendments to Chapter 73 are made under the authority of section 12 of the Model Act for the Regulation of Credit Life Insurance and Credit Accident and Health Insurance (act) (40 P. S. § 1007.12). Additional authority is found under section 649 of The Insurance Department Act of 1921 as renumbered and amended by the act of June 25, 1997 (40 P. S. § 289).
Purpose
The purpose of this final rulemaking is to interpret and implement the provisions of the act and section 641 of The Insurance Department Act of 1921 (40 P. S. § 281), as the latter relates to credit insurance, both of which authorize the Department to promulgate regulations.
Credit life insurance and credit accident and health insurance are presently regulated under Chapters 71 and 73. As the nature and type of credit transactions and resulting credit insurance coverages have evolved, Chapters 71 and 73 have become outdated and incomplete. Numerous notices and directives have been developed by the Department in an effort to keep credit insurance regulations current and to provide direction to the credit insurance industry. This final rulemaking incorporates and codifies these notices and directives. In addition, section 641 of The Insurance Department Act of 1921 was amended in 1994 to provide for the regulation of credit unemployment insurance under the act. This final rulemaking expands credit insurance regulations to now cover credit involuntary unemployment insurance and credit voluntary unemployment insurance.
The credit insurance industry has expressed a desire that the credit insurance premium rates provide for adequate expense and profit margins and that the prima facie premiums be periodically reviewed and updated, if necessary, based on claim experience. To ensure that prima facie rates continue to be based on current claim experience, this rulemaking makes the Department responsible for periodically reviewing loss experience and insurer expenses, and making appropriate adjustments in prima facie rates and loss ratio standards.
In developing the rulemaking, Department staff worked with an industry advisory group comprised of Pennsylvania credit insurers that write all types of credit insurance.
Comments
Notice of proposed rulemaking was published at 27 Pa.B. 3796 (August 2, 1997) with a 30-day public comment period.
During the 30-day comment period, comments were received from Protective Life Insurance Company (Protective Life), Universal Underwriters Group (Universal Underwriters), American Bankers Insurance Group (American Bankers), Consumer Credit Insurance Association (CCIA) and Cuna Mutual Group (CUNA). After the 30-day comment period, comments were received from the Insurance Federation of Pennsylvania (IFP). On October 2, 1997, comments were received from the Independent Regulatory Review Commission (IRRC).
Protective Life noted an inconsistency in certain terminology used in the proposed rulemaking; ''medical doctor'' was used in § 73.104(a)(4) (relating to life insurance and life insurance with TPD benefit), while ''physician'' was used in § 73.115(1)(iii) (relating to benefit exclusions). IRRC raised the same issue. Protective Life noted that the inconsistency in terminology raised an issue as to whether a doctor of osteopathy would qualify as a ''physician.'' The Department agrees with the expressed concern and has amended §§ 73.104(a)(4) and 73.115(1)(iii) to reference ''physician and podiatrist,'' and has added to § 73.103 (relating to definitions) a definition of ''physician,'' which includes a doctor of osteopathy.
Additionally, Protective Life requested clarification as to whether the formula contained in § 73.106(g) (relating to life insurance rate standards) or in § 73.106(i) should be used to calculate net rates for credit life insurance. Section 73.106(i) is an alternative formula, is captioned as such, and may be used in lieu of the formula in § 73.106(g). The Department believes that a change is unnecessary as the language of § 73.106(g) is clear.
Universal Underwriters suggested that the definition of ''simple interest loan'' be deleted from § 73.103 as the terminology is not used in the rulemaking. The Department agrees that the definition is unnecessary and has addressed the concern by amending § 73.103 to omit reference to ''simple interest loan.''
Additionally, Universal Underwriters requested clarification as to whether the 5% discount provided for by § 73.119 (relating to combination coverage rate) would be required when an insurer makes credit disability insurance available only in conjunction with credit life insurance. Whenever any credit insurance coverages (life, accident and health, and unemployment) are provided under separate and distinct policies and only a package of the coverages is made available to the debtor for purchase, the 5% discount applies. The Department agrees that clarification was necessary and has amended § 73.119 to provide clarification as to the types of credit insurance that are affected by the discount.
Universal Underwriters also suggested that the language of § 73.134(c)(12) (relating to compensation of producers and creditors) be revised due to the use of double negatives. The Department is in agreement and has addressed this concern by amending the language of § 73.134(c)(12).
Finally, Universal Underwriters suggested that the reference to ''reasonable return'' in § 73.134(c)(12) leaves the section open to question and interpretation. The Department believes that the use of the term ''reasonable return'' is a viable way to identify reinsurance arrangements that are designed primarily to provide compensation to producers of credit insurance. Section 73.134(c)(12) of the rulemaking has not been modified.
Sections 73.106(l) and (m), 73.109(l) and (m), 73.112(i) and (j) and 73.113(f) provide that if a change in the nonclaim elements of the premium rates is necessary, the Department will propose amendments to the loss ratio standards. American Bankers expressed concern that the loss ratio standards in § 73.123 (relating to loss ratio standards) would be implemented without the formal process required by the Regulatory Review Act (71 P. S. §§ 745.1--745.15). The Department had contemplated that the regulatory procedures of the Regulatory Review Act would be followed. IRRC suggested that the rulemaking clarify that amendments to the loss ratio standards of § 73.123 be made through the regulatory review process. The Department has provided such clarification in §§ 73.106(l) and (m), 73.109(l) and (m), 73.112(i) and (j) and 73.113(f) of the final rulemaking so that the procedures set forth in the Regulatory Review Act will be used to amend the loss ratio standards of § 73.123.
The CCIA, CUNA and Insurance Federation of Pennsylvania (IFP) expressed concern with the requirement in § 73.120(2) (relating to composite term premium rate) that a composite term premium rate not exceed by more than 5% any term specific rate within the composite term period. The commentators believe that a single term rate for all term periods should be permitted and requested deletion of the 5% limitation. The Department is not persuaded by the assertions that inequity in the premium rates is an acceptable tradeoff for premium rate structure simplification. Additionally, the parties point out that historically one rate has been used for all ages and for both males and females. The Department maintains that the historical practice of not differentiating in premium rates by age and gender, does not justify charging the same rate for all periods of coverage. It is appropriate to have some limitation which ensures that rates are not excessive for insured debtors. IRRC expressed its agreement that some limitation ensures that rates will not be excessive for insured debtors. Recognizing the concern with the number of term specific rates when imposing a 5% limitation, § 73.120(2) has been modified by changing the 5% limitation contained in the proposed rulemaking to now reflect 10%. The Department is of the opinion that a 10% limitation will maintain equity in the premium rate structure.
CUNA noted that the 5% limit in § 73.120(2) is inconsistent with the definition of ''composite term premium rate'' in § 73.103. The Department is in agreement. The statutory citation referenced in the definition of ''composite term premium rate'' should correctly reference § 73.120, not § 73.121 (relating to maximum rates). The Department has amended the definition of composite term premium rate in § 73.103.
CUNA suggested that § 73.115 (relating to benefit exclusions) be modified to clearly disclose that the exclusions and limitations of this section are intended to be in addition to those of §§ 73.104(a), 73.107(a) and 73.110(a) (relating to life insurance and life insurance with TPD benefit; accident and health insurance benefits; and involuntary unemployment insurance benefits). The Department agrees that clarification is necessary and has amended § 73.115 of the rulemaking accordingly.
CUNA noted concern with the Department's use of the term ''application,'' as opposed to CUNA's preferred ''written instrument,'' in various sections of the rulemaking. With respect to the issues of age, employment and contestability referenced in §§ 73.105 (3), (4), (6) and (7), 73.108 (4)--(6), (8) and (9) and 73.111 (4)--(6), (8) and (9), the Department believes that the use of the term ''application'' is correct and that it is important that the instrument on which the company would rely upon to invoke these sections be an application. While it is true that section 6 of Group Life Insurance Law (40 P. S. § 532.6) does speak to ''written instrument,'' that reference in the statute has long been interpreted by the Department to mean an insurance application. Accordingly, the Department did not modify the sections of the rulemaking which refer to ''written application.''
Both the CCIA and CUNA indicated that §§ 73.105(9), 73.108(10) and 73.111(10) did not clearly enunciate the effect on changes in the amount and term of the indebtedness that occur after the renewal or refinancing of an existing insured indebtedness. The Department agrees that clarification is needed. Accordingly §§ 73.105(9), 73.108(10) and 73.111(10) have been modified to clarify the effective date for renewed or refinanced indebtedness.
CUNA also commented on the provision in §§ 73.105(7), 73.108(9) and 73.111(9) which requires the presence of a fraudulent misstatement of age prior to allowing a premium or benefit adjustment. CUNA would prefer to eliminate the referenced fraud component during the initial 2-year contestability period of the contract. The Department maintains that the contestability provisions and the adjustment provisions of the rulemaking are unrelated. Hence, the contestability provisions do not apply to the adjustment of premiums or benefits. The contestability provisions allow a company to void coverage as if the coverage never existed. The adjustment provisions allow the company to adjust premiums, benefits, or both as necessary and permissible. There is no overlap between the contestability and adjustment provisions; each of the provisions have a separate and distinct applicability. The Department strongly believes that it is appropriate to require that a misstatement be fraudulent for the misstatement to result in an adjustment of the benefits, premiums, or both. The adjustment sections of the rulemaking have therefore not been modified.
CUNA noted concern with the requirement in § 73.105(8)(ii) that the life insurance certificate disclose the annual percentage rate (APR). CUNA is of the opinion that the disclosure is not applicable to monthly premium group certificates. For single premium certificates, CUNA expressed that the disclosure would be burdensome and unnecessary because the APR is disclosed in the loan document. The Department agrees that it is unnecessary to disclose the annual percentage rate in monthly premium group certificates or individual policies. However, the annual percentage rate is necessary in single premium group certificates or individual policies for the Department to verify that the single premium rate, and any refund applicable to an insured, are calculated correctly. The Department has amended § 73.105(8)(ii) to clarify that the requirement pertains only to single premium certificates and policies.
CUNA suggested that the definition of ''initial insured indebtedness'' in § 73.103 recognize that the insured indebtedness may be subject to a policy maximum. The Department is in agreement and has amended the definition.
CUNA questioned whether the conditions of § 73.107(7) under which payment of an A and H benefit terminates should be expanded. The Department did not modify § 73.107(7) because it is reasonable to assume that an insurer would not continue benefit payments on the other occasions (for example, death, recovery) mentioned by CUNA.
CUNA expressed concern that the reference to outstanding balance in § 73.109(b)(2) (relating to A and H insurance rate standards) is unclear. The Department is in agreement and has amended the definition of the monthly prima facie premium rate in this section. Due to this change, the Department also amended §§ 73.108(6), 73.109(g)--(i), 73.111(6), 73.112(e) and (f), 73.139(g)(1)(i), 73.140(d) and (e).
CUNA suggested that the reference to ''or limited'' in §§ 73.109(f) and 73.112(i) (relating to involuntary unemployment insurance rate standards) is unnecessary. The Department believes the reference is necessary to clarify that the requirements apply to both full term and limited term periods. Therefore, the Department has not amended §§ 73.109(f) and 73.112(i).
CUNA also suggested that §§ 73.106(l), 73.109(l) and 73.112(i) include a description of a formula for adjusting the loss ratio standards. The Department believes that the determination of an adjusted loss ratio standard should be based on the information and data available and on the methodologies in use at the time of the adjustment. Therefore, the Department has not amended § 73.106(l), § 73.109(l) or § 73.112(i).
CUNA expressed concern with the proposed disclosure requirements of § 73.116(a)(2)(i) and (ii) (relating to age requirements). CUNA believes that the disclosure of (1) the term of insurance coverage and, (2) the termination prior to the scheduled maturity date of the indebtedness, is inapplicable to open end loans and is unnecessary for closed end loans. CUNA suggested generally that it would be more appropriate to disclose only that the coverage will terminate when the insured reaches a certain age. CUNA also expressed concern as to whether the Department has the authority to mandate the disclosures. The Department is clearly authorized to require reasonable disclosure when it is in the public interest. The rulemaking has been modified, as suggested by CUNA, to require a disclosure of the age of the debtor at which the insurance will terminate. Accordingly, § 73.116(a)(2)(i) and (ii) have been amended.
CUNA suggested that § 73.130(c) (relating to election of coverage and disclosure requirements) clarify that both debtors agree on which one of the debtors will be selected as the insured. The Department believes that this clarification is unnecessary as it is obvious that agreement must be reached among the debtors prior to electing the coverage.
CUNA also suggested that the last sentence of § 73.139(f)(1) (relating to credit insurance on open end loans) be deleted because the minimum loan payment on open end loans is not always determined as a percentage of the loan balance. The Department is in agreement and § 73.139(f)(1) has been amended. For clarification, § 73.139(g)(1) and (i) have also been amended to provide that the premium rate methodology in § 73.139(g)(1)(i) applies when the benefit amount is expressed as a percentage of the loan balance.
CUNA suggested restricting the applicability of § 73.140(b) (relating to credit insurance on closed end variable interest loans) to single premium plans, contending that monthly premium plans do not require separate forms for different loan types. In certain cases, however, separate monthly premium forms would be required for use with variable interest loans. Additionally, the nature of the plan shall be identified in the filing so that the Department can determine whether the filed description of the monthly premium calculation is consistent with the requirement in § 73.140(d). Thus, § 73.140(b) has not been modified.
IRRC recommended that § 73.126 (relating to voluntary unemployment experience reports) be clarified as to the minimum advance notice required for filing voluntary unemployment insurance experience reports with the Department. The Department has now incorporated a period of 6 months as the minimum advance notice for § 73.126.
Sections 73.105(3), 73.106(5) and 73.111(5) concern the outright voiding of coverage within a certain period of time from issuance of the contract. Sections 73.105(4), 73.106(6) and 73.111(6) concern the termination of coverage at the end of each period for which a premium was collected. IRRC expressed concern that the distinction between §§ 73.105(3), 73.106(5) and 73.111(5) and §§ 73.105(4), 73.106(6) and 73.111(6) is unclear. Sections 73.105(4), 73.106(6) and 73.111(6) apply only in situations where premiums are payable monthly based on the actual monthly outstanding balance. Sections 73.105(3), 73.106(5) and 73.111(5) apply notwithstanding the manner in which the premium calculation is developed. Due to the inherent distinction between voiding and terminating coverage, the Department believes that the language of the rulemaking is sufficiently clear and has chosen not to modify these sections.
IRRC also expressed concern that § 73.104(a) is unclear as to whether all of the conditions of paragraphs (1)--(4) must be met in order for the prima facie premium rates to apply. The Department agrees that clarification is necessary. Accordingly, § 73.104(a) has been appropriately modified.
IRRC suggested that the term ''excess benefits,'' as used in § 73.105(1)(iii), be defined. The Department has incorporated a definition of ''excess benefits'' in § 73.103.
Sections 73.139(a), 73.140(a), 73.141(a), 73.142(a) and 73.143(a) provide requirements applicable specifically to credit insurance on open end loans, closed end variable interest loans, lease transactions, fixed residual loans and balloon loans, respectively. IRRC recommended deleting the phrase ''to the extent that they are inconsistent'' as that appeared in each of these sections of the proposal. The Department is in agreement that the requirements of §§ 73.139(a), 73.140(a), 73.141(a), 73.142(a) and 73.143(a) are not necessarily ''inconsistent'' with other provisions of the rulemaking. Rather, in certain situations, some provisions simply are not applicable. Sections 73.139(a), 73.140(a), 73.141(a), 73.142(a) and 73.143(a) have been modified to delete the phrase ''to the extent that they are inconsistent.''
Editorial changes have been made to: (1) § 73.106(l) by adding the word ''will''; (2) to § 73.109(g)--(i) and § 73.112(e) and (f) by adding the word ''premium''; (3) to § 73.130(a) by deleting ''to''; (4) to § 73.130(b) by substituting the words ''signed for'' with ''authorized'' and ''signing'' with ''authorizing''; (5) § 73.130(b)(2) by relocating the word ''credit''; and (6) to § 73.137(b) by clarifying a violation.
Affected Parties
This final rulemaking applies to life insurance companies and casualty insurance companies marketing credit life, accident and health, and unemployment insurance in this Commonwealth.
Fiscal Impact
State Government The Department anticipates that there will be a substantial reduction in Department staff time which is presently devoted to the regulation of credit insurance due to amendment to the rate adjustment procedure. Insurers are no longer required to file annually for rate adjustments for each of their creditor accounts. Last year alone, for example, rate adjustment filings numbered 8,000. Under the rulemaking, the Department will review only those rate filings which insurers choose to file for upward deviations. In addition, Department personnel will no longer need to review experience reports for each creditor account. The rulemaking will result in an estimated annual savings of $50,000.
General Public The Department anticipates that a greater number of insurers will be inclined to enter the credit insurance marketplace in this Commonwealth due to the elimination of compliance with the previously imposed burdensome rate adjustment system. A greater number of insurers should result in increased competition and resulting lower credit insurance rates and improved benefits.
Creditors' compensation will not be affected by the premium rates charged by the insurer. Therefore, creditors may be more likely to select, for their debtors, insurers offering lower credit insurance rates.
Political Subdivisions Implementation of this final rulemaking will not impose additional costs on political subdivisions. However, because insurers and creditors may need to employ fewer individuals to administer their credit insurance programs, there could be a slight increase in unemployment and a slight decrease in the income tax base for certain subdivisions. If a greater number of insurers and creditors offer credit insurance, those effects could be offset.
Private Sector This final rulemaking is anticipated to have a positive fiscal impact on insurers. Once implemented, it will be less costly for insurers to perform the administrative functions necessary to provide credit insurance coverage in this Commonwealth. There will be a substantial reduction in the number of deviation filings that insurers will need to prepare. It is estimated that the total cost savings will be $300,000.
The Department is also of the opinion that this final rulemaking may have the effect of opening a new market for insurers who have not previously participated in the credit insurance market due primarily to the administrative difficulties connected with the prior regulations.
This rulemaking will impact creditors fiscally to the extent that creditors will have to implement in their premium calculation systems substantially fewer rate changes. It is estimated that the total cost savings in that regard will be $100,000.
Paperwork
The adoption of this final rulemaking will reduce the amount of paperwork that insurers will have to maintain and file with the Department. Insurers will no longer need to submit to the Department annual rate adjustment filings for their accounts, or to notify the Department when changes of insurers occur. Insurers will be able to use an NAIC experience report, thereby reducing the need to prepare special reports for this Commonwealth. Additionally, the reduction in insurers' filings with the Department will result in a substantial reduction in the paperwork that the Department will have to process and maintain.
Effectiveness/Sunset Date
This rulemaking becomes effective July 20, 1998. No sunset date has been assigned.
Contact Person
Questions or comments concerning this final rulemaking should be addressed to Peter J. Salvatore, Regulatory Coordinator, 1326 Strawberry Square, Harrisburg, PA 17120, (717) 787-4429.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)) on July 23, 1997, the Department submitted a copy of the proposed rulemaking to IRRC and to the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee. In addition to the submitted final-form regulations, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' In compliance with 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.
These final-form regulations were approved by the House Committee and by the Senate Committee on January 25, l998, in accordance with section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)). IRRC met on January 29, 1998, and approved the final-form regulations in accordance with section 5.1(e) of the Regulatory Review Act.
Findings
The Insurance 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 for in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.
Order
The Insurance Commissioner, acting under the authorizing statutes, orders that:
(a) The regulations of the Insurance Department, 31 Pa. Code Chapters 71 and 73, are amended by deleting §§ 71.1--71.4, 73.1--73.5, 73.11--73.13, 73.21--73.29, 73.31--73.43 and 73.51 and Appendices A--D and by adding §§ 73.101, 73.102, 73.107, 73.110, 73.114, 73.117, 73.118, 73.121--73.125, 73.127--73.129, 73.131--73.133, 73.135 and 73.136 to read as set forth at 27 Pa.B. 3796 (August 2, 1997) and by adding §§ 73.103--73.106, 73.108, 73.109, 73.111--73.113, 73.115, 73.116, 73.119, 73.120, 73.126, 73.130, 73.134, 73.137--73.143 to read as set forth in Annex A.
(b) The Commissioner shall submit this order, 27 Pa.B. 3796 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, 27 Pa.B. 3796 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 July 20, 1998.
M. DIANE KOKEN,
Insurance Commissioner(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 28 Pa.B. 859 (February 14, 1998).)
Fiscal Note: Fiscal Note 11-148 remains valid for the final adoption of the subject regulations.
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