1990.06.20 - Records of Meeting



RECORDS OF MEETING

GOVERNING COMMITTEE

A Meeting of the Governing Committee of the Commonwealth Automobile Reinsurers was held at the offices of C.A.R, on -

WEDNESDAY, JUNE 20, 1990 AT 10:00 A.M.

The following Members were present -

Mr. Craig M. Bradley Mr. James D. Doherty

Mr. Richard W. Brewer Mr. Sumner D. Gilman

Mr. Donald O. Burns Mr. David J. Lane

Mr. Arthur J. Remillard, Jr. Mr. Robert V. McGowan

Mr. Edwin J. Rinehimer Mr. George Peters

Mr. James M. Stone *Mr. Ralph Petrarca

*Mr. Ralph Petrarca substituted for Mr. Louis M. Xifaras.

There were also present -

Commonwealth Automobile Reinsurers

President Mr. R. M. LaFontaine

Executive Vice President & Treasurer Mr. M. J. Trovato

Administrative Vice President & Secretary Mr. D. I. Jewell

Vice President & General Counsel Mr. J. J. Maher, Jr.

Vice President-Financial Services Ms. M. L. Corbett

Vice President-Claims Ms. V. B. Gedziun

Adm. Assistant for Industry Relations Mr. G. F. Monahan

Claims Consultant Mr. Robert Tyler

Administrative Manager Mr. J. D. Metcalfe

Underwriting Manager Ms. P. A. Wallace

Financial Manager Mr. J. V. Kelly

Data Operations Manager Ms. W. S. Thompson

Statistical Manager Ms. M. S. Adgate

S.C./Representative Producer Coordinator Mr. T. J. Costain

Executive Secretary Ms. B. A. Seminatore

Massachusetts Division of Insurance Mr. D. R. Judson

Hale and Dorr Mr. R. W. Mahoney

Allstate Insurance Company Mr. P. C. Gallery

Mr. J. R. Neault

Amica Mutual Insurance Company Mr. R. A. Williamson

Arbella Mutual Insurance Company Mr. W. D. Healey

Chubb Insurance Group Ms. Patricia Cronin

The Commerce Insurance Company Mr. D. H. Cochrane

Mr. R. P. Remillard

Commercial Union Insurance Company Mr. A. A. Kinsman, Jr.

Mr. D. L. Miller

Crum & Forster Commercial Insurance Mr. Edward Coloney

Fitchburg Mutual Insurance Company Mr. George Larson

Goodwin, Procter & Hoar Ms. Marie Lefton

The Hanover Insurance Company Mr. W. D. Howard

Mr. J. B. May

Independent Insurance Agents of Massachusetts Mr. E. J. Donahue, Jr.

Insurco Consulting Inc. Mr. Warren McLean

John Hancock Property & Casualty Ins. Co. Mr. Jerry Heberlein

Liberty Mutual Insurance Company Mr. F. E. Wilde

Metropolitan Property & Liability Insurance Co. Mr. D. J. Stoeckel

Morrison, Mahoney & Miller Mr. J. J. Moran, Jr.

New Hampshire Insurance Company Ms. Anne Koeck

Norfolk & Dedham Mutual Fire Insurance Company Mr. C. R. Johannesen

Pilgrim Insurance Company Mr. George Grieve

Plymouth Rock Assurance Corporation Mr. G. H. Arnold

Policy Management Systems Corporation Mr. Thomas Bigelow

Ms. Jean Walsh

Safety Insurance Company Mr. D. F. Brussard

Travelers Insurance Company Mr. J. H. Burns

Ms. D. C. Fortino

Mr. J. R. Johnson

Mr. Richard Welch

Trust Insurance Company Mr. Mark Sweeney

United States Fidelity and Guaranty Company Ms. S. A. Millen

W. B. Palmer Associates Mr. W. B. Palmer

Chairman McGowan called the meeting to order at 10:00 A.M. and announced that the Commissioner of Insurance approved the substitution of Mr. Ralph Petrarca for Mr. Louis M. Xifaras.

90.1 MINUTES OF PREVIOUS MEETINGS

A motion was made by Mr. James Doherty and duly seconded by Mr. David Lane to accept the Records of the Governing Committee Meeting of April 18, 1990.

The motion passed on a unanimous vote.

A motion was made by Mr. James Doherty and duly seconded by Mr. David Lane to accept the Records of the Governing Committee Meeting of May 16, 1990, with the following amendment:

On page 16, amend the last paragraph, last sentence to read as follows:

The written Records being available for Governing Committee consideration and review, a motion was made by Mr. James Doherty and duly seconded by Mr. Frederick Wilde to accept the Records of the Joint Actuarial and Commercial Lines Committee Meeting of March 29, 1990.

The motion to accept the Records of the Governing Committee Meeting of May 16, 1990, as amended, passed on a unanimous vote.

The written Records of the Governing Committee Meeting of June 4, 1990 being unavailable for Governing Committee consideration, approval was deferred until the next meeting.

90.5 COUNSEL REPORT

Mr. Joseph J. Maher, Jr., Vice President and General Counsel, suggested that because of the potential for litigation, it would be appropriate for the Governing Committee to consider the following matters in Executive Session: (1) Royal Insurance Company/Safety Insurance Company buy-out agreement, (2) St. Paul Fire and Marine Insurance Company's withdrawal, and (3) CIGNA's withdrawal from the private passenger automobile market.

Continuing, Mr. Maher noted that a package of proposed Rule changes was distributed to the Governing Committee Members, prior to this meeting, for their review. Mr. Maher advised that the proposed amendment to Rule 6, Coverages, is in regard to the Governing Committee's referral to the Servicing Carrier Committee of the question of limits to be provided on commercial policies. Mr. Maher advised that the Servicing Carrier Committee is recommending, for Governing Committee approval, that Servicing Carriers, at the request of the insured, be required to provide coverages up to the maximum cedable limits on "all other" motor vehicle policies not voluntarily retained by the Servicing Carrier. The Servicing Carrier Committee is also recommending that the ceded premiums associated with the limits in excess of statutory basic limits be exempted from the commercial cession limitation.

Ms. Mary Corbett, Vice President of Financial Services, speaking to the issue of C.A.R.'s ability to distinguish increased limit premiums from the statutory basic premium, reported that there are several methods for exempting from the commercial cession limitation calculations the premium representing limits in excess of those mandated by statute. Ms. Corbett advised that eliminating premium associated with the higher limits from the cession limitation calculation, with one hundred percent accuracy, would require a second rating of a commercial policy that is ceded at the higher limits. Ms. Corbett advised that the problems associated with this methodology would basically be that (1) companies would have to develop the capacity of doing a second rating on each policy that fits into this criteria, along with the reporting of statistics to C.A.R. that would identify the excess premium and (2) C.A.R. would similarly have to develop systems and procedures to verify the reported statistics and to segregate these premiums from the cession limitation calculation. Ms Corbett advised that the system updates would be fairly complicated and timely to develop for both C.A.R. and the companies. Where it is the Governing Committee's intent to implement the changes as expeditiously as possible, C.A.R. Staff proposes the following alternatives:

(1) To increase the commercial cession limitation percentage level to allow for the cession of additional premium so as to avoid any company being subject to the cession limitation penalty as a result of the company's ceding of increased limits. This adjustment would be based on the industrywide volume of premium that was written at the higher limits level for policy year 1988 (the last year in which there was no cession limitation). Ms. Corbett advised that one problem with using this alternative would be using a common

90.5 COUNSEL REPORT (Con.)

percentage for all companies. Any companies whose particular mix of business includes a higher volume of the excess limits premium would be disadvantaged, and a company whose mix was lower than average would be benefited.

(2) To look at each company's current year data on an individual basis to determine the mix of business for the various classes to try to estimate what their volume of premium would be at the excess limit levels, in order to establish a unique cession limitation level for each company according to its mix of business.

Ms. Corbett advised that C.A.R. Staff is requesting direction from the Governing Committee as to which of the two alternatives would be acceptable to the Governing Committee as well as the policy effective date for implementation of the proposed Rule.

In regard to the premium dollars relating to the commercial excess premium, the Governing Committee agreed that the amount of premium resulting from the difference between the basic and increased limits should be identified before a formula is agreed upon for excluding from the cession limitation calculation, premiums resulting from the higher limits. The Committee expressed concern over not wanting to weaken the existing cession limitation provision for "all other" vehicles.

After further discussion, a motion was made by Mr. James Doherty and duly seconded by Mr. James Stone to table discussion on proposed Rule 6.

The motion passed on a unanimous vote.

Continuing, Mr. Maher advised that the proposed amendment to Rule 6, Coverages, which requires that the Pollution Exclusion Endorsement be attached to all ceded garage policies, was deemed approved upon the passage of thirty days from the date of filing.

In regard to Rule 2, Definitions, Representative Producer, which was designed to more clearly set forth the circumstances within which a nonresident agent may have access to the Massachusetts motor vehicle insurance residual market. Mr. Maher advised that it was also deemed approved upon the passage of thirty days from the date of filing.

At this time, Chairman McGowan announced that he would accept a motion to convene into Executive Session.

A motion was made by Mr. James Doherty and duly seconded by Mr. Donald Burns to convene into Executive Session.

On a roll call vote, the following Members unanimously voted in favor of the motion:

Mr. Craig M. Bradley Mr. James D. Doherty

Mr. Richard W. Brewer Mr. Sumner D. Gilman

Mr. Donald O. Burns Mr. David J. Lane

Mr. Arthur J. Remillard, Jr. Mr. Robert V. McGowan

Mr. Edwin J. Rinehimer Mr. George Peters

Mr. James M. Stone Mr. Ralph Petrarca

Immediately following the Executive Session of the Governing Committee, the open session of the Governing Committee reconvened.

90.5 COUNSEL REPORT (Cont.)

A motion was made by Mr. David Lane and duly seconded by Mr. James Doherty to remove from the table the question in regard to Rule 6.

The motion passed on a unanimous vote.

Mr. Rinehimer suggested that in view of the heavy volume of commercial business in the first six months of the year, he would be amenable to a gross calculation such as Staff has proposed, as an interim measure for the remainder of policy year 1990, with the objective of compiling something that more precisely measures the difference between basic and increased limits premium for implementation with the policy year 1991 commercial cession limitation. He suggested that the difference might be measured by developing average factors that could be applied to gross premiums at the various levels of liability limits, to separate the basic limits premium from the increased limits premiums on an approximate basis.

After discussion, a motion was made by Mr. David Lane and duly seconded by Mr. James Doherty to adopt the amendment to Rule 6, Coverages, as presented, and direct Staff to submit the proposed amendment to the Commissioner of Insurance for his approval, with the understanding that Staff will implement Mr. Rinehimer's suggestion for adjusting the calculation for determining a company's all other cession limitation.

The motion passed eleven in favor, with one opposed.

Continuing, Mr. Maher advised that the proposed amendment to Rule 17, B, 3, (3), relates to the Governing Committee's earlier vote to modify the penalty for the cession limitation on commercial business. This revision allows a Servicing Carrier to retain the premium tax, commission, and direct writer selling expense portion of the ceding expense allowances on ceded "all other motor vehicle" premium which represents between 30% and 40% of the total premium on which the 1991 cession limitation is based. The Servicing Carrier receives no ceding expense allowances on ceded "all other motor vehicle" premium in excess of 40% of the total premium on which the 1991 cession limitation is based.

90.5 COUNSEL REPORT (Cont.)

A motion was made by Mr. James Doherty and duly seconded by Mr. James Stone to adopt the amendment to Rule 17, B, 3, (3), and direct Staff to submit the proposed amendment to the Commissioner of Insurance for his approval.

The motion passed eleven in favor, with one opposed.

Mr. Maher advised that the proposed amendment to Rule 17, B, 3, provides for the exclusion of ceded garage premiums in the commercial cession limitation calculations for policy years 1989 and 1990 only. Ceded garage premiums will be included in these calculations for policy year 1991, in light of the availability of the pollution exclusion endorsement.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to adopt the amendment to Rule 17, B, 3, and direct Staff to submit the proposed amendment to the Commissioner of Insurance for his approval.

The motion passed on a unanimous vote.

In conclusion, Mr. Maher advised that the proposed amendments to Rule 14, Representative Producer Requirements, Production Criteria, establishes a third year review during which time the Representative Producer must have a book of business of at least 400 motor vehicles.

After discussion, a motion was made by Mr. James Stone and duly seconded by Mr. Donald Burns to adopt Rule 14, as presented, with the modification that the Rule is to apply to only Exclusive Representative Producers. Also that the Rule specifies that Exclusive Representative Producers whose applications were submitted and who were appointed on or after January 1, 1990 shall be reviewed annually on the anniversary of each Exclusive Representative Producer's contract date.

The motion passed nine in favor, with Messrs. Gilman and Peters opposed and Mr. Petrarca abstaining.

90.6 MARKET REVIEW COMMITTEE

Mr. James Doherty advised that an oral report of the Market Review Committee Meeting of May 2, 1990 was given at the Governing Committee Meeting of May 16, 1990. The written Records being available for Governing Committee consideration and review, a motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to accept the Records of the Market Review Committee Meeting of May 2, 1990.

The motion passed on a unanimous vote.

90.6 MARKET REVIEW COMMITTEE (Cont.)

Continuing, Mr. Doherty, reporting on the Market Review Committee Meeting of May 22, 1990, advised that the Committee considered an appeal by the John G. Alden Insurance Agency, Inc. relative to the termination of its Exclusive Representative Producer appointment by the Royal Insurance Company for "failure to develop a book of business of at least one hundred vehicles." The Market Review Committee voted unanimously to deny the appeal.

The Market Review Committee considered establishing guidelines which would enable Staff to effectively evaluate the continued appointment of Exclusive Representative Producers pursuant to the definition of substantial effort to obtain a voluntary contract for automobile as identified in Rule 14, A, 4. Mr. Doherty advised that the Market Review Committee directed Staff to develop an outline for the Committee to review at its next meeting, containing the following criteria that will be considered by C.A.R. as a minimum of data that should be provided to a company by a producer when seeking a voluntary automobile contract.

1. General Background of Agency

2. Length of Time as an Exclusive Representative Producer

3. Location of Office and Branch Offices

4. Volume of Automobile Business

5. Mix of Business

6. Three Year Overall Loss Ratio

7. Management of the Agency

8. Level of Agency Automation

9. Three to Five Year Business Plan

10. Perpetuation Plan

11. Willingness of Agency to Write Other Lines of Business

A motion was made by Mr. James Doherty and duly seconded by Mr. David Lane to accept the Records of the Market Review Committee Meeting of May 22, 1990.

The motion passed on a unanimous vote.

Continuing, Mr. Doherty reported on the Market Review Committee Meeting of June 18, 1990. Mr. Doherty advised that the Market Review Committee considered an appeal by Robert M. Hunt in regard to the declination of his application for appointment as an Exclusive Representative Producer pursuant to the definition of market need, insofar as a market for automobile insurance exists for Mr. Hunt through an affiliation with another C.A.R. appointed agency. The Market Review Committee denied the appeal without prejudice.

Mr. Doherty advised that at the request of the United States Fidelity and Guaranty Company (U.S.F.& G.), the Market Review Committee reconsidered an appeal of the Robert C. Ayres Insurance Agency in regard to its agency

90.6 MARKET REVIEW COMMITTEE (Cont.)

termination which was originally considered by the Committee at its April 12, 1990 Meeting. The agency had been terminated by the U.S.F.& G. for "failure to remit payments to a Servicing Carrier on a timely basis." The Market Review Committee agreed to defer action on the appeal until its next meeting to allow for the presentation of additional written documentation.

Continuing, Mr. Doherty reported that the Market Review Committee considered an appeal by the Lake-Nestor Insurance Agency in regard to the declination of its application for Exclusive Representative Producer appointment pursuant to the definition of market need, insofar as a market exists for the Lake-Nestor Agency through an affiliation with another C.A.R. appointed agency. The Market Review Committee voted to deny the appeal without prejudice.

Mr. Doherty advised that the Market Review Committee discussed and modified criteria, developed at its previous meeting, that will be considered by C.A.R. as a minimum of data that should be provided to a company by a producer when seeking a voluntary automobile contract. The Committee directed Staff to prepare a sample document for consideration and possible implementation at its next meeting that would advise Exclusive Representative Producers of their responsibilities pursuant to Rule 14 for maintaining their appointments. The Market Review Committee agreed that the requirement apply only to those Exclusive Representative Producers located in noncredit eligible territories.

In conclusion, Mr. Doherty reported that the Market Review Committee considered an appeal by the S & K Insurance Agency, Inc. in regard to the termination of its Exclusive Representative Producer appointment by the Commerce Insurance Company for "failure to report all coverages bound...", "failure to remit payments in a timely manner...", and "failure to notify a Servicing Carrier of any suspected fraud surrounding a loss." The Market Review Committee voted to delay action for ninety days pending the investigation of a suspicious claim filed by an S & K insured. Commerce is to report to the Committee on the status of the S & K Agency regarding the three portions of Rule 14 that the Exclusive Representative Producer appointment was terminated for.

A motion was made by Mr. David Lane and duly seconded by Mr. Sumner Gilman to receive the oral report of the Market Review Committee Meeting of June 18, 1990.

The motion passed on a unanimous vote.

90.7 CLAIMS ADVISORY COMMITTEE

Mr. James Burns, reporting on the Claims Advisory Committee Meeting of May 23, 1990, advised that the Committee was provided a status report in regard to the Bodily Injury Fraud Seminars. The Seminars were held on June 5, 1990, June 6, 1990 and June 7, 1990, in Danvers, Braintree and Auburn and were attended by 390 industry claims personnel.

Continuing, Mr. Burns advised that the Claims Advisory Committee considered the reimbursement procedures relating to unusual facets of investigating potential fraud that were approved by the Governing Committee in May, 1987. Staff clarified which items of expense required pre-approval by C.A.R.'s Special Investigative Unit.

Mr. Burns advised that Staff reported to the Claims Advisory Committee that the review of bodily injury files from the Doctor/Lawyer Index has revealed that a major indicator of suspicious claims is passengers alleging injuries who are not listed on the police report. The inclusion of this information on the police report could be a significant cost containment measure in reducing the incidence of fraudulent bodily injury claims. The Claims Advisory Committee recommends, for Governing Committee approval, that a letter be sent to the appropriate authorities requesting that the police report be modified to show all passengers and not just injured parties.

A motion was made by Mr. James Doherty and duly seconded by Mr. Ralph Petrarca to adopt the recommendation of the Claims Advisory Committee.

The motion passed on a unanimous vote.

In conclusion, Mr. Burns advised that a report to the Claims Advisory Committee in regard to the Appraisers Licensing Board revealed the appointment of a new Chairman, who will now report directly to the Commissioner of Insurance. The Claims Advisory Committee will continue to monitor the problem of the scheduling of Appraisers Licensing Exams.

A motion was made by Mr. James Doherty and duly seconded by Mr. Donald Burns to receive the oral report of the Claims Advisory Committee Meeting of May 23, 1990.

The motion passed on a unanimous vote.

90.8 OPERATIONS COMMITTEE

Mr. Wayne Howard, reporting on the Operations Committee Meeting of May 24, 1990, advised that the Operations Committee unanimously approved the Accounting Subcommittee's recommendation regarding a methodology for collecting ceded loss history data from Servicing Carriers. This change is needed in order to enable C.A.R. to provide its Members with data needed to meet new reporting requirements of the Schedule-P, effective with the 1990

90.8 OPERATIONS COMMITTEE (Cont.)

and subsequent Annual Statements. The Operations Committee requested that C.A.R Staff first investigate whether some of the data may be available either from AIPSO or from C.A.R. Data which is easily available from these sources will be used, and data not available will be requested from Servicing Carriers in the future.

Continuing, Mr. Howard reported that the Operations Committee unanimously approved and is recommending, for Governing Committee approval, the Policy Edit/Write-Off Subcommittee's recommendation of the Company Reporting Profile package as proposed by C.A.R. Staff. In the near future, each company will receive a profile package which contains a cover letter, company reporting profile, ratings explanation, ratings standards, and a summary of industry totals. The profiles encompass twelve months of reporting in 1989 and will be mailed in early July.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to adopt the recommendation of the Operations Committee.

The motion passed on a unanimous vote.

Mr. Howard reported that the Operations Committee unanimously approved and is recommending, for Governing Committee approval, the Statistical Subcommittee's recommendations as follows:

1. A tolerance level of plus or minus twenty-five percent for the Distributional Edit analysis of each company's policy year 1988 to policy year 1989 premium/exposure data and accident year 1988 to accident year 1989 claim count/loss amount data.

2. A tolerance level of plus or minus ten percent for the analysis of classification codes by statistical and rate class, which will be performed on final calendar year 1989 data.

It was noted that this applies only to the portion of the analysis report that displays a comparison of total voluntary, plus ceded data, for each statistical class to the total data reported for all statistical classes.

3. An update to the 1990 Statistical Plan relative to the preinspection code table, which will be effective January 1, 1990. Also, an update to the 1991 Statistical Plan relative to Type of Risk, which involves adding Type of Risk Code "4" and amending "3", to allow identification of business written at deviated rate levels.

90.8 OPERATIONS COMMITTEE (Cont.)

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to adopt the recommendations of the Operations Committee.

The motion passed on a unanimous vote.

Continuing, Mr. Howard advised that C.A.R. Staff reported on the production delays which have recently affected the cession and accounting error listing cycles. The Operations Committee was advised that the problems, in part, are attributed to difficulties with a complex file conversion process C.A.R. performed in 1989. The problems have been exacerbated by unanticipated demands on C.A.R.'s resources stemming from Rule changes to depopulate C.A.R.

Mr. Howard reported that C.A.R. Staff stated that over the short-term, a plan has been put together to achieve normal monthly processing by mid to late summer, and C.A.R. management is closely monitoring this progress. Mr. Howard advised that this plan will be communicated to all companies. Over the long-term, Staff will be applying additional resources to the systems to review processing constraints, performance issues, and implementing any changes that will increase the schedule reliability. This may include additional Staff or computer resources to maintain the timeliness and accuracy of C.A.R.'s operation. The Operations Committee endorsed Staff's actions, noting the importance of timely C.A.R. reports to smooth operations at the companies. Staff was requested to solicit companies' comments as to any difficulties that these companies were experiencing as a result of delays.

In conclusion, Mr. Howard reported that the Operations Committee unanimously approved that a Bulletin be sent to all companies informing them that the Registry is prepared to provide each company, at its request, with its portion of the Registry's database.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to receive the oral report of the Operations Committee Meeting of May 24, 1990.

The motion passed on a unanimous vote.

90.11 ACTUARIAL COMMITTEE

Mr. Arthur Remillard advised that an oral report of the Actuarial Committee Meeting of April 17, 1990 was given at the Governing Committee Meeting of April 18, 1990. The written Records being available for Governing Committee consideration and review, a motion was made by Mr. Arthur Remillard and duly seconded by Mr. James Doherty to accept the Records of the Actuarial Committee Meeting of April 17, 1990.

The motion passed on a unanimous vote.

90.14 AUDIT COMMITTEE

Mr. David Brussard, reporting on the Audit Committee Meeting of June 13, 1990, advised that Staff reported that it is continuing the audit of Allstate's method of reporting nonpayment cancellation transactions to C.A.R. and will keep the Committee advised as to its findings.

Continuing, Mr. Brussard advised that the Audit Committee reviewed the new format for statistical field audits performed by C.A.R. on behalf of the Division of Insurance. Staff reported that both the audit reports and the company comparisons have been very well received at the Division of Insurance. The Audit Committee commended the Audit Department for their effort in developing a statistical field audit that meets the needs of the industry.

Mr. Brussard reported that the Audit Committee considered the retention of Coopers & Lybrand as C.A.R. auditors for fiscal year 1990. After receiving input from C.A.R. Staff, the Audit Committee voted four to one to recommend, for Governing Committee approval, that Coopers & Lybrand be retained for fiscal year 1990.

A motion was made by Mr. James Doherty and duly seconded by Mr. James Stone to adopt the recommendation of the Audit Committee.

The motion passed on a unanimous vote.

In conclusion, Mr. Brussard advised that the written Records of the Audit Committee Meetings of February 14, 1990 and March 14, 1990 were available for Governing Committee consideration and review.

A motion was made by Mr. James Doherty and duly seconded by Mr. Donald Burns to accept the Records of the Audit Committee Meetings of February 14, 1990 and March 14, 1990.

The motion passed on a unanimous vote.

A motion was made by Mr. James Doherty and duly seconded by Mr. Donald Burns to receive the oral report of the Audit Committee Meeting of June 13, 1990.

The motion passed on a unanimous vote.

90.16 COMMERCIAL LINES COMMITTEE

Ms. Pamela Wallace advised that an oral report of the Commercial Lines Committee Meeting of May 9, 1990 was given at the Governing Committee Meeting of May 16, 1990. The written Records being available for Governing Committee consideration and review, a motion was made by Mr. James Doherty and duly seconded by Mr. Donald Burns to accept the Records of the Commercial Lines Committee Meeting of May 9, 1990.

The motion passed on a unanimous vote.

90.18 GOVERNING COMMITTEE REVIEW PANEL

Mr. Donald Burns, reporting on the Governing Committee Review Panel Meeting of June 13, 1990, advised that the Panel considered petitions from six companies requesting exemption from Servicing Carrier status. The Governing Committee Review Panel denied petitions for exemption from Servicing Carrier appointment for the following companies:

Argonaut Insurance Company

CUNA Mutual Insurance Group

John Deere Insurance Company

Preferred Risk Group

Old Republic Insurance Company

Republic Western Insurance Company

Continuing, Mr. Burns reported that the Governing Committee Review Panel considered an appeal by Joseph W. Wooller, III, of the Market Review Committee's decision of February 20, 1990, denying his request for appointment as an Exclusive Representative Producer. C.A.R. Staff declined Mr. Wooller's application for not meeting the market need requirement that the agency be located in a credit eligible territory as defined in Rule 12 of C.A.R.'s Rules of Operation. The Panel voted to deny the appeal and uphold the decision of the Market Review Committee.

In conclusion, Mr. Burns advised that an oral report of the Governing Committee Review Panel Meeting of May 4, 1990 was given at the Governing Committee Meeting of May 16, 1990. The written Records being available for Governing Committee consideration and review, a motion was made by Mr. Donald Burns and duly seconded by Mr. James Doherty to accept the Records of the Governing Committee Review Panel Meeting of May 4, 1990.

The motion passed on a unanimous vote.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to accept the oral report of the Governing Committee Review Panel Meeting of June l3, 1990.

The motion passed on a unanimous vote.

Mr. Dana Jewell, Administrative Vice President and Secretary, distributed a report displaying the Servicing Carrier status of former non-Servicing Carrier companies, see attached.

Mr. Rinehimer, commenting on the exhibit, expressed concern that a substantial number of companies are in noncompliance with the recently enacted reform legislation requiring that effective in 1990 all writing companies be Servicing Carriers. Mr. Rinehimer further commented that the burden of providing Servicing Carrier services for the involuntary market is continuing to fall unfairly on those companies who were Servicing Carriers prior to January 1, 1990.

90.18 GOVERNING COMMITTEE REVIEW PANEL (Cont.)

Mr. Trovato, Executive Vice President and Treasurer, advised that those companies who have not been qualified by Staff as a C.A.R. Servicing Carrier have been referred to the Division of Insurance. Mr. Trovato further noted that decisions are awaited on those appeals filed by companies seeking to have an exemption from the obligation of becoming a Servicing Carrier.

90.21 I.B.N.R. COMMITTEE

Ms. Mary Corbett, Vice President of Financial Services, reported that the I.B.N.R. Committee met on June 12, 1990, for the purpose of establishing C.A.R.'s loss reserve levels for the Quarter ending March 31, 1990, and also to review information relative to the development of the frequency and severity database that the Committee will be using in the future to improve the accuracy of loss reserving.

Continuing, Ms. Corbett referred to the exhibits displaying C.A.R.'s underwriting results by participation pool as of the Quarter ending March, 1990, for policy years 1987 through 1990 and the historical development of the loss ratios for these policy years by pool (see attached).

Within the private passenger pools, there is an unusually large volume of data which was unreported as of the close of the March quarter, which produced some instability in the reserve indications for the current quarter, especially for the more recent accident years. As a result, the I.B.N.R. Committee placed significant weight on their reserve estimates for the prior quarter, where data was nearly complete, in setting the current quarter's reserve levels. Ms. Corbett noted that due to the missing data problem, the current reserves may require some additional adjustment in future quarters as the data becomes more complete.

Continuing, Ms. Corbett reported that within the private passenger pools, some improvement in the indicated deficit was observed in the 1987 and 1988 policy years, for both liability and physical damage coverages. For policy year 1987, the indicated deficit has declined this quarter by $4.4 million to a level of $452.6 million, based on a current loss ratio of 96%. For policy year 1988, the indicated deficit has declined by $8.3 million within the current quarter to a level of $391.9 million, based on a loss ratio of 89.4%. Ms. Corbett noted that because of the data problem in this quarter, there may be some future adjustment to the reserves for these policy years.

Ms. Corbett advised that the private passenger loss ratio for policy year 1989 currently stands at 95.3%, and the underwriting results deficit is $550.8 million as of the close of the March quarter. This represents fifteen months of development on this policy year. The deficit is currently higher than the I.B.N.R. Committee's projection of the ultimate deficit for policy year 1989, which was $529.2 million. Ms. Corbett noted

90.21 I.B.N.R. COMMITTEE (Cont.)

that at this point, the deficit for policy year 1989 could be expected to decline in the future quarters as a result of future earning of premium for this policy year, whereas expenses are currently reflected at a 100% level within the deficit.

Continuing, Ms. Corbett advised that the private passenger loss ratio for policy 1990 stands at 100.7%, however, since this policy year has only three months of development, it can be expected that some modifications will occur in the future.

Ms. Corbett reported that within the commercial pools, data for the quarter ending March 31, 1990 was more complete, and the I.B.N.R. Committee found that the reserve indications were more stable. Ms. Corbett advised that there was a slight improvement in the policy year 1987. These results were offset by a comparable slight deterioration in the results for policy year 1988. For policy year 1989, the commercial loss ratio currently stands at 89.9%, at fifteen months, which is higher than the fifteen month loss ratios for policy years 1987 and 1988. This is partially attributable to the understatement of reserves that had occurred for the older policy years in prior quarters, but it can also be attributed to the fact that the 1989 cession limitation for commercial business has encouraged the removal of better business from C.A.R., which would result in the increase in C.A.R.'s loss ratio. The commercial loss ratio for policy year 1990 stands at 101.5% as of three months, which would change significantly in the future as more data is reported.

In conclusion, Ms. Corbett reported that in regard to the development of the frequency and severity database, the I.B.N.R. Committee was provided information by C.A.R. Staff relative to the contents of C.A.R.'s major files, which could be used as a data source for developing this database. This would make possible more refined projections of reserve requirements for the residual market. The I.B.N.R. Committee will be reviewing this information and has established a subcommittee that will be meeting later this summer to provide C.A.R. Staff with more direction in developing the database and analysis reports from it.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to receive the oral report of the I.B.N.R. Committee of June 12, 1990.

The motion passed on a unanimous vote.

90.22 SERVICING CARRIER COMMITTEE

Mr. Richard Brewer advised that an oral report of the Servicing Carrier Committee Meeting of May 15, 1990 was given at the Governing Committee Meeting of May 16, 1990. The written Records being available for Governing Committee consideration and review, a motion was made by Mr. Richard Brewer and duly seconded by Mr. Craig Bradley to accept the Records of the Servicing Carrier Committee Meeting of May 15, 1990.

The motion passed on a unanimous vote.

90.28 JOINT ACTUARIAL AND COMMERCIAL LINES COMMITTEE

Chairman McGowan advised that the written Records of the Joint Actuarial and Commercial Lines Committee Meeting of May 1, 1990 being unavailable for Governing Committee consideration, approval will be deferred until the next meeting.

90.32 MARKET NEED CRITERIA COMMITTEE

Mr. Sumner Gilman, reporting on the Market Need Criteria Committee Meeting of May 22, 1990, advised that the Committee continued deliberation as to the manner in which an Exclusive Representative Producer's (ERP) business should be treated with respect to utilization.

Continuing, Mr. Gilman advised that the Committee considered input from the Commissioner of Insurance concerning: (1) incentives to companies giving voluntary contracts to ERPs, (2) the approach to be taken for the equitable distribution of the financial burden as a consequence of ERP assignments, and (3) revisions to Rule 2, C.A.R.'s Rule of Operation, definition of ERPs.

Mr. Gilman advised that Mr. Rinehimer, Travelers Insurance Company, distributed to the Market Need Criteria Committee for its consideration, a four point proposal for redistribution of the ERP burden among all Servicing Carriers for utilization purposes. To assist the Committee in its consideration of the proposal, Staff was requested to contact the Merit Rating Board to determine risks which could be excluded from the utilization calculation. The specifics of the proposal will be discussed at a future meeting.

In regard to the Rule 14 requirement that ERP's make a substantial effort to secure voluntary contracts for which they will be subject to review by C.A.R. Staff, the Market Need Criteria Committee recommended that the Market Review Committee give further consideration to this item.

Continuing, Mr. Gilman advised that the Committee explored the feasibility of having all ERP contracts expire on December 31, 1991. In order for the ERP appointment to be renewed, it would be incumbent upon the ERP

90.32 MARKET NEED CRITERIA COMMITTEE (Cont.)

to prove continued eligibility or file a plan with C.A.R. as to how they intend to comply with the requirements of Rule 14. The Committee also voted to explore the feasibility of imposing a commission differential and/or the imposition of a fee on those Representative Producers who do not operate from a credit eligible territory.

A motion was made by Mr. Richard Brewer and duly seconded by Mr. James Doherty to receive the oral report of the Market Need Criteria Committee Meeting of May 22, 1990.

The motion passed on a unanimous vote.

Mr. Gilman, reporting on the Market Need Criteria Committee Meeting of June 19, 1990, advised that the Committee discussed the impact of an ERP being permitted to retain multiple Servicing Carrier outlets pursuant to current C.A.R. Rules and determined that the definition of an ERP, as it currently exists in Rule 2, C.A.R. Rules of Operation, does not allow for the existence of a voluntary agency agreement in conjunction with an ERP designation. The Market Need Criteria Committee also discussed additional ERP eligibility requirements including, operating from a credit eligible territory and agency affiliations with other C.A.R. appointed agencies. The Market Need Criteria Committee recommends, for Governing Committee approval, that C.A.R. Bulletin all ERPs, notifying them, in principle, of all eligibility requirements and informing them that noncompliance with C.A.R. Rules may jeopardize their ERP appointment. Also, the Committee requested Staff return a draft of the Bulletin to the Committee prior to its release.

A motion was made by Mr. Sumner Gilman and duly seconded by Mr. Ralph Petrarca to adopt the recommendation of the Market Need Criteria Committee.

The motion passed on a unanimous vote.

Mr. Joseph Maher reported that Bulletin No. 330, amending Rule 2, Definitions, Exclusive Representative Producer, is now pending at the Division of Insurance. The proposed amendment would require, in part, that for 1990 only, an ERP appointment would continue notwithstanding the existence of a voluntary agreement for motor vehicle insurance. The Market Need Criteria Committee, after further consideration of the concept of allowing an ERP to have both a voluntary and involuntary appointment, is recommending to the Governing Committee that subsequent to January 1, 1991, any ERP that has a voluntary contract for motor vehicle insurance would no longer satisfy the definition of an ERP. The proposed amendment to the definition of an ERP as adopted by the Governing Committee at its last meeting contains language that is contrary to the Market Need Criteria Committee's recommendation. Mr. Maher noted that the amendments to Rule 2, ERP, have not been approved by the Division of Insurance because of a pending request for a hearing.

90.32 MARKET NEED CRITERIA COMMITTEE (Cont.)

Continuing, Mr. Maher advised that the current definition of Exclusive Representative Producer relative to the nonresident issue is as follows: nonresident licensed agents and brokers with a place of business in any state contiguous to Massachusetts may apply to C.A.R. for appointment as ERP. Mr. Maher advised that the proposed amendment requires that nonresident licensed brokers satisfy the requirements of Rule 14. Mr. Maher advised that it was implicit that any person making application for an ERP appointment must satisfy all the requirements of Rule 14, including the recently adopted Market Need Criteria. To withdraw the Rule in its entirety not only takes away an explicit statement, but leaves the implicit obligation that an applicant meet all Rule 14 criteria.

After discussion, a motion was made by Mr. James Stone and duly seconded by Mr. David Lane to withdraw the proposed amendments to Rule 2, (Bulletin No. 330) Definitions, Exclusive Representative Producer.

The motion passed on a unanimous vote.

Continuing, Mr. Gilman reported that the Market Need Criteria Committee then discussed the issue of cancellation of voluntary agreements by all remaining Servicing Carriers in a producer's agency resulting in the agency being left without an auto market. The Market Need Criteria Committee discussed whether the producer should be required to meet all ERP eligibility criteria before being allowed an appointment. The Market Need Criteria Committee unanimously voted to recommend, for Governing Committee approval, that the cancelled voluntary agent be assigned to an undersubscribed Servicing Carrier other than the cancelling Servicing Carrier(s), as an ERP. In addition to being required to meet all Rule 14 eligibility requirements, the ERP would be placed on three year probation, during which time the producer would attempt to secure voluntary agency agreement.

It was the consensus of the Governing Committee that this matter would be considered as an action item when the Governing Committee considers the Travelers proposal.

Mr. Gilman reported that the Market Need Criteria Committee addressed the issue of the withdrawal, by a producer, from a voluntary agreement with a Servicing Carrier for the purpose of obtaining or maintaining ERP status. The Market Need Criteria Committee unanimously voted, for Governing Committee approval, that any producer withdrawing from a voluntary agreement with a Servicing Carrier for the purpose of obtaining or maintaining ERP status would be in violation of the Rules of C.A.R. and would be ineligible for appointment.

A motion was made by Mr. Sumner Gilman and duly seconded by Mr. James Doherty to adopt the recommendation of the Market Need Criteria Committee.

90.32 MARKET NEED CRITERIA COMMITTEE (Cont.)

Mr. Stone suggested that none of these be action items at this time and that Governing Committee Members, who are not on the Market Need Criteria Committee, should discuss the concept of these items and vote on the entire package, including the Travelers proposal, with input from the Division of Insurance, at the next meeting of the Governing Committee.

Mr. Maher requested the Governing Committee provide direction as to voluntary agents who request cancellation of their voluntary automobile contracts and who subsequently apply to C.A.R. for an ERP appointment, whether Staff should make appointments in these instances.

After discussion, a motion was made by Mr. David Lane and duly seconded by Donald Burns to adopt a moratorium on appointments of ERPs where the applicant voluntarily has caused the termination of a voluntary automobile contract, until such time as the Governing Committee makes its final decision.

The motion passed on a unanimous vote.

Continuing, Mr. Gilman advised that the Market Need Criteria Committee addressed the issue of existing subsidiary appointments. The Market Need Criteria Committee unanimously voted to recommend to direct Staff to initiate termination proceedings for any known subsidiary agencies on the basis that an automobile market outlet exists through the affiliate appointment.

Mr. Gilman reported that the Market Need Criteria Committee directed Staff to continue ERP appointments when an agency is sold or otherwise comes under new ownership or management, provided there is no affiliation to another existing agency, as long as there is an existing book of business.

In conclusion, Mr. Gilman reported that the written Records of the Market Need Criteria Committee Meeting of April 17, 1990 are now available for Governing Committee consideration. A motion was made by Mr. Sumner Gilman and duly seconded by Mr. James Doherty to accept the Records of the Market Need Criteria Committee Meeting of April 17, 1990.

The motion passed on a unanimous vote.

Mr. Maher noted that amendments to Rule 14, increasing the minimum production criteria to 400 vehicles will be filed with the Division of Insurance and bulletined to all interested parties.

Mr. Stone suggested that at its next meeting, the Governing Committee consider both the report and recommendations, in Rule form, of the Chairman's Ad Hoc Committee and the Market Need Criteria Committee.

90.32 MARKET NEED CRITERIA COMMITTEE (Cont.)

After discussion, it was the consensus of the Governing Committee not to Bulletin all ERPs on recent amendments to Rule 14 until all issues still under consideration by the Governing Committee have been resolved.

A motion was made by Mr. Edwin Rinehimer and duly seconded by Mr. Ralph Petrarca to delay filing of proposed amendments to Rule 14, until Governing Committee has considered all the issues.

The motion passed on a unanimous vote.

A motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to receive the oral report of the Market Need Criteria Committee Meeting of June 19, 1990.

The motion passed on a unanimous vote.

90.38 CHAIRMAN'S AD HOC COMMITTEE

Mr. Edwin Rinehimer reported on the Chairman's Ad Hoc Committee Meetings of May 22, 1990, June 1, 1990, June 12, 1990 and June 19, 1990. Considered by the Committee was a proposed draft by the Travelers relative to the equitable redistribution among all companies of the financial burden resulting from the servicing of ERP business. Also discussed was the development of criteria, either based on individual risks or on an individual ERP basis, for the exclusion of certain business from the utilization formula and the potential implications this may have on the value of Rule 12 credits.

The action taken by the Chairman's Ad Hoc Committee is as follows:

At its June 12, 1990 Meeting, the Committee voted six in favor, with Commerce Insurance Company opposed, to adopt the document presented by the Travelers (see attached) as a basis for drafting revisions to the Rule 11 utilization formula, and to recommend, for Governing Committee approval, that a subcommittee be directed to solicit the opinion of the Commissioner of Insurance on the concepts embodied in the document before Rule drafting commences. Mr. Rinehimer noted that subject to Governing Committee approval of the concepts, the meeting with the Commissioner of Insurance has been scheduled for today, at 3:00 P.M.

Continuing, Mr. Rinehimer advised that the major components of the proposal adopted by the Committee, at its June 12, 1990 Meeting, are as follows:

1. A company's equitable share of total market ERP business (excluding ERP business that meets the exclusion criteria, to be developed) is based on the company's share of the voluntary agent market, including voluntary retained and voluntary ceded business written through voluntary agents.

90.38 CHAIRMAN'S AD HOC COMMITTEE (Cont.)

2. The equitable ERP share for a company for a particular year is based on data for the second year prior (two-year lag). So, for example, data for policy year 1989 would be used in determining a company's equitable ERP share for policy year 1991. New Servicing Carriers will be subject to gross-up procedures in this calculation.

3. If a company's current ERP writings (excluding any ERP business meeting the hard-core criteria, to be developed) exceed the company's equitable share as determined above, then the overage will serve to reduce the number of ERP exposures counted in the utilization formula for the company. Conversely, if the company's current ERP writings are less than its equitable share, then the underage will increase the number of ERP exposures counted in the utilization formula for the company.

4. As an incentive for companies to offer voluntary contracts to ERPs, the following provisions apply:

- Exposures written through the former ERP by the voluntary Servicing Carrier are not included in the voluntary agent market share calculation for a total of five years (three prospective years, plus the two-year lag).

- The above exposures continue to be counted as ERP exposures during this period, for purposes of determining the Servicing Carrier's overage or underage from its equitable share of ERP exposures.

5. No physical redistribution of ERPs among Servicing Carriers is required by the proposed formula. However, incentives would exist for undersubscribed companies to increase its share of the ERP market to the level of its equitable share. (Note that the three-party agreement provisions of the current Rules for voluntary movement of ERPs between Servicing Carriers would still exist.)

Continuing, Mr. Rinehimer reported that, at its June 19, 1990 Meeting, the Chairman's Ad Hoc Committee voted five in favor, with Commerce opposed, to recommend, for Governing Committee approval, the adoption of the ERP financial burden redistribution concepts embodied in the June 12, 1990 document, together with the explanatory information presented in the attached document from the Travelers, dated June 19, 1990, and that a subcommittee be directed to work with C.A.R. Staff to draft appropriate language to incorporate these concepts in Rule 11.

90.38 CHAIRMAN'S AD HOC COMMITTEE (Cont.)

Mr. Rinehimer noted that the June 19, 1990 document contains provisions for discouraging companies from appointing ERPs as voluntary agents and then cancelling them when the incentives for the appointment have expired.

Mr. Rinehimer reported that, at its June 19, 1990 Meeting, the Chairman's Ad Hoc Committee appointed a subcommittee to develop criteria for excluding hard-core business from the utilization formula. The Committee's primary focus was on the identification of such business based on risk characteristics (e.g., S.D.I.P. violations, territories and/or classes where rate subsidies exist), with the exclusion applying regardless of whether the risk is written by a voluntary agent or an ERP. The Chairman's Ad Hoc Committee also noted the need to coordinate any such exclusions with the Rule 12 credit provisions, to the extent that there may be some overlap in the exposures used in each formula.

Mr. Rinehimer presented the document for the Governing Committee's review and advised that, in his opinion, it was critical to discuss this proposal with the Commissioner of Insurance to determine whether it meets his expectations.

After discussion, a motion was made by Mr. Edwin Rinehimer and duly seconded by Mr. Richard Brewer to authorize the subcommittee to present this proposal to the Commissioner of Insurance for his review and comments.

The motion failed, eight against, with three in favor.

Where it was the consensus of the Governing Committee that the Chairman's Ad Hoc Committee continue its discussion, Chairman McGowan scheduled a Chairman's Ad Hoc Committee Meeting for Monday, June 25, 1990, at 1:30 P.M. It was noted that Messrs. Lane and Bradley requested and were appointed as Members to this Committee.

There being no further business, a motion was made by Mr. James Doherty and duly seconded by Mr. Richard Brewer to adjourn.

The meeting adjourned at 1:45 P.M.

DANA I. JEWELL

Administrative Vice President

and Secretary

Attachments

Boston, August 22, 1990

Note: These Records have not been approved. They will be considered for approval at the next meeting of the Governing Committee.

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