The Fine Print: Uhhh... Can Broker Business Assets Be Seized If A Carrier Is Insolvent?
The hard and fast answer is no.
The longer answer took a Senate bill, legislative committee staff, and legal counsel at the Insurance Department to address why.
If nothing else, brokers should keep this in their back pocket, should the need arise in the future.
THE RED FLAGS
The premise: what if an insurance company had to report all entity assets, INCLUDING affiliate assets to regulators?
This assumes an affiliate is any organization in the role of "management, administrative, accounting, data processing, marketing, underwriting, claims handling, investment or any other similar functions" on behalf of the insurer.
Senate Bill 1222 was introduced by Senator John Disanto, which states on page 15 of print number 1646 that "An affiliate that is party to an agreement or contract with a domestic insurer... shall be subject to the jurisdiction of any supervision, seizure, conservatorship or receivership proceedings against the insurer"
Whether Brokers were to be included in this interpretation, it was our duty to get to the bottom of this. If misinterpreted, there could be some serious ramifications. That's when we sent this letter:
Our letter was pretty clear: There is a difference between captive agents employed by an insurer directly, and independent health insurance brokers who might have contracts with 50+ carriers (like we do).
The spirit of SB1222 is really focused on insurance companies, and holding companies, so large that they are in domestic and international markets. Generally speaking, the household names that come to mind in insurance, are typically the ones that expand beyond the US. So, to have a regulator at the state level (Pennsylvania Insurance Department), federal level, and international reach from the EU, and/or UK means that compliance is complex, and a myriad of local, national, and international laws could cause issues when it does come to something as serious as insurer solvency.
We can say, we were so grateful on May 18th when Jonathan Humma, Executive Director of the Senate Banking & Insurance Committee came back with a brisk response. His statement was this:
I had the opportunity to review and discuss with the Pennsylvania Insurance Department and it was determined that the amendments to the insurance holding companies has limited applicability to internationally active groups and others that meet certain characteristics. The Department does not find the work of agents or brokers to be affected by the legislation.
The proposal is part of the National Association of Insurance Commissioner models that will be required for state insurance department accreditation as financial solvency tools and macroprudential regulation.
- J. Humma
While we were thankful that not only did the committee have a pair of eyes on this issue, they immediately roped in the Pennsylvania Insurance Department to ensure that brokers would not be adversely affected by the regulation. As brokers, we are the boots on the ground helping consumers not only navigate enrolling in health insurance, but often the first line of support when consumers have questions about bills, networks, or prescription needs. We couldn't imagine the type of liability insurance we would need to add to ourselves if we had to manage insurer-level volatility.
We pressed back on Mr. Humma. Our initial letter didn't specifically discuss the concerns of being an affiliate, the potential liability of seizure, and how the term "marketing" might unintentionally add liability to the broker community. Our statements were this:
Line 28 of page 15 specifically includes "marketing" as an applicable affiliate under agreement due to being "an integral part of the insurer's operations". For PID(Pennsylvania Insurance Department), this might not be an issue, but attached, under CMS (Federal), they do indicate in the second FAQ regarding 45 CFR 147.104(e) and 45 CFR 156.225(b) that "Insurers commonly use agents and brokers as an important part of their marketing and sales distribution channels..."
So, while PID wouldn't be concerned about liability, if we are looking at international-based carriers who have solvency issues, independent brokers under contract with an insurer could unnecessarily be exposed to much larger creditors who wish to recapture debts by using a producer's agency resources. For these carriers, it is more likely than not that a federal court would be brought in for creditors who would use state-level legislation in conjunction with federal-level legislation and government agency interpretations of the law. The attorney will bring PA statutes and federal agency comments together, showing precedence. Having the current bill, and the CMS letter in hand, one could argue that the fleet of brokers for a carrier could be held equally liable to cover creditor debts.
- J. Brooker
The attachment we were referring to can be found here:
Essentially, at the federal level, the government considers brokers an integral part of an insurer's marketing. Thus, an attorney could pose that Brokers are both under contract, and meet the burden of an affiliate.
Mr. Humma went back to the legal counsel at the insurance department and responded with this link. And he stated this:
Affiliate in the context of the this statute is a person that is directly or indirectly controlled particularly with respect to possession or power to direct or cause the direction of management through ownership of voting securities.
If an insurance agency is independent and not owned by an insurance company or part of an insurance holding company then it is not subject to the liability issues raised.
The attorneys at the Insurance Department have revisited this issue and do not find contractual business relationships between holding companies and independent insurance agencies would meet the definition of “affiliate” given the requirement of “control” or ownership.
- J. Humma
The long answer is, thankfully, no. We're sure your expectations were as much.
But, it is important to note that sometimes when you see red flags, it is important to run them to the ground JUST IN CASE. Between Pennie, CMS, and both state level and national congress members, there really are no wrong questions. Within government agencies, I've learned that federal employees are masters of their domain, but all parts don't always click together. Within the legislative branch, however, congress men and women MUST be generalists to make informed decisions about all matters of the country. It is our job to be in the middle and connect multiple specialists in different domains to the generalists and address public needs accordingly.
Here are also a handful of takeaways from Mr. Humma's office:
TIMELINE OF EVENTS BEFORE SB 1222
On September 22nd, 2017 the US and EU signed the "Bilateral Agreement Between the
United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance”
On December 18, 2018 the UK followed suit.
This agreement has a deadline of November 7th, 2022 at which time it goes into effect where states out of compliance can face retribution from the EU.
On May 16, 2022 PA State Senator John DiSanto reported bill SB1222 to the senate Banking and Insurance Committee to make PA in compliance.
On May 17, 2022 PA Health Advocates sent this letter to the Senator's office asking for clarification.
FULL REPORT: NAIC Financial Condition (E) Committee 2020 Revisions Memo