Insurance and Small Business

Insurers hope new law boosts their speed to market: But some entrepreneurs fear dereg could burn them

July 2, 2007

Small businesses should be able to purchase new kinds of property, casualty and Worker's Compensation insurance quicker than in the past under a new state law that delays regulatory oversight of new products.

But some business owners say the law puts them at risk of buying insurance that includes surprise clauses -- since regulators won't be checking them in advance.

The law rolls back regulations that slowed insurance sales in Indiana by effectively requiring insurers to clear new products with state regulators before selling the product. As of July 1, commercial insurers must file new products with regulators "for informational purposes only" and can do so within 30 days after they begin selling a new product.

Indiana's insurance companies say the relaxed regulation will make them nimbler and able to offer coverage for unusual items faster than before. And they think more insurance companies will try to do business in Indiana because of the law change.

"I do think it will invite more competition to the state. I do think insurers will see it as a positive change to the state of Indiana," said Jim Hynes, vice president of risk services at Indianapolis-based ILM Group, which insures businesses throughout Indiana.

But smaller businesses, including some insurance agents, aren't so sure it's a good thing. Jim Gislason, an independent insurance agent in Vincennes, said he wears too many hats to spend time making sure new insurance products meet the letter of the law.

"I don't have the time to do it for my customers, either," said Gislason, chairman of United Insurance Services Inc. "A typical commercial insurance policy is probably 75 to 100 pages. How long is it going to take to read, to study those pages to find the meaning of each paragraph? Because if somebody changes one word, it can change the whole coverage."

In a survey this year, a narrow majority of the members of the Indiana chapter of the National Federation of Independent Businesses opposed the looser regulations.

Carol Cutter, a deputy commissioner at the Indiana Department of Insurance, said consumers are still protected. For example, state regulators will continue to review insurers' new policies and notify insurers when they don't comply with state rules.

If any policy is written in a way that does not comply with insurance rules, regulators and courts can still enforce those rules on the insurer after the policy is sold if there's a complaint.

"Commercial policies tend to be purchased by a customer that is more adept at understanding insurance," Cutter said. "Those policyholders probably don't need quite the level of inspection that maybe some other policyholders do."

Gislason disagreed. He said review by regulators and courts could be too little too late for entrepreneurs.

"Yeah, you may win a case," he said. "But what does it take to get a case through the courts today? Three or four years? You've got a small business that's got a loss and they don't get paid [by their insurer], and they're out of business in four years."

The new law was a small portion of an omnibus insurance bill known as House Bill 1452. The bill, which also deregulates the buying of Worker's Compensation insurance, passed both the House and Senate unanimously.

The law completes a deregulation of commercial insurance that began in 2006 when lawmakers allowed insurers to change rates without first getting the blessing of state regulators. Under old laws, Indiana's regulators could hold up the sale of new policies by saying they did not comply with insurance rules.

If an insurer had already begun to sell the product before getting regulators' opinion, there was a small threat that regulators could force the company to go back and rework all the policies of that type it had already sold regardless of whether there was a customer complaint.

So most insurers, especially small and medium-size companies, waited for regulators to rule before selling a product.

Their waiting became especially long as a backlog at Indiana's Insurance Department meant new products waited months-even up to a year-to receive approval. Insurers sometimes had to turn down business because they couldn't meet their customers' specialized needs fast enough, said Steve Williams, president of the Insurance Institute of Indiana.

"From an insurer's point of view, when they were trying to deal with a customer's need, the whole deal could bog down because it could just take too darn long," Williams said.

That backlog vanished under Jim Atterholt, who became Indiana's insurance commissioner in 2005. But the state's insurance industry wanted some assurance that they wouldn't see long waits again under a different commissioner, Williams said.

Indiana already has allowed large businesses that use a risk manager to buy property and casualty coverage that is not vetted in advance by the Indiana Department of Insurance.

But for any customer with sales under $50 million, the Insurance Department had been taking 30 days to make sure an insurance company's new product complied with all state insurance rules.

Those rules include such things as guidelines to make sure a policy is priced to adequately cover losses or that cancellation and non-renewal policies are spelled out clearly.
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