With the adjournment of the New York Legislature early in July and the signature of Gov. Mario Cuomo on the "reform legislation" enacted by it to try to control rates for commercial liability insurance, it is a good time to understand what this legislation does and how it is likely to affect rates, availability of markets and the insurance industry.

Flex-rating is a new concept for New York and is a new tool to assist the superintendent of insurance in his efforts to prevent exorbitant rates and to stabilize a shrinking market for commercial liability risks such as municipalities, day-care centers, professional liabilities and other special coverages.Gov. Cuomo, in his memorandum approving the bill, said that the flexible- rating system is a new departure in insurance regulation that places the State of New York in a position of national leadership.

This method of insurance rate regulation, said the memorandum, will stem the large cyclical swings in liability insurance costs and availability that periodically have brought pain to insurers and left government scrambling for palliative measures. Flex-rating does this by tempering reliance on a competitive market to assure reasonable rates with flexibility bands within which rates must stay to avoid a requirement of prior regulatory approval.

Prior to this law, insurance companies offering commercial liability insurance coverage were free to set rates at whatever level the market place and competition dictated.

When the industry began to experience substantial losses a few years ago, companies reviewed their policyholder risks and began to cancel many of the more hazardous risks and increased the rates of risks they did not terminate by many fold so that policyholders were faced with paying extremely high premiums at often reduced policy limits.

Under the concept of flex-rating, the superintendent will determine after hearing, a level of rates which are reasonable, adequate, not excessive and not unfairly discriminatory for certain commercial risk, professional liability and public entity insurance coverages included in the bill. He will also establish annual limitations upon rate level increases or decreases that may take effect without prior approval. Insurance carriers may adjust their rates within the prescribed limits on a file and use basis. But any changes above or below the established bands would require prior approval by the superintendent before they could be used by the carrier filling them.

After hearings the superintendent established bands that range from plus or minus 10 percent to plus or minus 30 percent, depending on the kind of coverage. In all, 22 lines of commercial liability are covered and several are exempt. Among those exempted are fire and allied lines, ocean marine, inland marine, fidelity, burglary and theft, surety and credit insurance.

Among the lines covered by the bands, child- care facilities and non- profit directors and officers coverage have the narrowest band - plus or minus 10 percent. Municipal coverage, public schools, landlords and tenants, manufacturers and contractors ae assigned in the plus or minus 15 percent band. Professional liability, errors and omissions and product liability have a plus or minus 20 percent band while excess liability coverage and "A" rated renewals are assigned to the highest band, plus or minus 30 percent.

Since the legislators believe other enactments of the reform legislation will result in reduced costs for carriers, the new law requires carriers to file rates for risks affected by flex-rating that reflect the expected reduced costs.

The superintendent will review these rates and will approve them or adjust them if he determines they do not properly reflect the likely reduced cost of the reform legislation. Unless extended, the flex-rating provisions of the law expire on June 30, 1988. This new rating system applies only to a very limited area of commercial liability coverages and will not affect rates or availability of coverage for the major part of the insuring public that needs commercial liability insurance.

Even though the carriers continue to refuse to cover risks they consider too hazardous, there is less likelihood of a clamor for reform since an alternate mechanism is in place to handle the business the carriers may not want to insure.

The insurance industry is not happy with flex-rating - they would prefer the freedom from rate regulation they once enjoyed. That is a thing of the past - at least for the next three years. Whether the industry will be able to adjust to these new restrictions remains to be seen. What both the superintendent and the carriers do in establishing the limits for the new

flex-rating bands may well determine the success or failure of the reform legislation.

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