SCC examiners' jobs have them looking backward, forward On the SCC's front line for consumer protection

"We're trying to help insurers do what they want to do, and we're trying to make sure policyholders get what they paid for," says Bryan Wachter, a principal insurance market examiner. "It's not a gotcha."

When the State Corporation Commission's <a href="https://scc.virginia.gov/pages/Bureau-of-Insurance" target="_blank">insurance</a> and <a href="https://www.scc.virginia.gov/pages/Consumers" target="_blank">securities</a> bureaus' examiners get down to the business of looking out for Virginians' pocketbooks, they get down in the weeds.

Consider, for instance, the tale of the market conduct exam of Farmers Insurance and related companies that the company settled this summer, with a total of $21,681.83 in payments to 52 Virginia customers, along with an $86,400 check to the state.

None of those customers likely knew they had funds coming - it wasn't a complaint that prompted the review, and the sums any one policyholder received weren't all that large.

But these examinations matter. Insurance is a complicated business, and the point of the examinations is to make sure the insurers conduct it in precisely the right way, says Bryan Wachter, a principal insurance market examiner.

He works in the SCC Bureau of Insurance's life and health insurance section, focusing on a different sector of the multibillion-dollar Virginia market than Farmers operates in, but the basic approach is the same.

"We work with companies to be sure they're doing business the right way, and that consumers get the coverage they pay for. That's why we're here," Wachter said.

"Sometimes, an exam can take a few months. Sometimes, it can be years."

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<strong>It took</strong> <strong>years,</strong> in Farmers' case.

The exam started the way so many do: with statistical data in the company's annual market conduct statement that looked out of step with usual patterns.

Those statements include hundreds of columns of numbers detailing how policies are sold, priced and canceled as well as how claims and complaints are handled<strong>.</strong>

Some are numerical indicators that suggest how it discloses policy terms and conditions and whether its agents or sales staff know what they're doing, said principal insurance analyst Will Felvey.

But it isn't just some out-of-whack numbers that raise red flags for the bureau's market analysts.

With numbers in hand, and outliers standing out, they then start making rounds with colleagues who deal with policyholders' complaints and questions, as well as with the teams that handle insurers' rate filings and policy forms and notices to customers, Felvey said.

It's pretty easy, since they're all on the fifth floor of the SCC's building at the corner of 13th and Main streets.

And it's not really much of a challenge to check in with the teams up on the sixth floor that look at the hundreds of pages of financial reports that insurers have to file, including the detailed narrative interrogatories, way in the back of the annual filing, that offer detailed discussion of how business went.

"We do a lot of talking with others here," Felvey said.

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<strong>For Farmers,</strong> the red flags went up Dec. 18, 2018, the bureau's case file shows.

The bureau's "market action tracking system" picked up outliers when looking at the $56.9-million-a-year business that Farmers and affiliates Mid-Century Insurance Co. and Truck Insurance Exchange do in Virginia.

That was halfway through the fiscal year. As a result, the bureau's leaders decided they needed to learn more about Farmers' business when the fiscal year ended.

So by the start of February 2020, the bureau's 11-person property-casualty division began the deeper look of a market conduct exam.

That deeper look means a lot of close reading of some of the dullest writing around: insurance company forms and notifications as well as a fair amount of number crunching.

"We're probably talking thousands of pages," Wachter said.

Examiners have to make sure they are reading them carefully enough to match the very specific requirements detailed in Virginia regulations - requirements that often get down to what needs to be in boldface type and where it needs to be displayed.

And even though many of the numerical analyses that examiners need to do are embedded in spreadsheets, Wachter sometimes still has to whip out a calculator or create new equations or algorithms to solve a company-specific issue.

He's been doing this for 17 years at the bureau, after working for several years as an underwriter - an insurance company employee who determines who to insure with what kind of coverage.

Between his reading and those calculations, he looks at how insurers figure out what to charge; at who they decide to cover and who is rejected; and what they do with complaints, with claims, with policy cancellations and lapses.

Life insurance examiners also have to look at the complexities of how insurers credit interest and handle policy loans for companies offering whole life or universal life coverage. Examiners also review the projections insurers provide policyholders of how the cash value of life policies is trending. Those are issues that didn't arise for the Farmers team.

But for both life-health and property-casualty, every option and rider needs a look.

Examining health insurers brings up its own separate issues, including compliance with state regulations on mandated coverage, continuation and coordination of coverage.

That's on top of the rating and underwriting, forms, claims and complaints that are part of both life insurance and property-casualty coverage such as automobile and homeowners policies.

To really understand means pulling specific files to ask how an insurer handled a specific application for coverage, or why the company decided this was the premium a specific policyholder should pay, or how come a person's policy wasn't renewed.

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<strong>For Farmers,</strong> the property-casualty examiners traveled to Cleveland at times during an examination that ultimately lasted a year, and that generated an additional 18 months of back and forth with the company over the examiners' findings and the company's explanations.

There's a lot of paperwork in insurance and, for all those thousands of pages that examiners read, there is no way to read every file.

So just like accountants doing a financial audit, they take samples - they looked at 105 files of the nearly 17,000 auto policies and 105 of the nearly 21,000 homeowners policies Farmers wrote. They found errors in forms or pricing or notifications in 78% of the auto policies and 92% of the homeowners policies.

The samples may have seemed small, and the amounts of money generally were, too - in fact, for auto insurance renewals, the 80 errors found meant overcharges totaling a combined $398.42, as well as undercharges of $1,772.96. The biggest issues include 44 cases of using the wrong uninsured motorist rates and 22 of incorrectly saying the company had applied its early shopper discount.

For new homeowners policies, the team found errors in 37 of 40 files pulled. Here, too, overcharges were modest, a combined total of $90.16, while the company charged people $4,770.71 less than its forms and rates said it should have. Here, a big issue was failing to calculate replacement costs for a home's contents properly.

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<strong>Half of the</strong> 120 claims filed for auto insurance, a sample of less than 2% of those claims, had errors.

Here, the result was that Farmers paid policyholders $33,890.42 more than it should have while paying some a total of $19,219.74 more than it really owed.

Problems here include failing to tell policyholders that their coverage provides reimbursement for any medical bills after an accident that their health insurer didn't cover, as well as not providing cost estimates for repairs, or not paying for rental car coverage.

The claims reviews and discussions that followed got quite detailed - one of the examiner's concerns, overpayment for replacement of a $226.29 tire, was resolved after a couple of back-and-forth exchanges. The company pointed out a note on line 53 of a supplemental estimate that showed a reduction in the payment reflected tread wear on the tire.

And even as the examination was in process and finding early signs of problems with uninsured motorist claims, Farmers sent emails to all its adjusters detailing how the process had to be done and held a workshop on handling these claims.

Generally, insurers want to get things right as badly as the bureau examiners want them to, Wachter said.

"What we're trying to do is, we're trying to understand what happened with a particular claim or a policy," he said.

That means yet another step, beyond pulling files and reading.

"It can be helpful to go there and see the people," he said. "Sometimes that gives us a deeper understanding of what is happening."

Insurance, after all, is a complicated business. And in a big company like Farmers, it can involve hundreds, even thousands of people, all trying to figure which of those complexities apply to specific cases.

"We're trying to help insurers do what they want to do, and we're trying to make sure policyholders get what they paid for," Wachter said.

"It's not a gotcha."

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<strong>If insurance</strong> examiners look backward - in the Farmers' case, they were looking at the 12 months that ended June 30, 2019, some four years before the SCC's settlement order - their counterparts at the Bureau of Securities look forward when they're examining franchisers' filings.

They are trying to put themselves in the shoes of would-be franchisees, to make sure that they're getting all the often hundreds of pages of disclosures and projections that state regulations require.

Virginia is one of only 13 states to do this review, just as the bureau is one of the handful that still do merit reviews of companies' stock offerings - that is, the review of suitability that was pioneered in 1911 by Kansas and dropped by most states after the U.S. Securities and Exchange Commission expanded its oversight.

Bureau director Ron Thomas was back in the bureau when it said no to DeLorean Motors' 1978 initial public offering, four years before the U.S. SEC's questions about the company's viability pulled the plug on a follow-up $27 million stock sale.

"We saved Virginians on that one," Thomas said.

For Jude Richnafsky, the bureau's manager of franchise examinations, that kind of review means looking forward.

When he studies the hundreds of pages that companies selling franchises disclose to would-be franchisees, he's not just checking that everything that's supposed to be there is there.

There is plenty of that, from the franchisers' audited financial statements and lists of contracts to disclosure about how existing franchisees have fared financially to projections about what a new franchisee can expect in terms of start-up costs and likely income from the operations.

Beyond that, though, "I'm looking to see if it all makes sense, that one section doesn't contradict another," he said.

There are disclosures about fees, royalties, advertising expenses, required purchases and limitations on what the franchisee can set and where to acquire supplies, as well as information about the business experience of the franchisers' principals and any litigation, felonies or bankruptcies.

It was discovering that G.C. Franchising, which sells "The Growth Coach" business development franchises, had not disclosed the 2012 bankruptcy of its former director of franchise that prompted an SCC order that the company pay restitution to its Virginia franchisee - the amount was not disclosed - as well as a $1,000 penalty to the state.

And it was examiners' discovery of a discrepancy about Dental Support Plus' promised deferral of fee payments until it had completed all its preparations to launch its business - supposedly a way to refer patients to a dentist in return for a portion of the dentist's income from those patients - that helped crack a major federal investment fraud case.

Dental Support was selling franchises for $25,000, saying the franchise would be fully operational in 180 days, generating income of at least $200 a month.

Despite the bureau's requirement that the franchiser hold off cashing franchisees' checks until the franchiser had completed all the obligations it detailed in its registration statement, the company took the money, including $100,000 from one retired couple from Chesapeake and $75,000 from an elderly woman, also from Chesapeake.

As the FBI, IRS and the U.S. Postal Inspection Service dug in, they found the same principals were involved in selling licenses to use slots in the wireless phone and police radio spectrum.

In the end, David Alcorn, 78, of Scottsdale, Ariz., was sentenced in August to 15 years and 5 months in prison, and Aghee William Smith II, 70, or Roseville, Calif., received 13 years behind bars - both for wire fraud, money laundering and conspiracy.

Victims suffered losses of more than $20 million. Other principals in the frauds, tried earlier, received prison sentences of from five to 35 years.

"Not every state looks at franchises," said Thomas, the bureau director.

"But we're talking about what's often people's life savings."

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<strong>Whether it's</strong> the six-figure sums that are at issue when Richnafsky is checking for contradictions in a franchiser's disclosures or the 27 times the Farmers examiners found the company mistakenly told policyholders its "home security discount" had been applied to their premiums, the big issue examiners are after is making sure insurers and franchisers are following Virginia's rules about treating consumers fairly.

SCC Commissioner of Insurance Scott White said $9 million of reimbursements to Virginians resulted from market conduct examiners looking at various insurers' claim files, and finding widespread failure to tell policyholders that their auto policies' medical expense coverage was supposed to cover co-payments and other out-of-pocket expenses after their health insurer paid for treatment after an accident.

And a bureau directive to cover applied behavior analysis services to treat autism spectrum disorder resulted from examiners' review of health insurers' compliance with the SCC's requirement to cover autism treatments. In so doing, they learned that the federal Centers for Medicare and Medicaid Services held that this kind of teaching and behavior reinforcement approach should be covered, even though it is not strictly medical.

"Sometimes, insurers come to us to ask about market conduct issues," White said. "We want to be sure everybody is doing what they're supposed to and that consumers get what they're entitled to."

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