The Office of General Counsel issued the following opinion on March 29, 2005 representing the position of the New York State Insurance Department.
Re: Group Life & Health Insurance/Premium Rates
1. Is an insurer bidding to cover an employer-employee group for either life or health insurance required to use the Standard Industrial Code (SIC) or its successor the North American Industry Classification System (NAICS) classification which has been assigned by the present insurer?
2. May such an insurer waive any "surcharge" applied to insureds in a particular SIC/NAICS classification for a specific potential insured?
1. Since the SIC/NAICS classifications are not designed as risk assessment mechanisms, an insurer is not required to utilize them. Insurers must comply with New York Insurance Law §§ 4216 (McKinney 2000 and 2005 Supplement), for group life insurance, and 4235 (McKinney 2000 and 2005 Supplement), for group health insurance. In accordance with New York Insurance Law § 4224 (McKinney 2000 and 2005 Supplement) insurers may not improperly discriminate between insureds.
2. If an insurer utilizes the SIC/NAICS classification system and imposes "surcharges" based upon the classification assigned to a particular industry, waiver of any surcharge applicable to a particular industry for an insured may constitute a violation of New York Insurance Law § 4224.
The inquirer is licensed as an insurance broker in accordance with New York Insurance Law § 2104(b)(1)(A) (McKinney 2005 Supplement) and has, as a client, an industrial corporation with two subsidiaries. The corporation and its two subsidiaries each have a different SIC classification. The corporation and its subsidiaries are insured for group life insurance by the same insurer under a single policy. Because the SIC classifications are viewed by the present insurer as "substandard", that insurer surcharges the premium attributable to the group over and above what it would charge for an insured with a "standard" SIC classification.
The inquirers client has put its group life insurance out to bid and received a bid from one insurer that treats the group as if it had a "standard" SIC classification, in effect eliminating any surcharge.
Since the inquirer believes that the new insurers actions are improper, the inquirer has raised the above questions.
In accordance with New York Insurance Law §§ 4216(b) and 4235(c)(1), respectively, group life and accident & health insurance may be issued only to groups as specified therein. It is presumed that the inquirers client and its subsidiaries collectively qualify for such policies in accordance with New York Insurance Law §§ 4216(b)(1) and 4235(c)(1)(A).
The general standard for rates of life and accident & health insurance is set forth in New York Insurance Law § 4224:
(a) No life insurance company doing business in this state . . . shall: (1) make or permit any unfair discrimination between individuals of the same class and of equal expectation of life, in the amount or payment . . . of premiums, or rates charged for policies of life insurance . . . or in any of the terms and conditions thereof; . . .
(b) No insurer doing in this state the business of accident and health insurance . . . shall (1) make or permit any unfair discrimination between individuals of the same class in the amount of premiums, policy fees, or rates charged for any policy of accident and health insurance . . .or in any other manner whatsoever
. . .
The specific standard for rates of group life insurance is set forth in New York Insurance Law § 4216(c):
(1) No domestic, foreign or alien life insurance company shall be permitted to do business in this state if it hereafter issues, within or without this state, any policy of group life insurance which on its issuance does not appear to be self-supporting on reasonable assumptions as to interest, mortality and expense.
(2) Anything in this chapter to the contrary notwithstanding, any group life insurance policy issued or delivered in this state may provide for readjustment of the rate of premium based on the experience thereunder, at the end of the first year or of any subsequent year of insurance thereunder, and such readjustment may be made retroactive only for such policy year. Any such rate readjustment shall be computed on a basis which is equitable to all group life insurance policies.
Unlike group health insurance, there is no requirement that the initial premium rates for a group life insurance policy be filed with the Insurance Department.
In addition to New York Insurance Law § 4235(g), (h), & (j), which correspond to New York Insurance Law § 4216, the specific standard for rates of group accident & health insurance issued by commercial insurers is set forth in New York Insurance Law § 3231(d) (McKinney 2000 and 2005 Supplement):
Notwithstanding any other provision of this chapter to the contrary, no policy form subject to this section shall be issued or delivered, nor any insurance contract entered into, unless and until the insurer has filed with the superintendent a schedule of premiums, not to exceed twelve months in duration, to be paid under the policy forms and obtained the superintendent's approval thereof. The superintendent may refuse such approval if he or she finds that such premiums are excessive, inadequate, or unfairly discriminatory. The superintendent may consider the financial condition of such insurer in approving or disapproving any premium. In determining whether to approve the schedule of premiums filed, the superintendent shall . . . consider . . . the insurer's projections relating to claim costs, utilization and administrative expenses and shall not adjust the insurer's rates based upon the rates approved for other insurers.
The specific standard for rates of group accident & health insurance issued by not-for-profit insurers and all Health Maintenance Organizations is set forth in New York Insurance Law § 4308(b) (McKinney 2000):
No corporation subject to the provisions of this article shall enter into any contract unless and until it shall have filed with the superintendent a schedule of the premiums or, if appropriate, rating formula from which premiums are determined, to be paid under the contracts and shall have obtained the superintendent's approval thereof. The superintendent may refuse such approval if he finds that such premiums, or the premiums derived from the rating formula, are excessive, inadequate or unfairly discriminatory, provided, however, the superintendent may also consider the financial condition of such corporation in approving or disapproving any premium or rating formula. . . .
Rates for group accident & health insurance are also subject to the strictures of New York Insurance Law § 3231(a) (commercial insurers) and 4317(a) (McKinney 2000 and 2005 Supplement) (not-for-profit insurers and HMOs):
No . . . group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. . . . For the purposes of this section, community rated means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.
The SIC was developed by the United States government in 1937 to standardize the classification of industries in the United States economy for the purpose of economic analyses. The SIC's basic classification unit was the establishment, i.e., an economic unit, generally at a single geographical location, where business is conducted or where services or industrial operations are performed. The SIC covered the entire field of economic activities by defining industries in accordance with the composition and structure of the economy. It was revised periodically, last in 1987, to reflect the economy's changing industrial composition and organization.
Rapid changes in both the United States and world economies brought the SIC under increasing criticism. Accordingly, in 1993 the United States Departments of Commerce and Labor joined with their counterpart organizations in the Dominion of Canada and Republic of Mexico to develop the NAICS. The NAICS classification is based upon a six digit code, as contrasted with the SIC classification, which utilized a four digit code. The longer code accommodates the larger number of sectors and allows more flexibility in designating subsectors. The international NAICS agreement fixes the first five digits, with the sixth accommodates the user needs of each individual country.
In order for insurers to comply with the above quoted rating requirements, there must be a differentiation between insureds in the risk underwriting and rate setting to account for the specific risks presented by particular employers. While the SIC/NAICS is a structural measure of the economy and is not a risk assessment mechanism, it appears some insurers may utilize it as a surrogate for risk assessment purposes.
While this is not the purpose of the SIC/NAICS, so long as such use by some insurers appropriately stratifies insureds and complies with the requirements of Insurance Law §§ 4216, 4224, and 4235, the Insurance Department does not object.
If an insurer utilizes the SIC/NAICS in its risk assessment process and reassigns a potential insured to a different classification, it may be a violation of New York Insurance Law § 4224(a) or (b). It would depend on the particular facts and circumstances of the situation. If an insurer utilizes the SIC/NAICS classification system in its risk assessment process and imposes surcharges based upon the classification assigned to a particular industry, a waiver of any surcharge applicable to a particular insured in that industry may similarly constitute a violation of New York Insurance Law § 4224(a) or (b).
For further information please contact Principal Attorney Alan Rachlin at the New York City Office.