Clearing Compliance Reporting Hurdles

Today it is harder than ever for insurers to keep up with state reporting requirements. Carrier underwriting departments face two key compliance obligations: auto liability insurance reporting and loss payee/mortgagee reporting.

A majority of states require insurance companies to electronically notify the state Department of Motor Vehicles (DMV) about vehicles covered by liability insurance. This is done to protect the public from uninsured drivers. The states often impose stiff penalties for driving without insurance, such as steep fines, license revocation, and impounded cars. States can also impose fines on an insurer for noncompliance in reporting. The challenge for insurers is meeting each state's requirements, and these can vary widely. A typical response by an insurance company is to build and maintain a stand-alone process for each state in which the company writes business. This helps manage each state's rules but can become a logistical nightmare and a significant cost burden.

In addition to DMV notifications, insurers are typically required to notify lienholders and mortgagees of auto and property coverage for vehicles and homes in which the lending company has a financial (and insurable) interest. This responsibility derives from the fact that most lending agreements require the borrower to assume responsibility for providing physical damage or property coverage and present proof of insurance to the lending institution.

Clearly, notification of insurance coverage is an important issue for law enforcement, DMVs, and financial institutions. From the insurer's point of view, compliance reporting is not just mandatory but also is a critical part of operations.

Compliance reporting poses a number of hurdles for insurers. Every state maintains its own set of insurance laws that vary widely across different lines of business, and every state has its own reporting rules and format requirements. State requirements are always changing, and the complexity always increasing. Insurers can be hard-pressed to manage all these responsibilities.

The Challenge of Electronic Reporting

To date, 32 states require electronic automobile liability insurance reporting (ALIR), and more will likely require it in the future. State reporting can typically be divided into two groups: batch and web services. Some states even require both. Batch reporting formats vary widely from proprietary (custom) layouts to different versions of ASC X12. Web service states can send thousands of requests for insurance verification at once, and they typically mandate round-trip times not exceeding two seconds.

Planning for the tremendous volume and real-time reporting is an incredible burden for insurers. Setting up a system to respond to requirements is difficult, time-consuming, and costly. To comply, insurers need a reliable reporting, tracking, and error-correction system.

In addition to requirements for electronic ALIR reporting, insurers also need to be prepared for the growing trend of banks and financial institutions requesting insurance verification electronically and in real time.

Insurers can invest a great deal of time in programming for compliance with electronic reporting requirements. For smaller insurers, in particular, it is beyond their means to design and implement their own stand-alone solutions, which, by their very nature, are inefficient.

In light of the high costs of in-house programming and the burden of juggling multiple states' requirements and constantly changing regulations, many insurers are turning to outside providers' solutions. When doing so, there are several things to bear in mind.

Using Compliance Solutions

When considering an outside provider, insurers should look for a solution that facilitates accurate compliance, while minimizing the impact and cost on operations. Carriers also need a solution that can easily change as states enact new regulations.

The best compliance solutions allow insurers to report transactions directly via a single data feed. The solution provider would then apply robust technology to transform and transmit data using whatever format and delivery method the state DMVs and third parties mandate. Solutions should use state-of-the-art technology to adapt new platforms and manage all communications with DMVs or financial institutions. The best solutions include web-based tools for receiving acknowledgments and correcting errors.

Insurers who choose the right compliance solution will benefit from having a single process for all states that is independent of state-specific requirements. And they will know which states easily handle change. Insurers should seek a comprehensive solution that offers workflow efficiencies, "once and done" implementation, economies of scale, and customer support and service. With the right solution, carriers can rest assured their reporting compliance is being handled correctly while they focus on building their businesses.

James Levendusky is product manager for the Coverage Verifier Suite of Services of ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics.