Arizona State Senate

ARIZONA STATE SENATE RESEARCH STAFF ALANNA BENDEL ASSISTANT RESEARCH ANALYST TO: JOINT LEGISLATIVE AUDIT COMMITTEE MOLLY GRAVER DATE: January 3, 2020 LEGISLATIVE RESEARCH ANALYST FINANCE COMMITTEE Telephone: (602) 926-3171 SUBJECT: Sunset Review of the Arizona Department of Insurance ______

Attached is the final report of the sunset review of the Arizona Department of Insurance, which was conducted by the Senate Finance Committee of Reference. A performance audit of the Arizona Department of Insurance was conducted by the Arizona Office of the Auditor General (Report No. 19-110).

This report has been distributed to the following individuals and agencies:

Governor of the State of Arizona The Honorable Douglas A. Ducey

President of the Senate Speaker of the House of Representatives Senator Karen Fann Representative Russell Bowers

Senate Members Senator J.D. Mesnard, Chair Secretary of the Senate Senator Lela Alston Senate Resource Center Senator Sean Bowie Senate Republican Staff Senator Paul Boyer Senate Democratic Staff Senator Lupe Contreras Senate Research Staff Senator David C. Farnsworth Office of the Chief Clerk Senator Vince Leach House Republican Staff Senator David Livingston House Democratic Staff Senator Martin Quezada House Research Staff Senator Michelle Ugenti-Rita

Arizona Department of Insurance Office of the Auditor General Arizona State Library, Archives and Public Records

Senate Finance Committee of Reference Report

Arizona Department of Insurance

Background

Established in 1968, the Arizona Department of Insurance (DOI) regulates and monitors insurance companies and professionals operating in Arizona to protect the public and help ensure that these entities follow Arizona and federal laws (Ariz. Const. art. 15 § 5). Laws 2019, Chapter 252 consolidated the Arizona Department of Financial Institutions and the Arizona Automobile Theft Authority as divisions within DOI and renamed DOI the Arizona Department of Insurance and Financial Institutions, effective July 1, 2020.

DOI is responsible for: 1) licensing qualified insurance professionals and companies, such as long-term care insurance, property insurance, vehicle insurance and workers' compensation insurance; 2) investigating consumer complaints and suspected fraud; 3) overseeing insurance companies’ financial solvency; 4) reviewing insurance policies, rates and products; and 5) administering the Arizona Life and Disability Insurance Guaranty Fund and the Arizona Property and Casualty Insurance Guaranty Fund (A.R.S. §§ 20-285; 20-376; 20-466; 20-491.03; 20-662; and 20-683).

DOI is set to terminate on July 1, 2020, unless legislation is enacted for its continuation (A.R.S. § 41-3020.17).

Committee of Reference Sunset Review Procedure

The Senate Finance Committee of Reference conducted a public meeting on Tuesday, December 17, 2019, to review the audit report prepared by the Auditor General, evaluate DOI's response to the sunset factors and receive public testimony.

Committee Recommendations

The Senate Finance Committee of Reference recommended that the Arizona Department of Insurance and Financial Institutions be continued for five years until July 1, 2025.

Attachments

A. Meeting Notice B. Minutes of the Senate Finance Committee of Reference C. Auditor General Presentation D. Chairman’s Letter requesting the DOI's response to the agency factors E. DOI's response to the agency factors pursuant to A.R.S. § 41-2954, subsection F

MG/AB/gs

REVISED REVISED REVISED

Interim agendas can be obtained via the Internet at http://www.azleg.gov/Interim-Committees

ARIZONA STATE SENATE

INTERIM MEETING NOTICE OPEN TO THE PUBLIC

SENATE FINANCE COMMITTEE OF REFERENCE FOR THE SUNSET REVIEWS OF THE ARIZONA DEPARTMENT OF INSURANCE, THE ARIZONA DEPARTMENT OF REVENUE AND THE ARIZONA STATE BOARD OF INVESTMENT AND THE REVIEW OF THE LEGISLATIVE PROPOSAL TO ESTABLISH ARIZONA FERTILITY INSURANCE COVERAGE

Date: Tuesday, December 17, 2019

Time: 8:30 A.M.

Place: SHR 1

AGENDA 1. Call to Order 2. Roll Call 3. Legislative Proposal to Establish Arizona Fertility Insurance Coverage • Overview of the Sunrise Application to Establish Arizona Fertility Insurance Coverage • Public Testimony • Discussion • Recommendations by the Committee of Reference 4. Sunset Review of the Arizona Department of Insurance • Presentation by the Office of the Auditor General • Response by the Arizona Department of Insurance • Public Testimony • Discussion • Recommendations by the Committee of Reference 5. Sunset Review of the Arizona Department of Revenue • Presentation by the Office of the Auditor General • Response by the Arizona Department of Revenue • Public Testimony • Discussion • Recommendations by the Committee of Reference 6. Sunset Review of the Arizona State Board of Investment • Presentation by the Office of the Auditor General • Response by the Arizona State Board of Investment • Public Testimony • Discussion • Recommendations by the Committee of Reference 7. Adjourn Page 1 of 2

Members:

Senator J.D. Mesnard, Chair Senator Lela Alston Senator Sean Bowie Senator Paul Boyer Senator Lupe Contreras Senator David C. Farnsworth Senator Vince Leach Senator David Livingston Senator Martin Quezada Senator Michelle Ugenti-Rita

12/10/19 12/13/19 sa jr

For questions regarding this agenda, please contact Senate Research Department. Persons with a disability may request a reasonable accommodation such as a sign language interpreter, by contacting the Senate Secretary’s Office: (602) 926-4231 (voice). Requests should be made as early as possible to allow time to arrange the accommodation.

Page 2 of 2 ARIZONA STATE SENATE

Minutes of the Meeting December 17, 2019 8:30 a.m., Senate Hearing Room 1

Members Present: Senator J.D. Mesnard, Chair Senator Lela Alston Senator Sean Bowie Senator David C. Farnsworth Senator Martin Quezada Senator Michelle Ugenti-Rita

Members Excused: Senator Paul Boyer Senator Lupe Contreras Senator Vince Leach Senator David Livingston

Staff: Molly Graver, Senate Research Analyst Alanna Bendel, Senate Research Assistant Analyst

Chairman Mesnard announced that the Committee would begin to hear testimony and eventually the Committee will officially start with the review of the Sunset process.

LEGISLATIVE PROPOSAL TO ESTABLISH ARIZONA FERTILITY INSURANCE COVERAGE

Overview of the Legislative Proposal to Establish Arizona Fertility Insurance Coverage

Molly Graver, Legislative Research Analyst, Finance Committee, gave an overview of the Legislative process for a legislative proposal to establish Arizona Fertility Insurance Coverage.

Senate Finance Committee of Reference December 17, 2019 Page 1 Public Testimony

Elizabeth Marshall, representing herself, distributed a handout entitled "Letters in Support of Proposal to Establish Arizona Fertility Insurance Coverage" (Attachment A) and testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Dr. Jesse Hade, Boston IVF, Arizona Center, distributed a handout entitled "Access to Fertility Care Benefits" (Attachment B) and testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Dr. H. Randall Craig, Fertility Specialist, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Chairman Mesnard called the meeting to order at 9:15 a.m. and attendance was noted.

Tyler Webb, representing himself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Kerri Lopez-Howell, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Nicole Smith, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Rachel Wilgoren, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jullian Lenehan, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Hannah Israelsen, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jovan Heusser, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Jennifer Klein, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Kathryn Fiore, representing herself, testified in support of the proposal to establish Arizona Fertility Insurance Coverage.

Marc Osborn, representing America's Health Insurance Plans (AHIP), Blue Cross Blue Shield of Arizona, testified in opposition to the proposal to establish Arizona Fertility Insurance Coverage and answered questions posed by the Committee.

Senate Finance Committee of Reference December 17, 2019 Page 2 Brian Hummell, representing American Cancer Society, Cancer Action Network, testified in support of the proposal to establish Arizona Fertility Insurance Coverage and answered questions posed by the Committee.

Ms. Marshall offered additional testimony and answered questions posed by the Committee.

Ms. Smith answered questions posed by the Committee.

Ms. Lenehan offered further comments.

Ms. Heusser offered further comments.

Mr. Osborn answered additional questions posed by the Committee.

Discussion

Senator Mesnard offered comments.

The Committee discussed and shared comments on the proposal to establish Arizona Fertility Insurance Coverage.

Ms. Graver answered questions posed by the Committee.

Ms. Marshall gave additional testimony and answered additional questions posed by the Committee.

Ms. Graver answered additional questions posed by the Committee.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference make the recommendation that the Legislature explore the topic of fertility insurance coverage further in the 2020 session.

Senator Alston made a substitute motion that the Committee on Finance give a positive recommendation to the Sunrise application on the issue of establishment of Arizona Fertility Insurance Coverage.

Senator Mesnard stated that the Committee would be voting on the substitute motion first.

The motion FAILED by show of hands 3-3-0.

Senator Mesnard stated that the Committee would vote on the underlying motion by show of hands.

Senate Finance Committee of Reference December 17, 2019 Page 3 The motion FAILED by show of hands 2-4-0.

The Committee discussed their recommendation.

Chris Kleminich, Senate Rules Attorney, answered questions posed by the Committee.

The Committee further discussed their concerns, shared comments and suggested to change the language on the recommendation.

Senator Bowie moved that the Committee of Reference make the recommendation that the Legislature consider the topic of fertility insurance coverage further in the 2020 session. The motion CARRIED by show of hands of 6-0-0.

SUNSET REVIEW OF THE ARIZONA STATE BOARD OF INVESTMENT

Fareed Bailey, Director, Legislative Affairs, Arizona State Treasurer's Office, gave an overview of the Arizona State Board of Investment.

Senator Mesnard called for questions. No questions were offered.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona State Board of Investment be continued for eight years until July 01, 2028. The motion CARRIED by voice vote.

SUNSET REVIEW OF THE ARIZONA DEPARTMENT OF INSURANCE

Presentation by the Office of the Auditor General

Rosa Ellis, Office of the Auditor General, gave an overview of the performance audit and subsequent outlined recommendations in the Sunset Review of the Arizona Department of Insurance. Ms. Ellis answered questions posed by the Committee.

Response by the Arizona Department of Insurance

Keith Schraad, Director, Arizona Department of Insurance, addressed the findings of the audit, agreed with the findings and stated that the Department has already taken substantial steps to address the issues. Mr. Schraad answered questions posed by the Committee.

Senate Finance Committee of Reference December 17, 2019 Page 4 Public Testimony

Senator Mesnard called for public testimony, however, no one came forward.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona Department of Insurance and Financial Institutions be continued for five years until July 1, 2025. The motion CARRIED by voice vote.

SUNSET REVIEW OF THE ARIZONA DEPARTMENT OF REVENUE

Presentation by the Office of the Auditor General

Jeremy Weber, Auditor General's Office, distributed a copy of the Arizona Department of Revenue Performance Audits and Sunset Review (Attachment C) and gave an overview of the findings.

Response by the Arizona Department of Revenue

Grant Nülle, Deputy Director, Arizona Department of Revenue, addressed the findings of the audit and that the Arizona Department of Revenue has been actively working on all the findings. Mr. Nülle answered questions posed by the Committee.

Public Testimony

Senator Mesnard called for public testimony, however, no one came forward.

Discussion

No discussion was offered by the Committee of Reference.

Recommendations by the Committee of Reference

Senator Bowie moved that the Committee of Reference recommend that the Arizona Department of Revenue be continued for eight years until July 1, 2028. The motion CARRIED by voice vote.

Senate Finance Committee of Reference December 17, 2019 Page 5 Attached is a list noting the individuals who registered their position on the agenda items (Attachment D).

There being no further business, the meeting was adjourned at 11:36 a.m.

Respectfully submitted,

Toy Brown Committee Secretary

(Audio recordings and attachments are on file in the Secretary of the Senate’s Office/Resource Center, Room 115. Audio archives are available at http://www.azleg.gov)

Senate Finance Committee of Reference December 17, 2019 Page 6 Arizona Department of Insurance

Performance Audit and Sunset Review Report 19-110 Issued: September 2019 Presenter: Rosa Ellis Date: December 17, 2019

Department regulates insurance industry

• Licenses insurance companies and professionals • Investigates consumer complaints • Investigates reports of suspected insurance fraud • Reviews insurance policies, rates, and products Agency consolidation

2019 consolidation: • Arizona Department of Financial Institutions • Automobile Theft Authority

Arizona Department of Insurance and Financial Institutions effective July 1, 2020

Examples of Department meeting its statutory objectives and purposes

• Issued licenses we reviewed to qualified applicants • Resolved complaints we reviewed timely • Reaccredited in April 2019 to license and monitor insurance companies operating in Arizona and facilitate reciprocal licensing Department determines which fraud referrals to investigate

Other states we contacted also receive more fraud referrals than they investigate New prioritization process piloted in fiscal year 2019

Criteria used: • Public impact of the fraud • Estimated loss over $10,000

Prioritization process lacks important components to help ensure effectiveness

• Does not require specific, standardized referral information • Does not use referral data to identify fraud trends and to inform future prioritization efforts Recommendations

• Strengthen its referral prioritization process • Evaluate the effectiveness of the process and implement any needed changes • Assess fraud investigative staffing needs

Practices for managing conflicts of interest increase nondisclosure risk

Statute requires public officers and employees to fully disclose substantial interests and refrain from participating in related decisions and matters

Can help deter self-dealing by public officers and employees and promote transparency and public confidence Practices for managing conflicts of interest increase nondisclosure risk • Department supports 3 boards, but Board members not required to complete disclosures • Employees not required to update disclosures • Department directed employees—but not board members—to complete a disclosure form. As of April 2019, 59 percent had a disclosure form on file for public inspection.

Recommendations

Implement conflict-of-interest policies that address: • Annual disclosure requirements for employees and board members • Process for managing disclosed conflicts • Process for maintaining completed forms for public inspection Department not reviewing long-term care insurance rates within 45 days Rate filings received in 2018 averaged 250 days to complete important review

Recommendations

• Department should research an appropriate time frame and work with the Legislature to revise the statutory time frame • Implement the national task force’s recommendations for improving long-term care insurance rate reviews, as applicable and appropriate Department has not convened 2 statutorily required public boards

• Insurance Consumer Advisory Board never formed • Continuing Education Review Committee not met since 2005 Recommendation: The Department should determine whether these public bodies are necessary and, if so, convene the bodies to fulfill their purposes. If not, the Department should work with the Legislature on statutory changes.

Department agreed with findings and will implement recommendations

Department agreed with 16 recommendations

Initial followup will begin in February 2020 Arizona Department of Insurance

Performance Audit and Sunset Review Report 19-110 Issued: September 2019 Presenter: Rosa Ellis Date: December 17, 2019

Office of the Director Arizona Department of Insurance 100 North 15th Avenue, Suite 102, Phoenix, AZ 85007-2624 Phone: (602) 364-3100 | Web: https://insurance.az.gov Douglas A. Ducey, Governor Keith A. Schraad, Director

September 5, 2019 c/o Ms. Molly Graver Senator J.D. Mesnard Arizona State Senate 1700 West Washington Street Phoenix, Arizona 85007

Re: Sunset Review Factors

Dear Senator Mesnard:

We are pleased to provide the following information concerning additional sunset review factors enumerated in your letter of June 11, 2019.

1. An identification of the problem or the needs that the agency is intended to address. The mission of the Department of Insurance is to protect Arizona citizens and businesses by promoting a safe, strong, innovative and competitive insurance marketplace. Insurance is principally regulated and tax by states by virtue of an 1869 Supreme Court decision (Paul v. Virginia) and the subsequent enactment of the McCarran‐Ferguson Act in 1945 Every US state and territory has an insurance department, insurance commission or similar government agency with essentially the same purpose.

2. A statement, to the extent practicable, in quantitative and qualitative terms, of the objectives of such agency and its anticipated accomplishments. Overarching objectives of the Department of Insurance established in law are:

 To license, control and supervise domestic and foreign insurers (Const. Art. 15, §5).

o Arizona licensed and oversees over 269,000 insurance companies, insurance intermediaries and insurance professionals (see Table 1 on the following page). Page | 2

Type of Company Domestic Foreign Alien Total INSURERS Table 2: Insurance Licenses in Casualty Insurer 4 105 109 Force as of September 1, 2019 Disability Insurer 7 23 30 Domestic Surplus Lines Insurer 5 5 Fraternal Benefit Society 30 1 31 During FY 2019: Health Care Services Organization 15 13 28 Life & Disability Insurer 26 416 3 445  Processed insurance Life Insurer 26 2 28 professional license and Mortgage Guaranty Insurer 1 19 20 Mutual Aid Association 2 2 renewal applications in an Prepaid Dental Plan Organization 6 6 average of only 1.5 days, Prepaid Legal Insurer 3 3 Property & Casualty Insurer 31 815 3 849 with 89.5% of applications Property Insurer 7 7 being submitted entirely Service Corporation 3 3 Title Insurer 1 26 27 online. INSURERS ‐ Subtotal 99 1,485 9 1,593  Deposited over $11 million

REINSURERS in license and renewal fees Accredited Reinsurer 20 20 to the State General Fund. Certified Reinsurer 9 9 Life & Disability Reinsurer 20 20  Processed insurance Unaffiliated Credit Life & Disability Reinsurer 22 22 company license/expansion REINSURERS ‐ Subtotal 42 20 9 71 applications in an average CAPTIVE INSURERS of 37.3 days. Agency Captive Insurer 1 1 Association Captive Insurer 2 2  Reviewed 98.9% of financial Group Captive 5 5 filings by multi‐state Protected Cell Captive Insurer 2 2 Pure Captive Insurer 103 103 domestic insurers within Risk Retention Group 11 11 time frames established by CAPTIVE INSURERS ‐ Subtotal 124 0 0 124 the National Association of OTHER INTERMEDIARIES AND PROVIDERS Insurance Commissioners. Life & Health Administrator 23 295 5 323 Life Care Provider 12 2 14 Life Settlement Provider 23 23 Purchasing Group 25 514 539 Reinsurer Surplus 2 2 Reinsurer Trust 17 17 Risk Pool 24 24 Risk Retention Group 102 102 Senior Residential Entrance Fee Contract Provider 4 2 6 Service Company 34 169 203 Third Party Intermediary 1 2 3 OTHER INTERMEDIARIES/PROVIDERS ‐ Subtotal 123 1,111 22 1,256

INSURANCE PROFESSIONALS Resident Nonresident Total Adjuster 14,464 2,213 16,677 Bail Bond Agent 0 161 161 Certified Application Counselor 5 301 306 Insurance Producer 192,641 52,679 245,320 Life Settlement Broker 93 37 130 Navigator 0 92 92 Portable Electronics Vendor 40 4 44 Risk Management Consultant 0 14 14 Self Service Storage Agent 36 71 107 Surplus Lines Broker 2,943 321 3,264 Title Agent 138 82 220 INSURANCE PROFESSIONALS ‐ Subtotal 210,360 55,975 0 266,335

GRAND TOTALS 210,748 58,591 40 269,379 Page | 3

 To administer the state insurance laws, protect the citizens of this state who purchase insurance, provide information and respond to insurance consumer needs and encourage competition to stimulate the Arizona insurance market. Laws 1980, Ch. 230, §1. To administer this state’s insurance laws, protect the citizens of this state who purchase insurance, provide a better response to the needs of persons who purchase insurance, stimulate the insurance market by encouraging competition, protect the public from unregulated insurers and represent insurance consumers’ interests. Laws 2000, Ch. 306, § 3, and Laws 2010, Ch. 13, § 3.

o During Fiscal Year 2019, the Department reviewed and closed over 2,000 written complaints from insurance consumers. Table 2: Number of complaints closed by type of insurance # of Complaints Type of Insurance Closed Accident & Health 441 Auto 837 Fire, Allied Lines & CMP 48 Homeowners 259 Liability 34 Life & Annuity 156 Miscellaneous 307 Other 1 Grand Total 2,083

o During Fiscal Year 2019, the Department administered the health care appeals process allowing 515 cases, in which healthcare claims or coverage and appeals through the insurance company were denied, to be elevated for additional review. The Department reviewed 159 cases to determine whether the claim/benefit should be covered by the member’s insurance policy, and referred 364 cases for review by an independent review organization to determine whether the health care services or prescriptions were medically necessary.

o During Fiscal Year 2019, we investigated and submitted for prosecution 221 insurance fraud cases. Additionally, the Department of Insurance collects over $500 million in insurance premium tax that is deposited into the State General Fund, and an additional $40 million that contribute funding for firefighter and law‐enforcement‐officer pensions. Page | 4

3. An identification of any other agencies having similar, conflicting or duplicate objectives, and an explanation of the manner in which the agency avoids duplication or conflict with other such agencies. The Department partners with local law enforcement agencies, county attorneys and federal law enforcement to investigate and prosecute insurance fraud. The Department is required to license bail bond agents. Some counties within Arizona require bail bond agents to be registered with the county in order to act as bail bond agents. The Department is required to receive fingerprints and photographs from bail recovery agents. These same individuals may also need to be licensed as private investigators by the Department of Public Safety.

4. An assessment of the consequences of eliminating the agency or of consolidating it with another agency. As to consolidating the agency with another agency, Laws 2019, Chapter 252 (Senate Bill 1469) consolidates the Department of Insurance, Department of Financial Institutions and the Arizona Automobile Theft Authority effective July 1, 2020, and changes the name of the consolidated agency to the Department of Insurance and Financial Institutions. The Department is currently working with the other two agencies to coordinate the consolidation. We do not anticipate adverse impacts from the consolidation. Eliminating the agency would have profound impacts on Arizona citizens, businesses and the economy in the following ways.

Solvency Regulation By having laws, resources, procedures and practices that meet accreditation standards promulgated by the National Association of Insurance Commissioners, state insurance departments by and large are able to prevent insurer insolvencies, and are able to mitigate the magnitude of insolvencies that are produced from unforeseeable or uniquely intense economic or environmental factors. Without regulation, excessive or cut‐throat pricing would lead to unlawful or inadequate rates and, ultimately, to insurer insolvencies. Fewer solvent insurers in the marketplace would dramatically reduce competition and hinder the remaining insurers’ ability to manage and share risk exposure, resulting in higher premiums for all consumers. The insurance market would become a “buyers beware” environment where consumers would have to bet on an insurer maintaining adequate reserves in order to make good later on the promises they make in their insurance policies. Without the Department’s insurer receivership administration and control, insolvent insurer assets would likely dissipate and disappear without regard to maximizing the ability to pay policyholder claims. Page | 5

If the guaranty funds continued to exist, solvent insurers (and ultimately their consumers through higher premiums) would incur the costs of a greater number and amount of assessments to pay the claims of an increasing number of insolvent insurers. And Arizona taxpayers would suffer because of higher tax credits to which the solvent insurers would become entitled as a result of paying the guaranty fund assessments. If the guaranty funds ceased to exist, policyholders/claimants of insolvent insurers would have to wait years to receive little or no claims or benefits payments.

Consumer Protection Without regulation, fraudulent unregulated “insurers” could flood the market, harm consumers and gain unfair competitive advantage by violating Arizona insurance laws. Insurance companies could issue insurance policies that are misleading, lacking provisions required by Arizona law, or contain terms or conditions that are inconsistent with the requirements of Arizona law. Insurance companies could charge rates that are unfairly discriminatory, that are excessive and unjustified, or that are insufficient and detrimental to their financial conditions. Insurance consumers would have no way to know whether they were the victims of underwriting or rate discrimination. Insurers could unlawfully refuse to pay valid claims. There would be no examinations of insurer activities or other means of market oversight to determine whether consumers are getting what they are entitled to receive under their policies. Insurance professionals could, without a threat of Department detection, investigation and prosecution, falsify or forge information in insurance applications; improperly withhold, misappropriate or convert customer funds; intentionally misrepresent the terms of insurance contracts or make untrue statements about a competing insurer or its products; use fraudulent, coercive or dishonest practices; be incompetent, untrustworthy or financially irresponsible; and engage in other unlawful practices. While health care appeals elevated from an insurance company might in the absence of the Department be administered by the federal government, Arizona citizens and businesses would otherwise have to fend for themselves in disputes with insurance companies, in many cases having to face substantial costs and delays in having their cases litigated. Arizona policyholders would be forced into David and Goliath battles with insurance companies that have vast litigation resources, whereas the Department of Insurance currently reviews complaints from Arizona policyholders and helps policyholders recover the benefits to which they are entitled. Arizona courts would have to deal with an increase to the cases they must adjudicate because Arizona citizens and businesses would not be able to avail themselves to the Department for help in resolving complaints. Page | 6

The Department serves as the best and most readily accessible source of consumer insurance information, whether it comes from our knowledgeable staff, our various publications, or our website. Terminating the agency would leave consumers without any resources when encountering problems with their insurance policies, agents, or claims.

Fraud Investigation and Deterrence The Department of Insurance Fraud Unit was established because the insurance industry believes that having a unit dedicated to investigating and prosecuting insurance fraud is an efficient way to deter people from committing insurance fraud, which results in higher insurance premiums borne by insurance policyholders, much in the same way that shoplifting affects the prices that retail stores must charge for the goods they sell. If the Department were eliminated, either both the Unit and the assessment that funds the Unit would be eliminated or the assessment would be levied by another organization with law enforcement authority and the Unit would be moved to that organization.

Licensing The agency website is available 24/7 to provide consumers with the current status of an insurance professional’s license and detail on an insurance company’s financial status. The absence of the Department’s insurance licensing functions would allow anyone to develop and market an alleged “insurance” product. Financially hazardous insurers and unscrupulous producers/agents could market unlawful products and prey upon consumers in unlimited ways. Without any administrative leverage or disciplinary authority, there would be no incentive to comply with existing insurance laws. Insurer and producer/agent employment would be adversely impacted and would have a negative effect on the integrity of the insurance profession. The State would lose $11 million in annual license and renewal revenues.

Insurance Premium Tax If the Department were eliminated, either the over $500 million of insurance premium tax revenue would be eliminated or the responsibility for imposing and collecting the tax would be shifted to another agency, such as the Arizona Department of Revenue. However, currently, insurance companies are compelled to pay insurance premium tax by the fact that in addition to imposing civil penalties and interest, the Department can suspend or revoke the authority of an insurer that refuses to pay tax, which would effectively shut down the insurer’s business in Arizona. Finally, General Fund revenues would dramatically decrease. Fewer insurers would be participating in a deteriorated, untrusted marketplace with severe impacts to aggregate insurance premium volume (and thus, taxable premiums). Presumably, no one would Page | 7

be licensing insurance professionals, and the state would lose around $10 million in annual license and renewal fees.

5. The extent to which the agency potentially creates unexpected negative consequences that might require additional review by the committee of references, including increasing the price of goods, affecting the availability of services, limiting the abilities of individuals and businesses to operate efficiently and increasing the cost of government. The Department’s vision is effective insurance consumer protection with minimal regulatory and taxpayer burden. Department of Insurance employees are fully aware that any costs that we impose on the insurance industry end up being paid by Arizona’s insurance‐buying citizens and businesses. The Arizona Department of Insurance operates with the fewest FTE’s per capita all the insurance departments across the US, but maintains performance levels that rivals the best‐performing departments.

Thank you for your interest in the Department of Insurance. We look forward to your consideration concerning the continuation of the agency.

Respectfully,

Scott B. Greenberg, Deputy Director, for Keith A. Schraad, Director

Page | 8