Rodney R. Ayer, 44, former president of Phoenix Underwriting Managers Inc., could face up to 24 months in prison at sentencing before U.S. District Court Judge Ricardo M. Urbina. A date for sentencing has not bee set.

In a related civil matter, Ayer has agreed to pay $500,000 as a civil monetary penalty and to set aside an additional $495,000 in an escrow account to cover specified expenses related to the insurance claims at issue, according to U.S. Attorney Ronald C. Machen Jr.

Prosecutors said the investigation is continuing and that Ayer, as part of his plea agreement, must cooperate with investigators.

Ayer was the founder, president and majority owner of Phoenix, a New Jersey-licensed MGA that focused on insurance products for unique association groups and other specialty programs. Ayer and another insurance professional, referred to as “Insurance Broker A-1,” placed association groups with insurance carriers.

In April 2006, after learning an insurance company would not establish an insurance program it was marketing, Ayer, Insurance Broker A-1 and others filed an application with the District of Columbia Department of Insurance, Securities and Banking seeking permission for a company to operate as a captive insurance company under the District’s laws. Prosecutors said the application contained false information suggesting Hannover Rueckverisherung AG had been the previous insurance carrier.

Prosecutors said three association groups served by Ayer and Insurance Broker A-1 were Wright and Co., the IMA Group (IMA), and the Hands-On Trade Association (HOTA). Wright and Co. provided supplemental insurance programs to the federal government, including a program known as the Federal Employee Professional Liability insurance program (the FEPL Program), which provided insurance protection to federal employees against civil and criminal actions filed against them for acts committed while performing official duties.

IMA and Hands-On were associations that offered their members insurance coverage through a non-profit entity known as the Health and Beauty Risk Purchasing Group (HBRPG).

Ayer admitted that he and Insurance Broker A-1 intended to insure the members of the FEPL Program and the HBRPG with insurance carriers, known as “Cells,” established through a multi-national insurance carrier, Hannover Rueckverisherung AG (Hannover Re). Ayer and Insurance Broker A-1 intended to co-own the Cells, which would be associated with Hannover Re, and supervise the administration of the FEPL Program and the HBRPG. Based on their knowledge of the claims histories for the FEPL Program and the HBRPG, Ayer and Insurance Broker A-1 expected to retain substantial underwriting profits from the FEPL Program and the HBRPG through their use and ownership of the Cells.

To be legally operative, however, Hannover Re and the insurance regulatory agency in Guernsey had to approve the Cells.

Ultimately, Ayer and Insurance Broker A-1 were unable to obtain formal approval from Hannover Re or the insurance regulatory agency in Guernsey to operate the Cells. Nevertheless, Ayer, Insurance Broker A-1 and others led the IMA, HOTA, Wright and Co., and insurance regulatory agencies in the District of Columbia and Kentucky to believe that Hannover Re had approved Cells to insure the FEPL Program and the HBRPG. Ayer and Insurance Broker A-1 received substantial premium payments from the members of the FEPL Program and the HBRPG based on representations that Hannover Re insured those Programs when, in fact, Hannover Re had not formally approved the Cells to insure the FEPL Program and the HBRPG, prosecutors said.

As a result, after Ayer and Insurance Broker A-1 paid the claims and expenses associated with the Programs, they were able to retain the underwriting profits associated with those Programs for themselves, prosecutors said.

In April 2006, after Ayer learned that Hannover Re would not establish the Cells to insure the FEPL and IMA Programs, Ayer, Insurance Broker A-1 and others caused an application to be filed with the District of Columbia’s Department of Insurance, Securities and Banking seeking approval for a District of Columbia Certificate of Authority allowing Defense Shield Insurance Co. Inc. (DSIC) to operate as a captive,  according to court records.

DSIC was intended by Ayer and Insurance Broker A-1 to succeed the Cell purportedly associated with Hannover Re as the next insurance carrier for the FEPL Program, prosecutors said. The application falsely stated that Hannover Re had been the previous insurance carrier for the FEPL Program and the IMA when, in fact, Ayer knew that Hannover Re had not been the insurance carrier for the FEPL Program and the IMA, officials said.

Founder of N.J. insurance agency pleads guilty in District fraud case via IFAwebnews.

Gennet Purcell

D.C. Mayor Adrian Fenty has established a Health Reform Implementation Committee, co-chaired by Gennet Purcell, commissioner for the District’s Department of Insurance, Securities and Banking (DISB), and Julie Hudman, director of the D.C. Department of Health Care Finance.

The committee will advise Fenty on implementation of health reform guidelines and coordinate its execution in the District, according to a statement from the DISB.

“This reform has the power to affect many District families – including our most vulnerable seniors and low-income residents – and DISB will work with the other agencies on the committee to be diligent, effective and efficient about its implementation,” said Purcell in a statement. “Our staff has been studying the law, coordinating with others, and is ready to work on putting in place the benefits that will provide greater access to quality affordable health care for all District residents.”

Also serving on the committee are District Department of Health Director Pierre Vigilance and Department of Human Services Director Clarence Carter.

Staff at all four agencies represented on the committee are to provide administrative, clerical and technical support, according to the announcement.

The DISB notes that the new reform law requires a partnership between the District and the federal government, and that there are several state-based requirements and mandates that must also be met by the District government.

D.C. forms implementation committee for federal health reform via IFAwebnews.

An order rescinding the prior approval, issued to the Owings Mills, Md.-based insurer March 3, states that health insurance premiums for affected customers will revert to their previous rate until CareFirst files and receives approval for a revised rate. The new rate can take effect 90 days after CareFirst notifies subscribers.

The order also provided for a refund of any overpayments plus interest.

Gennet Purcell

Citing the regulatory action’s occurrence during National Consumer Protection Week, DISB Commissioner Gennet Purcell said her agency “has pursued regulatory measures that keep on protecting consumers’ financial interests.

“Residents can make a difference when they file complaints with the agency, even if they only suspect that the activity is unfair, abusive or excessive,” she said in a statement.

CareFirst’s filing for the individual, non-Medigap indemnity health insurance policy through its subsidiary, Group Hospitalization and Medical Services (GHMSI), was initially approved by the DISB in October 2009, where the increased rate was to take effect Jan. 1. The DISB said based on a complaint by one consumer earlier this year, the agency’s staff requested additional documentation from CareFirst, realizing “it did not meet specific requirements to warrant such an increase.”

The agency said due to “an administrative error” on the part of the insurer, an incorrect ratio was used to approve the 35% rate increase and without that error, the information in the rate filing would not support the requested increase.

The order states that GHMSI did not incorporate the premium rates approved by the DISB in 2009 for the Comprehensive Major Medical coverage into its administrative system, resulting in affected subscribers being charged the prior year’s premium rates.

The error caused the loss ratio for the product subject to the filing to be higher than CareFirst had charged the correct premium, the order states. Purcell subsequently rescinded the rates in her March 3 order.

CareFirst did not immediately respond to a request for comment by IFAwebnews.com on the rescinded rate or the administrative error cited by the DISB.

District regulators said as of March 7, the rates approved last October are no longer in effect and CareFirst should continue charging individuals at the rates they paid prior to Jan. 1, 2010, and should also refund any amount charged in excess of the rates with interest at 5% on the excessive amounts charged.

DISB officials are still in the process of determining whether the reserves of GHMSI were “unreasonably large,” and thus a violation of District law. The decision, which was supposed come by the end of 2009 was delayed to “a later date.”

A DISB spokesperson told IFAwebnews.com there is no news or timeline regarding the reserve determination by Purcell.

Complaint, error scuttle D.C.’s approval of CareFirst rate increase via IFAwebnews.

As part of the new initiative, regulators in Washington, D.C., and Ohio have been piloting the new referral system with rollout to additional states expected soon.

Stephen Perry

Stephen Perry, associate commissioner for enforcement and investigation with the District’s Department of Insurance, Securities and Banking says having one central reporting conduit “is working.”

“I think there is less confusion,” he recently told IFAwebnews.com. “We have a more standardized format that gets to the states now.”

Alan Haskins, director of government affairs for the NICB, said the idea of a single, central fraud referral system has been “kicked around” for nearly seven years. He noted that 42 states have mandatory reporting laws and have evolved from their own reporting system, using data faxed to state regulators, to online systems, but have sought one central location for nationwide data collection.

The NICB, which represents more than 1,000 commercial and personal line property-casualty insurers and self-insured organizations, and the NAIC, which represents the nation’s state insurance commissioners, worked together toward making that a reality, Haskins said.

“In this industry, a lot of times, you can’t get everyone to agree, but all the parties have worked toward this,” he said. “The ultimate goal is to make it easier and uniform.”

This story originally appeared in the February 2010 print edition of Insurance & Financial Advisor.

D.C. fraud bureau among first users of new nationwide referral system via IFAwebnews.

Aero Indemnity Insurance Co. also was ordered in the D.C. ruling to pay the outstanding premium taxes from 2008, according to an order from the District of Columbia Department of Insurance, Securities and Banking.

Aero Indemnity is a captive insurance company, accused in June 2009 of violating District law by not complying with annual reporting requirements.

The company failed to appear at a hearing last July.

Records show that on Feb. 2, 2009, The Taft Cos. sent a letter to the DISB requesting a waiver of the requirement for an Annual Statement, CPA Audited Statement, Actuarial Review and Opinion, premium tax payment and certificate of renewal fees for the year ending Dec. 31, 2008. The company was being dissolved.

That same day, DISB granted the waiver, except for the premium tax payment, provided the company dissolved by May 1, 2009.

This story originally appeared in the January 2010 print edition of Insurance & Financial Advisor.

District pulls insurer’s license for non-payment of taxes via IFAwebnews.

Stephen Perry

In the last three fiscal years, fraud referrals to the DISB’s Enforcement and Investigation Bureau have averaged about 350 per year and risen 75% from fiscal 2007 to fiscal 2009, according to recently released statistics from the department.

“It is a combination of some new fraud-fighting technologies and our department’s success in gaining the attention of D.C. citizens to report fraud,” Perry, the DISB’s associate commissioner for enforcement and investigation, said. “Citizen awareness of insurance fraud, and its cost to them, has been growing over the years.”

Reporting suspicion of insurance fraud by regulated insurance carriers is mandated under the District’s insurance fraud law. Perry said the majority of referrals are electronically submitted using systems from the National Insurance Crime Bureau (NICB) for its members insurance companies and the National Association of Insurance Commissioners (NAIC) featuring both consumer and insurer referrals.

Perry’s bureau also works closely with its counterparts in the Maryland Insurance Administration, and in Virginia, through the state’s Bureau of Insurance and Virginia State Police, who investigate fraud cases.

“We’ve had information sharing meetings in the past, can exchange emails, and I’d say we have a ‘pick up the phone’ relationship and the lines of communication are working very well,” Perry said.

Statistical data

The largest number of fraud referrals to the enforcement and investigation division over the last three fiscal years concerned auto insurance, with a rise in auto owner give-ups, staged accidents and backdating actual dates of accident claims, Perry said.

There was a subtle drop, Perry noted, from fiscal 2008 and 2009, which he attributes in part to cooperation with the Maryland Automobile Insurance Fund (MAIF). The state’s insurer of last resort, MAIF has made more than 140 referrals to DISB regarding premium avoidance, where a District resident claims to have a Maryland address, thus securing a lower premium.

“Since MAIF set up the program with us, the word is out that MAIF and DISB will detect the fraud and possibly the claims won’t get paid,” Perry said.  “MAIF is a great partner.”

One statistic that may be a bit misleading, Perry said, is a rise in agent fraud referrals. In 2008, the DISB’s insurance and fraud bureaus combined their efforts in agent enforcement, which has resulted in more referrals for investigation, he said.

This story originally appeared in the January 2010 print edition of Insurance & Financial Advisor.

New focus spurs rise in District of Columbia insurance fraud referrals via IFAwebnews.

Thomas E. Hampton

Hampton has joined law firm Sonnenschein Nath & Rosenthal LLP as a senior advisor in its insurance regulatory practice. He will work in the firm’s Washington, D.C., office on K Street.

Gary Hernandez, chair of Sonnenschein’s insurance regulatory practice, said Hampton’s “insight and experience make him a tremendous resource for our clients.

“As commissioner, Tom oversaw every aspect of the agency responsible for regulating all of D.C.’s financial service industries, including insurance companies, D.C. chartered banks and securities firms. He was also responsible for enforcing all of the district’s laws relating to financial services activities,” Hernandez said in a statement.

According to Sonnenschein’s website, the firm’s insurance regulatory practice advises clients in every segment of the insurance industry and helps regulated entities “manage their operations, address current issues and undertake strategic planning.”

Hampton joined DISB in 1988 and in May 2006 was named as commissioner of the agency. In August, he was dismissed by the mayor’s office and replaced with Gennet Purcell, who was recently confirmed by the D.C. Council as Hampton’s successor.

Sonnenschein said the firm will benefit from Hampton’s work to increase the number of captive insurance companies and risk retention groups operating in the District and developing health insurance coverage options for the uninsured. The firm also highlighted his work with the National Association of Insurance Commissioners (NAIC) regarding accounting and actuarial issues, including the principles-based reserving working group and the capital and surplus relief working group.

“Sonnenschein is a thought leader in the insurance regulatory industry, and I’m extremely enthusiastic about helping the firm expand its world-class practice into the D.C. market,” Hampton said in a statement.

Former D.C. insurance commissioner joins local law firm via IFAwebnews.

Gennet Purcell

Purcell took over as acting commissioner of the department Aug. 28, after her predecessor, Thomas E. Hampton, was dismissed by the mayor’s office. Hampton told IFAwebnews.com in August, that a representative of Mayor Adrian Fenty told him there was a desire to “go in a different direction” with the operation of the DISB.

In a statement, Purcell said she was “humbled by this show of support by the [D.C.] Council.

“And I am appreciative of this opportunity given to me by the mayor to serve as the District’s chief regulator of the financial-services industries,” she said.

Purcell served as deputy commissioner for the DISB beginning in 2008 and is an attorney and member of both the State of Maryland Bar and the Commonwealth of Virginia Bar. As deputy, she oversaw various aspects of the agency’s operations, including insurance and securities.

One of her first acts as acting commissioner was to oversee a two-day hearing in September, reviewing the surplus levels of CareFirst affiliate, Group Hospitalization and Medical Services (GHMSI). Following the hearing, Purcell announced that the DISB would delay any action on the matter until Maryland regulators completed their review of the surplus, which was expressed in a report issued Nov. 4.

As for future goals, the DISB said Purcell will focus on “realigning and centralizing” the consumer protection and advocacy functions of the agency. Other goals include ensuring that financial services in the District are more affordable and accessible and that the momentum of captive insurance in the District is ongoing, according to the agency.

Prior to joining District government, Purcell was a partner in her own privately owned law firm, covering various areas including insurance, surety bond financing and estate planning.

Purcell confirmed as new D.C. insurance commissioner via IFAwebnews.

The Maryland Insurance Administration released on Nov. 4 an analysis, performed by financial consulting firm The Invotex Group, reviewing the surplus of Owings Mills, Md.-based CareFirst and its Group Hospitalization and Medical Services Inc. subsidiary.

The report is the culmination of nearly a year of review by state regulators into whether the non-profit insurer’s reserve levels are excessive and how to better monitor insurer surplus overall. An MIA hearing on the matter is scheduled for Nov. 19.

GHMSI, with a current reserve of $687 million, covers about 150,000 policyholders in the District, 700,000 in Maryland and 300,000 in Northern Virginia, the report said.

The report finds that neither CareFirst of Maryland nor GHMSI have excessive surplus with $394 million and $687 million in reserves, respectively. In comparison with nine other mid-sized, nonprofit, national Blue Cross or Blue Shield affiliates, including Pennsylvania-based Independence Blue Cross and Capital Blue Cross, Invotex found that GHMSI’s reserve levels were at the higher end of the range and CareFirst’s were at the lower end.

Tyler’s take

Speaking before members of the Independent Insurance Agents of Maryland on the same day as the report’s release, Maryland Insurance Commissioner Ralph S. Tyler called CareFirst “the most significant company we [the MIA] have regulatory responsibility” over.

Ralph S. Tyler

Tyler added there is the belief that there is “no such thing as too much surplus,” as more surplus means more consumer protection, but it also means at some point, people were charged rates that were too high.  At the other end of the spectrum, Tyler said, if an insurer’s surplus it too low, the company could be at risk.

“What I’d stress is that this is an important topic because this is a company that provides health care coverage to about 50% of the people in our state that have coverage and its solvency is tremendously important to them and to all of us,” Tyler said. “At the same time, its rates are tremendously important.”

Report recommendations

While Invotex validated an approach to determine reserve levels by CareFirst’s actuarial firm – Milliman – as “reasonable,” it recommended that the MIA implement ranges that it called “lower and tighter.” It also recommended regulators evaluate the insurer’s reserve levels every three years to five years, unless “unusual events or circumstances” arise.

“For example, once the outcome of national health care reform efforts is known, an updates or supplemental analysis may be warranted,” according to the report.

Invotex also made several other recommendations to the MIA in its report on possible changes to its regulations on defining the surplus review process with the state’s nonprofit health service plans.

The outcomes of the review in Maryland are of great interest in Washington, D.C., where the District’s Department of Insurance, Banking and Securities held hearings in September on GHMSI’s reserve levels.  D.C.’s regulators have delayed their decision on the matter until the end of the year to review the Invotex report and its findings.

Under D.C. law, if insurance regulators determine the surplus as “unreasonably large,” CareFirst must come up with a plan to redistribute funds among its subscribers in Maryland, Virginia and the District.

The Invotex report calls that apportionment of funds “attributable” to each jurisdiction “a concept that has no financial meaning, applicability or relevance and should be reconsidered.”

“Any effort by one jurisdiction …to apportion surplus and use the company’s assets for purposes unrelated to the claims of existing contract holders will, by definition, lower the surplus of the entity as a whole and, to that extent, leave the contract holders in [Maryland, the District and Virginia] less protected than they were before,” Invotex concludes.

Report deems surplus for CareFirst, subsidiary ‘not excessive’ via IFAwebnews.

The hearing will be held more than two weeks after state regulators are scheduled to release a report (Nov. 4) prepared by Invotex Group, an actuarial firm hired by the agency to look at the methodology and size of the insurer’s surplus.

A similar review was recently completed in Washington, D.C., with regulators there postponing a determination on whether GHMSI’s reserves are “unreasonably large” under District law, requiring a return of premium dollars.

Last month, District regulators announced they would delay their verdict until the end of the year to take Maryland’s findings into consideration following two days of testimony from the insurer’s representatives and others.

Ralph S. Tyler

GHMSI, with a current reserve of $687 million, covers about 150,000 policyholders in the District, 700,000 in Maryland and 300,000 in Northern Virginia.

“As a standard part of our regulatory function of protecting consumers, we want to ensure that CareFirst is financially viable today and into the future for its policyholders,” Maryland Insurance Commissioner Ralph S. Tyler said in a statement. “This review of CareFirst surplus will offer a valuable framework for looking at the financial status and operational conditions of the company and better guidance on future decisions regarding oversight of this unique company.”

The MIA said the review of CareFirst and GHMSI reserves was commissioned to evaluate whether current statutory reserve requirements are adequate to protect policyholders and to recommend a regulatory framework for reviewing and determining when the surplus for both companies on an individual or consolidated bases has become excessive.

The hearing will be held Thursday, Nov. 19, at 9 a.m. in the MIA Hearing Room at 200 St. Paul Plaza in Baltimore, Md. The hearing will include a presentation by Invotex Group on its report with representatives from CareFirst and the public able to respond.

MIA to hold hearing on reserves level for CareFirst, subsidiary via IFAwebnews.