Reform Regulation Via States, Not D.C.

“A reformed system of state insurance regulation is superior toan unproven new system of federal regulation crafted in a difficultpolitical environment.”

The basis for this position is detailed in a public policy paperby the National Association of Mutual Insurance Companies:“Regulation Of Property-Casualty Insurance: The Road To Reform.”The paper and its accompanying campaign are intended to create areason for pause among insurance policymakers.

NAMIC has tried to move the debate away from a narrow discussionof the best system of regulation for any particular type ofinsurance company, and instead urged consideration of what is thebest regulatory system for all stakeholders–consumers, taxpayers,insurers, insurance agents and all others–affected by theregulatory structure.

Both the direction and the conclusion of NAMICs public policypaper are a result of years of active member involvement andthousands of hours of research.

We began with a question: What is good public policy? Bydefinition, it is policy that operates for the public good.Therefore, it should not be created in a vacuum. NAMIC believesthat before making far-reaching public policy decisions about theregulation of insurance, consideration should be given to thesocial, political, and economic environment in which insurancecompanies operate.

Next we asked: Why regulate? In NAMICs view, regulation isnecessary to protect the public against market failure, and tofacilitate public interest activities such as gathering consumerinformation.

A third reason–to address societal issues–is an unacceptable andpotentially disruptive rationale to regulate. However, becausesocial regulation is increasingly employed at the federal level,with mandates often imposed on businesses with unintendedconsequences for consumers and the private sector, insurers mustproceed with caution before inviting Congress to act.

After all, the state system has performed admirably throughoutits long history. State insurance regulation has been adaptable,accessible and relatively efficient, with few insolvencies and notaxpayer bailouts.

Clearly, state insurance regulation can be cumbersome,particularly for larger companies that do business on a nationalbasis and are forced to comply with inconsistent regulation across51 different jurisdictions–not to mention rate regulation thatoften deprives consumers of choice by limiting competition in amarket. These are issues that advocates of federal interventionseek to resolve. But while it must be fixed, the state systemshould not be scrapped for an unknown, unproven and untestedfederal regime.

One of the strongest arguments for supporting reformed stateregulation and rejecting a federal role is the likelihood that anact of Congress originally drafted for relatively narrow reasonscould result in expansive new demands and expectations on the p-cindustry. Even advocates of federal charters concede thatburdensome social regulation, such as community reinvestmentobligations for insurance companies, is likely to be included infederal legislation.

There is simply no guarantee that any proposal that requiresCongress to hold hearings and debate a bill on the floor of theHouse and Senate will produce the framework or results sought andtouted by federal advocates, much less produce sound publicpolicy.

What else would federal legislation mean? A dual charter wouldadd more regulatory layers to the current system of insuranceregulation. And while federal regulation might bring us closest touniformity in regulation, misguided policies or flawed regulationby that single national regulator could have significanteconomy-wide consequences.

No one can guarantee that federal uniformity is the panacea thatis promised by some. It could make things worse. Even under a dualcharter, the federal government will have to promulgate andinterpret a large body of regulation, and there is no way to knowif the various federal district courts will agree on the finalinterpretations. If that occurs, the U.S. Supreme Court will haveto resolve any “split in the districts,” but our nations highestcourt rightly considers only a few questions each term.

We can reform state regulation. This is a bold statement, butone that is entirely achievable. How do we begin? By focusing onreforming at least four areas causing problems within the currentstructure of state regulation: rate regulation, marketsurveillance, solvency regulation and company licensing.

State legislatures, not Congress, are our most productive avenuefor reform. This will take time, but the National Conference ofState Legislatures has provided a tremendous opportunity to presenta comprehensive package of reform proposals directly to the statesthrough its “Task Force to Streamline and Simplify InsuranceRegulation.” Its recommendations will be announced before the endof the year.

The NCSL Task Force is the right vehicle at the right time. Itsmembers are elected state officeholders who actually enactlegislation in the states. Among its participants is the leadershipof the National Conference of Insurance Legislators–owners of along record in favor of state regulatory reform. The officers ofthe National Association of Insurance Commissioners have expressedtheir support for the NCSL process and are working with the taskforce.

Before taking radical steps that might negatively affect allstakeholders, the makers of public policy need to consult a “map.”In our public policy paper, NAMIC not only details the reasons thatfederal involvement in insurance regulation is unwise, but alsoprovides solutions for its improvement. (The paper is availableonline at www.namic.org).

A year ago in these pages I wrote, “state regulation is at theproverbial fork in the road.” NAMIC members suggest that the roadto reform runs through state capitals, not Washington, D.C.

Its time to start the journey

Larry Forrester is president of the National Association ofMutual Insurance Companies in Indianapolis.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 13, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.