Industry Split In Federal Charter Debate

Washington

The stark divisions within the insurance industry over optionalfederal chartering erupted at a Congressional hearing last week,with one member of Congress suggesting that a “tiered” system,which would apply OFC only to certain categories of business, mightbe in order.

The hearing by a House Financial Services Subcommittee revealedindustry differences on two levels. The first was between the lifeand property-casualty insurance industries, as even the p-copponents of OFC acknowledged that life insurers have differentproblems than p-c insurers and might have a better case forOFC.

The second level was within the p-c industry, with some p-crepresentatives saying that OFC is necessary for the futurecompetitiveness of the industry, and others insisting that it couldmake insurance regulation even more burdensome and expensive.

Joseph J. Gasper, president of Columbus, Ohio-based NationwideFinancial Services and chairman of the Washington-based AmericanCouncil of Life Insurers, called the current state regulatorysystem a “competitive albatross.”

He noted that the system was designed when the life insuranceindustry was much different than it is today. Life insurers, Mr.Gasper said, no longer focus simply on traditional life insuranceproducts. The business today, he said, is about retirement securityand long-term savings. In addition to competing against each other,Mr. Gasper said, life insurers must also compete against banks,mutual funds and securities firms.

Unfortunately, he said, these competitors have an advantage overlife insurers in that they can develop products and bring them tomarket quickly. But life insurers, he said, may have to wait 18months or more to get approval for new products from alljurisdictions. And even then, he noted, local variations mightforce life insurers to tweak a new product in a way thateffectively transforms it from a single, national product to 30 ormore different products.

“The current system is not designed to accommodate nationalcompanies, and it doesnt,” Mr. Gasper said.

Tony Nicely, chairman of Washington-based GEICO, said heunderstands Mr. Gaspers concerns. Mr. Nicely, who spoke on behalfof the National Association of Independent Insurers, said thatwhile he could not speak for the Des Plaines, Ill.-based NAII onthe issue of establishing a life insurance-only federal charter, hepersonally would not oppose it. But he does oppose establishing OFCfor p-c insurers, he said.

While acknowledging that the state system needs reform, Mr.Nicely said that OFC would have severe consequences for p-cinsurers. “We believe that geographic and state conditions are suchthat customers needs differ from state to state,” he said.

Moreover, Mr. Nicely said, an OFC system could have adevastating effect on small and medium-sized insurers. Under thecurrent OFC proposals, he said, insurers would not be required toreport loss data to advisory organizations such as the InsuranceServices Office, and indeed, may even be restrained from doing sobecause of federal antitrust exposure.

“Without the availability of aggregate loss-cost data, thesesmall and mid-sized insurance companies would not have credibledata and would be unable to compete with larger companies that canrely solely on their own data,” Mr. Nicely said.

He said he believes that even the toughest states for p-cinsurers, such as New Jersey, are starting to see the light onregulatory modernization and are moving towards reform.

Asked by Subcommittee Chairman Richard Baker, R-La., how longCongress should wait before acting, Mr. Gasper said that if thereis no progress on state regulatory reform, then he would say moreaction is needed. But he said that for life insurers, Congressionalaction is already 15 years too late.

Rep. Paul Kanjorski, D-Pa., brought up the issue of a tieredsystem, one that might apply only to life insurers and perhaps alsoto certain large commercial risks.

Mr. Nicely replied that if certain segments of the industry,such as life insurance, are carved out, it might be possible. “Ican see Mr. Gaspers arguments,” he said. However, the p-c businessis so complex, Mr. Nicely added, it could take several years justto understand the implications of OFC.

For his part, Mr. Gasper also acknowledged that the twoindustries are very different. But he noted that Nationwide is alsoa major p-c company, and even from that perspective, he said thatinsurers should have a choice. If Mr. Nicely believes that stateregulation is better for GEICO, he should have that choice.Nationwides institutional view, on both the life insurance side andthe p-c side, is for choice.

A representative of a major p-c group, the Washington-basedAmerican Insurance Association, agreed. Robert Restrepo, presidentof Allmerica Property & Casualty Companies of Worcester, Mass.,said the level regulatory playing field created by OFC is criticalto the long-term viability of the industry.

“The current state regulatory system imposed significant costson insurers and, ultimately, our customers, as well as the economyat large,” Mr. Restrepo said. Moreover, he said, the challengesfacing the p-c industry are increasingly national and internationalin scope.

“Terrorism, natural catastrophes, fraud and asbestos litigationare just some of the major issues the industry faces,” he said.“But the current decentralized regulatory system lacks the tools toaddress these issues in a comprehensive manner.”

While AIA also supports reform of state regulation, Mr. Restreposaid the process is slow and uneven. “For every incrementalmovement toward greater state regulatory efficiency or uniformity,there are many new state-specific regulatory requirements thatresult in cost, delay and frustration for insurers with little, ifany, consumer benefit,” he said.

But Paul Mattera, senior vice president of Boston-based LibertyMutual, said that a federal system could undermine the bestcharacteristics of state regulation, including diversity,innovation and responsiveness. “It is difficult to imagine a singleregulatory system working in harmony with the diversity ofunderlying reparation laws and differing public expectations aboutthe role of insurance regulation,” he said.

Mr. Mattera raised several questions:

Will an open and competitive rating law work in a state with atradition of subsidizing urban drivers, he asked?

How responsive will a federal regulator be to marketdislocations in individual states caused by extreme weather orseismic activity?

Finally, he asked, can market conduct be fairly assessed by afederal regulator unfamiliar with the underlying state law or courtinterpretations?

Mr. Mattera said that efforts to achieve OFC are likely to leadto dual regulation. For example, he said, Congressional interest inpreempting state solvency regulation in favor of uniform financialrequirements enforced by a federal regulator might not extend torate and form regulation. This separation of financial regulationfrom market regulation would present the worst of dual regulation,he said.

The state system needs improvement, he said, but there is noreason to believe a federal system would be any better.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, June 17, 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.