Reform Regulation Via States, Not D.C.

“A reformed system of state insurance regulation is superior to an unproven new system of federal regulation crafted in a difficult political environment.”

The basis for this position is detailed in a public policy paper by 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 a reason for pause among insurance policymakers.

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

Both the direction and the conclusion of NAMICs public policy paper are a result of years of active member involvement and thousands of hours of research.

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

Next we asked: Why regulate? In NAMICs view, regulation is necessary to protect the public against market failure, and to facilitate public interest activities such as gathering consumer information.

A third reason–to address societal issues–is an unacceptable and potentially disruptive rationale to regulate. However, because social regulation is increasingly employed at the federal level, with mandates often imposed on businesses with unintended consequences for consumers and the private sector, insurers must proceed with caution before inviting Congress to act.

After all, the state system has performed admirably throughout its long history. State insurance regulation has been adaptable, accessible and relatively efficient, with few insolvencies and no taxpayer bailouts.

Clearly, state insurance regulation can be cumbersome, particularly for larger companies that do business on a national basis and are forced to comply with inconsistent regulation across 51 different jurisdictions–not to mention rate regulation that often deprives consumers of choice by limiting competition in a market. These are issues that advocates of federal intervention seek to resolve. But while it must be fixed, the state system should not be scrapped for an unknown, unproven and untested federal regime.

One of the strongest arguments for supporting reformed state regulation and rejecting a federal role is the likelihood that an act of Congress originally drafted for relatively narrow reasons could result in expansive new demands and expectations on the p-c industry. Even advocates of federal charters concede that burdensome social regulation, such as community reinvestment obligations for insurance companies, is likely to be included in federal legislation.

There is simply no guarantee that any proposal that requires Congress to hold hearings and debate a bill on the floor of the House and Senate will produce the framework or results sought and touted by federal advocates, much less produce sound public policy.

What else would federal legislation mean? A dual charter would add more regulatory layers to the current system of insurance regulation. And while federal regulation might bring us closest to uniformity in regulation, misguided policies or flawed regulation by that single national regulator could have significant economy-wide consequences.

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

We can reform state regulation. This is a bold statement, but one that is entirely achievable. How do we begin? By focusing on reforming at least four areas causing problems within the current structure of state regulation: rate regulation, market surveillance, solvency regulation and company licensing.

State legislatures, not Congress, are our most productive avenue for reform. This will take time, but the National Conference of State Legislatures has provided a tremendous opportunity to present a comprehensive package of reform proposals directly to the states through its “Task Force to Streamline and Simplify Insurance Regulation.” Its recommendations will be announced before the end of the year.

The NCSL Task Force is the right vehicle at the right time. Its members are elected state officeholders who actually enact legislation in the states. Among its participants is the leadership of the National Conference of Insurance Legislators–owners of a long record in favor of state regulatory reform. The officers of the National Association of Insurance Commissioners have expressed their support for the NCSL process and are working with the task force.

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

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

Its time to start the journey

Larry Forrester is president of the National Association of Mutual 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Reform Regulation Via States, Not D.C.

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