An insurance oversight system that would have a centralized federal regulator handling some lines of business, while state insurance commissioners maintain control over others, was suggested here by a member of a professional liability firm.

Indeed, carving out professional liability and other commercial lines for deregulation or centralized regulation could be preferable to an optional federal charter, Leib Dodell, president and chief executive officer of Media/Professional Insurance in Kansas City, Mo., said during the opening session of the Professional Liability Underwriting Society's annual conference.

Under optional federal charter legislation that has been proposed in Washington, insurers would agree to have all or no part of their business under the scrutiny of a federal regulator.

While other panelists–including Michael McGraith, director of the Illinois insurance department–agreed with Mr. Dodell's assessment that state regulation of commercial lines needs to be improved, Mr. McGraith repeatedly took issue with the idea of federal regulation over any part of the insurance process.

The moderator–veteran television journalist Forrest Sawyer–kicked off the debate by asking: “Why not just keep the state system, reform it and drive on?”

“I don't think the issue is so much who is doing the regulation, but how it's being done,” Mr. Dodell said initially, noting that the professional liability lines environment in which PLUS members participate requires them “to move fast to protect [their] capital, and also to get products to our customers.”

“We need to have an efficient system, and the current structure makes it very difficult for us to get products out to the marketplace quickly on an admitted platform,” he said.

“In some lines, state regulation makes perfect sense because states have an obvious interest” in protecting consumers, and they have “decades, if not more” experience in doing so, he said, referring to personal lines. In other lines, however, it doesn't make sense, Mr. Dodell said.

“Does Idaho have a position on cyber-liability form and rate filings?” Mr. Dodell asked, suggesting an example of a line where state-specific rules don't make sense. It's hard to understand why regulatory hurdles to getting cyber-insurance and other errors and omissions products out to the market need to exist, he said.

Mr. McGraith countered that insurance is unique from the securities and banking industries, where dual regulation exists.

In securities, for example, “the consumer assumes the risk” since he or she buys a security knowing it can go up or down. In contrast, “in insurance, you're transferring the risk,” he said.

“For the most important parts of your life, you're seeking protection–your health, your life, your family, your home, your cars. That uniqueness needs to be recognized,” he said, adding that there are local differences that need to be appreciated.

“There are differences between the property-casualty market in Florida and Illinois,” he said.

He conceded there are some things that state regulators can do better.

“Some forms take too long for certain states to approve. We agree with that,” he said, noting that work is being done in the areas of speed-to-market and producer licensing as well.

Still, Illinois gets 15,000 inquiries from consumers a year about issues such as unpaid fender repairs related to auto accidents. “If we involve the federal government in insurance regulation, where do these people go?” he asked.

“When we get into car accidents, do we want to have to deal with a federal agency run by another Arabian trainer?” he asked–making a reference to the background of Michael Brown, the former head of the Federal Emergency Management Agency.

“We want someone we can call immediately to get some response. That's what state regulation is for,” he asserted. It's not just about assuring financial solvency, he added. “It's direct interaction with insurance companies for the benefit of consumers.”

But while Mr. Dodell referred to some elements of state rate and form regulation of commercial lines as cumbersome, Johnny Rowell, head of specialty lines with Beazley Group in London, characterized the process of starting up an admitted commercial lines insurer as “torturous.”

In the U.K. regulatory environment, you can set up a company in about 60 days, he said, comparing the two-year process he's gone through in the United States.

“We spent two years trying to find a clean shell [and] it cost $10 million,” he said, adding that his lawyers advised him that changing the name of the purchased company would cost another $1 million.

“Now nearly 18 months later, unfortunately in some states, our policies are still being issued under the name Mutual of Omaha,” the old name of the purchased shell, he added.

“While, on the one hand, we're enthusiastic entrants to the admitted market,” he said–explaining that the London-based firm wanted a U.S. platform to better access small and midsized business that it hadn't previously been able to write–”the process is somewhat tortuous, and possibly I am understating that.”

Later, Mr. Rowell noted that for his company to operate in the professional lines admitted market in the United States, it takes five times the number of people that it takes to write the same business out of London.

Panelist Gerald Sullivan, president of the Sullivan Group and a surplus lines producer in Los Angeles, also noted there are issues in the nonadmitted commercial lines market.

“You correctly address the issues of auto and homeowners, but most of us here are involved with commercial customers,” Mr. Sullivan told the Illinois regulator, going on to explain the difficulties involved with placing a multistate risk as a surplus lines producer.

“The way things are at the moment, the laws are so contrary that I have to break some [in placing every multistate risk],” he said. “That would suggest that on the commercial side of things there are problems in adapting, changing, moving” as required to keep up with changing economics of customers' businesses, he added.

Mr. McGraith responded that “there's no question that commercial risk should be dealt with differently than personal lines. The challenge is how do define the sophisticated consumer for a commercial policy.”

Later, Mr. Sawyer asked Mr. McGraith directly if the idea of having “federalism” confined to certain areas of the business might have some appeal.

“Not at all,” Mr. McGraith replied. “As an American citizen I am offended by the idea that we need to create another massive federal bureaucracy to essentially deregulate an industry that affects every single person's life in one way or another.”

Point/Counterpoint

Over the course of a panel at the recent PLUS conference, speakers raised both positives and negatives about the state regulatory system for insurance.

Negatives:

o Multistate commercial exposures do not lend themselves to local oversight, although personal lines might be handled better at the state level.

o State regulatory hurdles slow the introduction of new products into the market and raise insurer expenses.

o State-specific rules don't make sense for certain line of business, especially in professional lines.

Positives:

o Insurance is unique due to local conditions, unlike other financial services, such as banking, thus requiring state regulation.

o A federal bureaucracy would be less responsive than state regulators to consumer problems.

o Progress is being made among state regulators in streamlining the speed-to-market and producer licensing process.

Special Reports /

Split Federal, State Regulation By Line Of Business, Pro Liability CEO Suggests

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