Insurance company executives and regulators faced off over whether the state oversight system should be reformed or tossed entirely during an impromptu exchange between two sets of panelists at a gathering of top industry officials.

During one panel discussion at the recent Property-Casualty Insurance Joint Industry Forum, insurer CEOs criticized the current state regulatory system as "archaic" and "broken," offering fixes ranging from trusting consumers to make the right choices, to chucking the entire state-based approach in favor of a federal alternative.

Thomas Wilson, chief executive officer of Northbrook, Ill.-based Allstate, addressed a question regarding the lack of product innovation by saying that personal lines insurers are thwarted, in part, by a "regulatory environment that is so arcane you can't get anything done."

That statement prompted South Carolina Insurance Commissioner Scott Richardson to step up to an audience microphone and challenge the insurers to tell him exactly what regulators could do to cease being archaic.

Mr. Richardson also demanded to know why "800-pound gorillas" like Allstate are pushing for federal government solutions to catastrophe insurance problems. The South Carolina commissioner, participating on a prior panel consisting of regulators, had warned against letting Washington into the insurance business. (See NU, Jan. 14, page 7.)

Large personal lines carriers talk about such solutions "because we're the ones on the hook," Mr. Wilson said, choosing to respond to the second part of the regulator's two-part question.

"But you did that voluntarily," Mr. Richardson shot back.

"Yes sir, we absolutely did. But we recognize that the risk is too great for the return we're getting," Mr. Wilson said, going on to describe how Allstate has cut its exposure in Florida to about one-third of its prior size in recent years, and outlining the catastrophe insurance fix that Allstate supports--a system that would layer state and federal backstops on top of private insurance.

Addressing the first question, Mr. Wilson said, "I do think the state-based system is up for review and should be improved."

"Time and again, I see regulators deciding that they know best and that they need to be out there" controlling prices and designing coverage forms, said Mr. Wilson, whose view was later echoed by Gerald Schmidt, CEO of Mutual of Enumclaw in Enumclaw, Wash., who referred to "onerous pricing oversight" that results in an "absence of freedom in a free-market economy."

Mr. Wilson urged regulators to loosen the reins and "to believe in the customer."

"It's worked in every other industry. If you let consumers choose, they will get themselves educated, they will understand what to do," he said.

Mr. Richardson--a former independent insurance broker described by insurance company panel moderator Frank Nutter, president of the Reinsurance Association of America, as "probably the most free-market commissioner we have in the country"--responded that such an approach is not possible in coastal states, where two or three insurers write 40-to-50 percent of the business.

"You're saying, 'Let the customer walk.' If Allstate wants to get a 100 percent rate increase, I should give it to you and Johnny Lunchbucket will go to somebody else," he said. "That sounds good in theory, but I'm not sure there's enough capacity in this room that would come sucking in [to] take the business [you] leave."

Balancing the need for adequate rates with consumer affordability concerns is "a tough dance" for regulators, Mr. Richardson added.

Mr. Wilson insisted that the two issues--fixing catastrophe insurance problems and reforming regulation--are separate.

Allstate's catastrophe proposal recognizes that "the political, economic and social prospects for getting totally free-market pricing in homeowners [insurance] is not possible," he said, going on to repeat his call for regulators to trust insurers and customers in areas where the free market can work.

Evan Greenberg, CEO of Bermuda-based ACE Ltd., advocated a single, countrywide set of uniform regulation.

"Just look at the number of [National Association of Insurance Commissioners] model acts that have been passed where they're to be adopted by all the states...How many of them have in fact been done?" he asked.

"It's a broken system and it's antiquated," Mr. Greenberg said, noting that unanimous adoption of model acts is virtually nonexistent.

If you went to any foreign country and had this kind of a regulatory environment, he said, "we'd call it a trade issue."

It's not enough to "tinker with the edges" of the current regulatory system to fix it, he concluded. "We're one country. There should be one uniform set of regulations."

NAIC President Sandy Praeger, who also took part in the earlier panel discussion, got up during the company panel to respond to all the issues raised, including a call by Mr. Schmidt for uniform agent and company licensing laws across the country. She tried to assure the carriers that their concerns are in the process of being addressed.

"We're...taking a very hard look at the way we develop models and in a sense set ourselves up to fail," said Ms. Praeger, who is insurance commissioner of Kansas, an elected position.

"I think there are some areas where we are going to have to have assistance from Congress to get to the uniformity," she added, pointing to principles-based reserving--a life insurance initiative--as one example.

As for uniform producer licensing, "that's low-hanging fruit. We need to fix that and we're really committed to doing it," she said. Demonstrating the commitment, she said, the NAIC has sent a team into every department in the county to gather data that will help the group understand why there are still complaints in states that have supposedly adopted the measure.

Finally, she said, insurers and regulators should work as partners and not adversaries in getting good products to market.

"We're moving in a direction that I think is going to bring about some modernization" while preserving a state-based system that instills consumer "confidence in the products you're selling," she said.

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