AIA Offers Intriguing IdeasIn Federal Chartering Plan
The American Insurance Association has significantly advanced the debate over insurance regulatory reform with its proposal for optional federal chartering of insurers.
Regardless of whether one supports or opposes optional federal chartering, the substantive system that AIA is proposing is clear, comprehensive, logical and based on marketplace principles that are the underpinning of the American economy. While the political viability of federal chartering will be tested in the years ahead, the substance represents a promising benchmark for reform, whether on the state or the federal level.
AIA first embraced a federal role in insurance regulation in the early 1990s, when Rep. John D. Dingell, D-Mich., was conducting extensive investigations into state regulation. The premise of Rep. Dingells investigations and subsequent legislation was that the federal government would be more effective than the states in policing insurance company solvency.
While we always thought Rep. Dingells premise was rather suspect, the states and the National Association of Insurance Commissioners responded with a solvency policing agenda that helped take the issue of federal regulation off the table. But now the issue is whether the states can develop a more uniform and efficient regulatory system that will not unduly burden the insurance industry in an increasingly complex, globalized and high-tech environment.
While the states and the NAIC are working in that direction, it remains to be seen whether they can reach the finish line. Overcoming parochial state interests to enact model laws has long been a vexing problem for NAIC.
If the current efforts fail, more and more insurers will likely look to optional federal chartering as the only way to modernize the system.
The AIA proposal would be an intriguing vehicle for such reform. It leaves rate regulation ultimately to the best regulator–the marketplace. It gives insurers more freedom to develop and introduce new and innovative products. And it protects consumers by largely eliminating antitrust exemptions for ratemaking activities.
Certainly, a host of obstacles await the AIA proposal in Congress. Wont the same political forces that back state regulation try to impose federal rate regulation? If they were able to succeed in the states, why should we assume they will not succeed in Congress? Further, while it might be easy for members of Congress to support market-based insurance rating during an era of abundant capacity, what will happen if and when another market crunch hits, such as the liability crisis of the 1980s?
As we are witnessing in the debate over health insurance regulation, members of Congress are quite prepared to depart from free market principles when constituents get angry enough and their reelection is at stake.
One possible answer is that a dual chartering system will create beneficial regulatory competition among state and federal jurisdictions that will prevent either from imposing overly burdensome controls on insurers.
These and other issues will be fully explored as the debate over federal chartering evolves. But AIA deserves plaudits for putting a thoughtful and comprehensive plan on the table.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 6, 2001. Copyright 2001 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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