NAMIC Paper Blasts Fed Chartering

NAMIC Paper Blasts Fed Chartering

By E.E. Mazier

NU Online News Service, April 12, 4:05 p.m. EST?A reform of insurance regulations by the states is preferable to an "unproven" system of optional federal or dual chartering "crafted in a problematic political environment," an insurers trade group is advising.

The finding was contained in a white paper from the National Association of Mutual Insurance Companies.

In other words, "the road to reform runs through state capitals, not Washington, D.C.," said David Anderson, chairman of the Indianapolis-based group and secretary-treasurer of Farm Mutual Insurance Co. of Lincoln County, Canton, S.D.

NAMIC said it released its 43-pages of findings titled "Regulation Of Property/Casualty Insurance: The Road To Reform" to kick off a new push for reform at the state level.

The white paper examines the reasons for regulating insurance and evaluates federal and dual regulation alternatives. It also sets out specific proposals for achieving reform through the states.

While the group recognizes that others in the insurance industry, notably fellow trade organization American Insurance Association, do not oppose optional federal chartering plans, NAMIC believes its proposal for reforming state regulation will ultimately prove to be the best policy for all parties affected by insurance regulation.

The basic premise behind the NAMIC report, according to its preface, is that public policy should not be created and does not operate in a vacuum.

Therefore, the operative social, political and economic environments must be taken into account when formulating a reform policy, NAMIC said.

The major points raised by the white paper include:

? Protecting against market failure and the public interest --such as the gathering of consumer information --are the two primary and legitimate reasons to regulate insurance.

? Social regulation, meaning the use of business to solve societal problems, is not a legitimate reason to regulate insurance, and in fact often creates unintended negative consequences. However, this purpose frequently is imposed on business, increasingly at the federal level.

? Although state regulation of insurance is flexible, innovative and closer to the people, it still requires reform. Among other failings, state regulation can be slow to act and it is inconsistent from state to state.

Additionally, NAMIC believes most states continue to have "unnecessary rate regulation regimes" that result in fewer choices and higher rates for consumers.

The advantages of state regulation include the ability of state governments to recognize and adapt to unique local issues, such as risks related to weather and consumer product preferences.

Additionally, consumers and insurers have easier access to regulators and lawmakers at the state level than they would at the federal level.

? Proposals for the federal or dual regulation of insurance entail a number of problems.

These problems include likely additional social regulation for the industry, the creation of inefficient layered regulation, new conflicts with existing state tort laws, and the likelihood of increased regulatory cost and a bloated bureaucracy.

The white paper states that while federal regulation would bring a measure of uniformity, it is no better than state regulation for addressing market failures or consumer interests. In fact, the use of federal action for enacting social regulation provides "one of the most compelling arguments for opposing it," NAMIC wrote.

Moreover, federal and dual charter proposals do not offer many advantages to consumers, the report notes.

Among the proposals for reforms at the state level, the NAMIC report recommends:

? States should get rid of the approval process for pricing insurance products as well as "burdensome and unproductive" form-approval processes.

? States must adopt a new market surveillance program that is based on the premise that insurers "are in the business to treat their policyholders fairly," and that only companies that violate that trust should be singled out and punished.

According to the white paper, market conduct examinations today are frequently initiated with no tangible proof that the targeted company has treated its policyholders unfairly.

As a result, the targeted companies end up paying regulators "thousands of dollars in examination costs" without the detection of any substantive problems.

? The costs of the current financial examination function now conducted by most states must be reduced and additional training for examination staff must be provided so that regulatory oversight can focus on financial analysis and risk assessment.

? The insurance company licensing process must eliminate state-specific requirements and develop an electronic process that allows insurers to seek licensure or change information about corporate governance "with a few keystrokes."

The NAMIC report concludes that state regulation can be "the optimal insurance regulatory structure: but only if state legislatures become the focus of an all-out effort" to enact reforms that protect consumers, create uniformity, ensure competition and provide more choices for buyers of insurance.