Battle Lines Drawn Over Optional Federal Chartering

Insurance regulation needs fundamental reform, Mr. White said, but the emphasis should be on state legislatures, not Congress. He cited a recent policy paper developed by NAMIC which pointed out numerous shortcomings with federal regulation, including the likelihood that insurance will be treated as a government entitlement, the possibility of dual regulation, and an increase in costs and bureaucracy, Mr. White said.

In addition, he said, when a national regulator makes a mistake, it will have national implications, instead of just localized damage.

However, he added, NAMIC does welcome the hearings on regulation. "At their conclusion, we believe you and your colleagues will reach the same judgment as our member companies: While insurance regulation cries out for reform, industry governance is best based in the states," Mr. White said.

Ann Spragens, senior vice president with the Alliance of American Insurers in Downers Grove, Ill., agreed. Moreover, she said a recent study by the Alliance found that consumers believe that states are far more responsive to consumer concerns than the federal government. "Consumers hold states in high esteem," she said.

Ms. Spragens said that property-casualty insurance is so closely tied to state tort and contract laws that it follows that insurance regulation should be state-regulated. "Insurance products are designed and priced differently in each state to account for these differences," she said. "At its best, state insurance regulation is adaptable to changing notions of public policy or to competitive pressures of the industry."

But Steve Bartlett, chief executive officer of the Washington-based Financial Services Roundtable, said that optional federal chartering is needed immediately. "The need for such a system was evident at least two decades ago," he said. He added that his organization, which represents 100 of the nations largest integrated financial services companies, cites optional federal chartering as one of its top priorities.

Mr. Bartlett challenged the notion that insurance regulation should remain state-regulated because it is tied to state tort and contract law. Every business, including federally regulated banks and securities firms, must comply with the laws of the jurisdictions in which they do business, he said. There is no reason why insurance should be any different.

He added that the current regulatory system is stifling profitability, as evidenced by the fact that the rate of return for insurance is much lower than it is for banking, for diversified financial services companies, and for the Fortune 500. The result is a lack of competition and a lack of choice for consumers, he said.

As for responsiveness to consumers, Mr. Bartlett said that states can be more or less responsive than the federal government. The key is to have a truly optional system that creates a healthy, market-based competition for regulation, he said.

Indeed, Mr. Bartlett added, even if the states manage to achieve uniformity, it may well be a uniformly bad system. "We dont want to just change a grossly inefficient system to a largely inefficient system," he said.

Just as dual bank chartering has led to efficient bank regulation, allowing banks to choose between state and federal charters, dual insurance regulation will have the same benefits for insurance companies and consumers, he said.

However, Mark Young, a Vermont state representative who spoke on behalf of Albany, N.Y.-based NCOIL, said that state reforms are proceeding. States, he noted, are considering proposals for national insurer licensing within a state-based regulatory system, such as through interstate compacts. As for agent and broker licensing, he said, states beat the deadline established in the federal Gramm-Leach-Bliley Act by more than 18 months.

Meanwhile, more than 20 states have achieved speedier rate and form approval with the adoption of the Commercial Lines Deregulation Act, he noted. In addition, following a comprehensive study in 1999, states have identified areas where they can reform market conduct regulation, Mr. Young said.

However, a representative for major commercial insurance buyers–Michael D. Phillipus, vice president with the New York-based Risk and Insurance Management Society–said it is difficult to achieve state-based reforms.

"The NAIC has taken measurable steps to reform state insurance regulation–most notably the adoption of the state certification program, speed-to-market initiatives, and steps to deregulate commercial lines of insurance," Mr. Phillipus said. "By the very nature of state regulation, however, it is almost impossible to achieve uniform laws and regulatory interpretation of those laws."

While it may be a long road to optional federal chartering, he said, risk managers believe that the time for the idea to become a reality is now.

Steven J. Harter, president of the Alexandria, Va.-based National Association of Professional Insurance Agents, acknowledged that the current agent licensing system needs reform. "PIA members can no longer bear the cost and processing time of a dissimilar and conflicting multi-jurisdictional environment, and a compliance system that is outdated and does not move in rhythm with the pace of todays market," he said.

However, he said, PIA believes that despite these problems, the current state-based system remains the most efficient vehicle for ensuring common sense regulation and competitiveness.

At best, Mr. Harter said, optional federal chartering will create a federal system that competes with the states. At worst, he said, it will invite or create conflicting rules and processes. "This adds a 56th insurance jurisdiction to our members current 55 insurance jurisdiction compliance reality," he said.

Other insurance industry groups are scheduled to testify at future hearings, both for and against optional federal chartering.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 10, 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.