Senator Blasts Industry, Pushes For Fed Regulation

Insurance companies, historically, have said they support state regulation, he said, but time and time again they go to the federal government seeking federal action on product liability reform, flood and crop insurance, and now terrorism insurance.

Every time the insurance companies go to the Hill, Sen. Hollings said, they insist that losses are too high. They refuse, he said, to write coverage on little league teams because of the fear of lawsuits.

But the fact is, he said, that lawsuits are not the cause of the premium increases. Rather, he said, the cause is investment performance.

When the investment markets are up, he said, the industry says "sell, sell," and doesnt care about the premium. The industry just wants the cash, he said.

But then, Sen. Hollings said, when the market turns, the industry goes to Capitol Hill and demands tort reform.

"I cant find out what is the truth," he said.

Sen. Hollings is sponsoring legislation, S. 1373, which would establish federal insurance regulation. Only insurance companies that do business exclusively in one state would be exempt from federal regulation.

Both rates and forms would be subject to prior approval regulation.

"There is no doubt real federal regulation of insurancenot optional federal charter, which would allow each company to choose their regulatorwould benefit the industry, the consumer and the stability of our overall economy," Sen. Hollings said.

But South Carolina Insurance Commissioner Ernst Csiszar, who spoke on behalf of the Kansas City, Mo.-based National Association of Insurance Commissioners, said that by and large, the state system has worked.

The fear, he said, is that with federal intervention there could be two systems, which may be good for insurance companies, but would be bad for consumers.

Moreover, Mr. Csiszar said, citing the savings and loan debacle as well as other bank failures, the federal government has not done all that well when it comes to financial regulation.

The NAIC, Mr. Csiszar said, is working hard to respond to the changing nature of the marketplace and the convergence of financial products. NAIC, he said, understands the need for product innovation and pricing flexibility and is developing a more market-driven approach to regulation.

He emphasized that effective consumer protection that focuses on local needs is the hallmark of state regulation.

But J. Robert Hunter, director of insurance for the Washington-based Consumer Federation of America and former insurance commissioner of Texas, said that NAIC is failing in many areas.

NAIC, he said, has done nothing about unsuitable insurance sales. It has done nothing on credit scoring and market conduct. Moreover, he said, it is scaling back consumer protections.

He said that he has always supported state insurance regulation, but both he and CFA are reevaluating that support. It is likely, he said, that CFA will adopt a position in favor of federal regulation that tracks S. 1373.

Mr. Hunter said he strongly opposes optional federal chartering because it will produce a "race-to-the-bottom" as far as consumer protection regulation goes, as regulators compete to attract more insurance domiciles while failing consumers.

Indeed, when asked by Sen. John Sununu, R-N.H, whether dual chartering had led to a race-to-the-bottom for bank regulation, Mr. Hunter replied that it had.

As for insurance, Mr. Hunter said that CFA supports insurance reform that enhances consumer protection and that repeals the insurance industrys antitrust immunity. This, he said, would force more price competition.

But Craig Berrington, senior vice president and general counsel with the Washington-based American Insurance Association, which supports optional federal chartering, said AIA is willing to give up the antitrust immunity with respect to pricing if insurance companies can price their products according to the market like every other industry.

Currently, he added, there are some 350 different regulated pricing schemes in the states.

Mr. Berrington said that while not everyone in the industry favors optional federal chartering, the support continues to grow.

Thomas Ahart, a Phillipsburg, N.J., insurance agent representing the Alexandria, Va.-based Independent Insurance Agents and Brokers of America, urged the Committee to consider a middle ground.

Federal regulation, he said, is not the answer. It is unproven, Mr. Ahart said, and represents "total overkill" of the problem.

The pragmatic approach is the one being developed by IIABA that would use federal tools to mandate uniform regulation in those areas where it is needed, such as speed-to-market, rating and producer licensing, he said.

Moving to a federal system, Mr. Ahart said, would require a huge federal bureaucracy. Moreover, under an optional federal chartering system, insurance agents would be particularly disadvantaged.

In addition to the state licenses they must already carry, he said, agents would have to obtain a federal license in order to represent federally chartered insurers.

Federal standards, Mr. Ahart said, represent the best approach to reforming insurance regulation in that the standards can be targeted to solve specific problems while leaving actual regulation in the hands of the states.

Mr. Ahart emphasized that the IIABA proposal, which is still being drafted, would call for federal standards, not federal minimum standards. This comment was in response to criticisms that the IIABA proposal would not lead to uniformity if state-by-state differences were still permitted.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 24, 2003. Copyright 2003 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.