AIA Backs Federal Role

As far as motivation for a modernized regulatory system is concerned, leveling the playing field among competitors in different financial services sectors that are selling essentially the same products is one factor. However, a more pressing concern and motivation is the current regulatory penchant for government utilization of "command and control" tools that actually prevent insurers from bringing products to market in a timely and efficient manner. This hinders competition, stifles creativity, limits consumer choice and needlessly adds to the cost of insurance.

Unfortunately, there has not been much substantive progress among state regulators in recent years with respect to speed-to-market reforms. Indeed, individual states and the NAIC have been unable to achieve meaningful reforms.

Sadly, the most recent NAIC "Insurance Modernization Action Plan" actually retreats from speed-to-market reforms proposed by the NAIC only three years ago and seeks several more years to implement more limited reforms.

Commissioner Pickens criticized property-casualty insurers for failing to utilize SERFF, the electronic system for filing policy forms. While the creation of SERFF was a step forward, it does not achieve uniformity or meaningfully affect the command-and-control problems that remain at the heart of the state-based system.

Commissioner Pickens also asserted that insurers unfairly blame state reserve requirements for their relatively low returns on equity in comparison to banks. In fact, the American Insurance Association fully supports the need for strong capitalization requirements and has even made them an integral part of our optional federal chartering proposal.

Efforts to improve ROE would be better served by having one uniform, market-based regulatory standard. This would both eliminate the politicized price controls that do not reflect market realities and also reduce the costs of complying with multiple jurisdictional requirements.

More importantly, it would empower consumers by allowing the normal principles of supply and demand to govern.

It is important to note that AIA supports a new regulatory regime in which insurers that choose to be federally chartered would fund the budget of the federal regulator themselves through various fees. There is no reason to presume that what Commissioner Pickens fears (a "huge" and "costly" regulatory bureaucracy) would be necessary.

Already, we have seen a real-world, positive example of federal regulation in the implementation process of the Terrorism Risk Insurance Actthe Treasury Departments practical and business-like approach provides a useful template for effective regulation.

Turning to consumer protection (another topic addressed by Commissioner Pickens), it is a fact that todays consumer protection laws and their enforcement currently vary widely among the states. Under our proposal, consumer protection would be consolidated under a single federal roof, with specific responsibility to address consumers questions and concerns.

Consumer protection would be further enhanced by federal oversight, which will allow the federal regulator to discern patterns of regional and national conduct that currently go unnoticed by state regulators.

Additionally, tough but smart market conduct exams would allow the federal regulator to quickly take care of bad actors. As Commissioner Pickens is no doubt aware, there have been dangerous lapses in state-based solvency oversight mechanisms in recent years.

Again, unlike the fragmented state system, a federal regulator could spot and respond to troublesome trends much more quickly than separate state efforts. Our proposal would, in fact, require federally chartered insurers to participate in state guaranty funds as well as pay state premium taxes.

After decades of working with the states in a good-faith effort to achieve substantive reform, AIA remains hopeful that the NAIC and Commissioner Pickens will choose to focus on the real problems that underlie the state-based system and work with us to develop meaningful solutions.

Craig Berrington
Senior V.P. and General Counsel
American Insurance Association
Washington, D.C.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 19, 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.