Spitzer Probe Should Not Prompt Federal Oversight
Broader issues of public policy are being raised in the wake of the actions by New York Attorney General Eliot Spitzer to combat alleged wrongdoing by a major insurance broker and a number of the prominent carriers with which they do business. Anytime alleged abuses spawn reform efforts, there is a risk of getting some aspects of the reforms wrong and creating a new set of problems.
We are amazed at how many people, speaking with what appears to be scant knowledge of the insurance industry as a whole, have cited the Spitzer lawsuit to assert that compensation arrangements in insurance are "like no others," that insurance is non-competitive, that state oversight of insurance is a failure, and that the clear path to salvation is federal oversighta refrain also being echoed by some insurance executives. We disagree with all of these assertions.
Compensation arrangements in insurance are no different than those used in real estate, on Wall Street and in most businesses. Contrary to being non-competitive, insurance is in fact an exceedingly competitive sector of the financial services industry.
Proposals to federalize insurance regulation are based on two erroneous assumptionsthat state oversight has been ineffective, and that by its very nature, federal oversight would be more effective. With respect to the latter, there seems to be an elitist attitude on the part of some advocates of federal oversight that assumes federal authorities are more intelligent than people in the states, and that state authorities are rubes or local yokels.
We couldnt disagree more. At its core, regulatory oversight serves the interests of the public by assuring a well-managed, financially sound, competitive marketplace that sets rules and guidelines to keep competitors and their practices on track. Where and when it is needed, regulators take action to discipline, punish or coordinate with other government authorities to prosecute violators.
Mr. Spitzers probe was a joint investigation, conducted in tandem with New York Insurance Superintendent Gregory V. Serio. The charges filed were based on state lawsnot federal laws. Investigations were conducted, lawsuits were filed, and allegations of illegal activities were aggressively pursuedall by state authorities, acting under state law.
Mr. Serio followed up by directing the firms charged by Mr. Spitzer to appear before him to respond to the allegations. In the commissioners arsenal is the authority to suspend or revoke licenses, seek restitution on behalf of aggrieved parties, and levy monetary penalties.
So, exactly how does all of this add up to ineffective state oversight? It is hard to imagine that more effective oversight would occur if authority were transferred to the federal government.
A contemporary, robust functional insurance oversight system is about what regulations and rules are needed to provide a sound, responsible insurance marketplace. Regulatory reform that stifles commerce and over-regulates free enterprise is bad for consumers. But no amount of regulationstate or federalis going to stop some individuals from engaging in illegal activities. If that were possible, houses of worship would be full and prisons would be empty.
In the war against fraud and abuse, state authorities are our nations first responders, and not just in insurance. Previous investigations involving securities and savings and loans began on the state level. State regulation is closest to consumers and is much more responsive.
Iraq used to have a federalized insurance system. It was called Saddam Hussein. His system of federal insurance oversight was streamlined and efficienthis supporters got insurance and his opponents did not.
After Saddam was toppled, Iraq needed real insurance. The job of drafting the new Iraqi insurance laws went to Mike Pickens, Arkansas insurance commissioner and past president of the National Association of Insurance Commissioners. It was a logical choice. After all, who better to advise the new government than someone who headed up Americas world-class system of state-based insurance oversight?
The National Association of Professional Insurance Agents primarily represents independent agency principals who own small-to-midsize independent businesses located in communities of all sizes across the nation. PIA agencies are localor, as our motto says, we are "Main Street, not Wall Street." Our members are apostles of the American free enterprise system who are skeptical anytime someone proposes yet another set of federal regulations.
In the aftermath of the Spitzer actions, there will clearly be additional enhancements to transparency and disclosure by brokers. Balanced reform initiatives should originate from the states through groups such as the NAIC and the National Conference of Insurance Legislators. What is not needed are onerous, overly broad, expansive measures that stifle competition, cripple commerce, undermine free enterprise and give consumers fewer choices.
Now that the effectiveness of state insurance regulation has again been vividly illustrated, let us begin the reform process by agreeing that proposals must never seek to replace the functional state-based system of insurance oversight and enforcement that has helped make Americas insurance industry the envy of the world with a less effective, less responsive federal system.
State insurance regulation works. Improve it, but dont mess with success.
Leonard C. Brevik is executive vice president and CEO of the National Association of Professional Insurance Agents in Alexandria, Va..
Reproduced from National Underwriter Edition, November 23, 2004. Copyright 2004 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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