Industry Split Over

In seeking comments from the property- casualty industry on what insurance regulation should look like in the United States, the Treasury Department laid bare a rift between those seeking to maintain the current state-based system and proponents of a federal oversight option.

The Treasury asked the industry to provide its views in connection with a review of the regulatory structure for insurers--part of a broader initiative to prepare a blueprint for an improved U.S. financial regulatory structure.

In comment letters submitted on the issue, some insurance trade groups voiced support for an optional federal charter approach, while others such as the Independent Insurance Agents and Brokers of America, endorsed a "vital but limited federal legislative role to modernize the state regulatory system to overcome obstacles that currently exist."

At the same time, the National Association of Professional Insurance Agents was critical of the whole process, saying the Treasury Department's broad review of financial regulation "is biased in favor of federal regulation of insurance and foreign business entities."

Specifically, PIA said in its comment letter that it "supports continued state regulation and oversight of insurance, not industry-managed self-regulation under the guise of global competitiveness."

PIA added that "rather than soliciting comment from interested parties in an objective manner," the notice in the Federal Register poses a series of "loaded questions" designed to encourage predetermined responses.

"No attempt is made to disguise the clear bias of these questions," according to Leonard Brevik, executive vice president and CEO of PIA. "For example, three questions that specifically relate to insurance all attempt to elicit comments supportive of federal regulation of insurance. This survey clearly lacks objectivity and is slanted toward expanding federal regulation of insurance."

Other producers would not mind giving Washington a shot at the regulatory job, in the form of an optional federal charter.

In its comments, the Council of Insurance Agents and Brokers said that "creation of an OFC regime" is the group's "preferred method of reform, because such a system would give insurers and producers the choice between a single federal regulator and multiple state regulators.

The CIAB comments--by Scott Sinder, outside regulatory counsel--explained that such an approach "would not dismantle the state system; rather it would complement the state system with the addition of a federal partner."

The result, Mr. Sinder said, is that "it is likely that many insurers and producers--particularly those who operate in a single state or perhaps a small number of states--would choose to remain state-licensed."

However, "large, national and international companies, on the other hand, would very likely opt for a federal charter, thereby relieving themselves of the burden of compliance with 55 different regulatory regimes," Mr. Sinder said.

Another ad hoc agent lobbying group--Agents For Change--also called for a federal option, arguing that the current state regimes "cannot keep up due to the globalization of the business, and this critical shortcoming has a very real and detrimental impact on insurance producers and consumers, and the insurance marketplace as a whole."

In a letter signed by its board of directors, Agents For Change argued that in spite of the improvements brought about through the federal Gramm-Leach-Bliley Act, most states continue to maintain a "variety of individual requirements" in areas such as fees, fingerprinting and certifications, among others.

Additionally, the group noted that two of the largest states in terms of premiums written--Florida and California--have not enacted legislation to meet GLB's reciprocity threshold.

"These states, in large part, are disinclined to license as a nonresident a producer whose home state (they believe) has 'inferior' licensing standards to their own, even a state with similar or identical statutory language," the group said.

"Thus they are not reciprocal because they do not trust their fellow states to sufficiently regulate producers," the group added.

"States use similar rationale for duplicative regulatory requirements throughout the system," noted Agents For Change. "This strikes us as indefensible--regulators defending the system of state regulation of insurance while essentially admitting that consumers in some states benefit from stronger oversight than others."

In its comments, the IIABA asked Treasury "to consider regulatory reforms that will improve and enhance the state-based system of insurance regulation, and not concentrate solely on options for a federal takeover of insurance regulation via mandatory or optional federal regulation of insurance."

The IIABA comment letter--signed by Robert Rusbuldt, president and CEO, and Charles Symington, senior vice president of government affairs and federal relations--noted that "despite our historic and longstanding support of state regulation, we do not believe the state system can effectively address efficiency and uniformity issues on its own."

IIABA, they added, "feels there is a vital, but limited, federal legislative role in helping to modernize the state regulatory system to overcome obstacles that currently exist," while noting that "the current system of insurance regulation does have significant strengths--particularly in the area of consumer protection--and is a system worth streamlining and making more efficient for consumers and the industry."

An example of the approach favored by IIABA--also supported by the National Association of Mutual Insurance Companies--was presented in the comments of the National Association of Surplus Lines Offices, pointing to legislation aimed specifically at resolving the problem of regulating multistate surplus lines risks.

The Nonadmitted and Reinsurance Reform Act--which has won House approval and is awaiting action in the Senate--would establish a "home state" for the risk that would serve as regulator for the coverage, as well as collect and distribute taxes on the policy as needed.

"Multiple states attempting to regulate and tax each policy transaction with exposures in more than one state has created problems that have thus far defied a state-based solution," NAPSLO Executive Director Richard Bouhan said in the group's comment letter.

The proposed legislation is an "immediate and apparent" solution to this problem that "would do little damage to the state regulatory structure" he added, "and would be an easy way to allow state regulation to continue in a better and more efficient manner."

The split in industry opinion was evident not only among agent associations but in responses from groups representing carriers.

The American Insurance Association asked Treasury to support an optional federal charter. "We urge Treasury to develop an ambitious blueprint for regulatory modernization that includes as a linchpin OFC for property-casualty insurers," said Debra Ballen, AIA's executive vice president for public policy management.

"What's needed is a fundamental restructuring of insurance regulation that addresses the market inefficiencies of government price and product controls, the non-uniform implementation of regulatory standards, and the structural barriers to a more holistic approach to the regulation of all U.S. financial services, one that will ultimately work to benefit and empower U.S. insurance consumers," she said.

However, NAMIC President and CEO Charles Chamness said that "with the Bush administration's strong record of support for small businesses and states' rights, NAMIC is confident the Treasury Department will agree with our comments that any significant reforms should take place at the state level."

At the same time, Mr. Chamness, echoing the views of IIABA and NAPSLO, said "there are situations in which the federal government can assist and support the insurance marketplace," citing terrorism risk insurance, the National Flood Insurance Program, privacy and credit standards, and regulatory coordination among the states.

"NAMIC is not opposed to looking at a federal-tools approach on a case-by-case basis, such as surplus lines reinsurance--an example of an issue in which Congress has a limited role in promoting modernization streamlining," Mr. Chamness said.

In considering regulatory reform, Mr. Chamness said NAMIC also "urges" Treasury to "acknowledge and preserve proper legal protections, such as appropriate privilege and confidentiality provisions, essential to business operations."

Some insurers responded with their own individual opinions.

Allstate's assistant vice president and assistant general counsel, Stephen Ihm, called for the review to focus on helping companies compete in a global market and repairing burdensome or inflexible regulatory regimes--goals outlined in a report commissioned by New York City Mayor Michael Bloomberg and U.S. Sen. Charles Schumer, D-N.Y.

Mr. Ihm called for the establishment of an OFC for insurers as a means of reaching those goals.

"An optional federal charter would, in our view, deliver the improved efficiencies in overall financial regulation that Treasury is seeking while maintaining a focus on consumer protection," he said in a comment letter. "In our experience, the current dispersed, varied and cumbersome state-based insurance regulatory system leads to market inefficiencies and slow growth. It is a system that worked well years ago when the industry was concentrated in small geographic areas."

Affiliates Zurich North America and Farmers Group sent a joint letter, signed by two senior vice presidents--Alessandro Iuppa of Zurich and Ron Coble of Farmers--arguing that individual state markets have stymied insurers' ability to innovate and have kept solvency regulation from taking a more holistic view of a company's risk exposure.

The two companies note that "to their credit," regulators have worked to implement reforms and streamline requirements, and have made some strides. "The reality, however," they added, "is that today's marketplace demands far more dramatic action than the states alone are able to provide."

From a regulator's perspective, New York Insurance Superintendent Eric Dinallo noted that neither the current state-based system nor the proposed OFC option is an ideal solution. Were the government starting from scratch, "I highly doubt we would create the current system," but offering a federal option will not provide a cure-all either, he said.

While "complex and costly," Mr. Dinallo argued that the state-based regulatory regime has achieved the goal of solvency and consumer protection, "and generally does so while preserving a vibrant and innovative insurance industry."

That success, he explained, can be seen in the instances in which other markets have failed.

"While the securities industry and banking industry have periodically endured significant disruptions, scandals and regulatory failures--including the S&L crisis, securities research settlements, the recent subprime mortgage meltdown and others--we have not seen such problems on a significant scale in the insurance industry," he said.

Instead of looking at state- vs. federal regulation, Mr. Dinallo called on Treasury to take a different perspective on the issue, questioning whether the concept of regulation itself, rather than the specific format, should be changed.

In his comment letter, Mr. Dinallo suggested that regulation of insurance and other financial services should take a "principles-based" approach that would be focused on achieving the outcome of ensuring fair, competitive markets and ensuring provider solvency.

"At some point, box-checking and rote adherence to prescriptive rules that have outlasted their usefulness cease to serve the principles that motivated the development of these rules and serve to slow innovation, frustrating both industry and consumers," he said. "Additionally, loopholes and gaps between rules develop, which weaken protection for consumers."

The Consumer Federation of America, in its comments, said its concern is the quality of the standards used to regulate and the effectiveness of enforcement of those standards, "not the locus of regulation."

"In other words, we are concerned less with regulatory form than with regulatory effectiveness," said CFA Insurance Director J. Robert Hunter, in the letter.

Financial services regulation "is badly in need of reform," Mr. Hunter said, "but the primary focus of that reform should be to strengthen the protections provided to consumers and investors, not reduce its burdens on industry."

Regarding an optional federal charter, Mr. Hunter said that "if a consolidated financial services regulator were to apply more uniform standards, and if it applied uniformly high standards, the end result could be greater clarity and consistency in financial services regulation."

On the other hand, he added, "the effectiveness of a consolidated federal financial services regulator might be seriously undermined by the complex and sometimes conflicting roles that regulator would be asked to play."