Change Appears Inevitable for Insurers

One phrase that has been part of the discussion of federal insurance regulation over the last few years has been "optional federal charter." But Fitzgerald believes you can drop the optional part, meaning insurers likely still will be reporting to the states in which they do business as well as a new federal office.

The good news is the federal government is aware of the success states have demonstrated in dealing with consumer protection involving insurance and won't be tempted to duplicate those efforts.

"The states will continue the micro regulation on pricing and the consumer piece," says Fitzgerald. "The federal government just will want to know what products are being sold where and what effect that has on company solvency."

Most insurance carriers have been low key about the discussion, Fitzgerald claims; still, he adds, fans of a federal takeover of all industry regulation are going to be disappointed.

"Tom Wilson [CEO] at Allstate will not be pleased because he's not going to get 50 states rationalized into one federal agency," says Fitzgerald. "That's not going to happen. Too much political capital has to be expended for too little gain, in my opinion."

In an op-ed piece published by the New York Times this spring, Wilson stated his view on federal regulation: "Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks. Business leaders must work with the government to create a new regulatory structure. All companies that create risk for the financial markets need to be in 'the pool' of federal regulation, including companies like Allstate. A good start would be for Congress to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies."

If any federal regulation is to include systemic risk, Fitzgerald believes the government would have to go after smaller insurance carriers. But, he maintains, there more likely is going to be a threshold between the two regulatory groups.

To prepare for federal regulation, an important concern for insurers is how readily accessible their data is. "Are CEOs or CFOs ready to sign their name to a document, much like after SOX came in?" he asks. Celent has issued what it calls a boardroom series of discussions to focus on whether the industry is ready for federal regulation.

"The thrust of the series is don't wait," says Fitzgerald. "Get some people around the table and start talking about what needs to be done."

Fitzgerald doesn't believe it will take too much work for carriers, since they already are working on compliance issues with the states. However, he feels insurers need to be ready to respond to requests for reporting, possibly as early as the fourth quarter of this year.

"Insurers that have been investing in data management, data quality, and data tools will be able to do it quickly," he says. "The ones that haven't–it's going to be another fire drill."

Many CIOs will be reminded of the TRIA compliance debate earlier this decade, Fitzgerald contends. "There was nothing in place, and nobody knew what was going to happen or how to respond," he says. "What some companies did was create cross-functional teams to get the work done quickly, come to a common understanding across functions, and figure out what they needed to do to respond."

Fitzgerald is encouraging companies to look at examples of that in the past. "You may not have to do anything yet but remind people a TRIA-like program may be coming," he says. "That can make a big difference. There are models of response that should be leveraged, and that's what we're trying to remind people."

Fitzgerald calls this a "great grandstand issue for the legislative branch." He believes Congress has nothing to lose by taking on some form of federal regulation.

"It is a chance for Congress to put people in the spotlight and remind people how much we spent on AIG," he says. "It's low risk, high reward for some legislators to bring this to the forefront."

Asked to make a prediction, Fitzgerald expects regulation will happen faster than some people think. "Will it happen before the end of the year?" he asks. "Before the healthcare debate, I would have said it would. Now, I'm not so sure."