One-Size-Fits-All Regs Ill-Suited For Insurance

It is no coincidence that when free markets encounter turbulence, stability in the regulatory environment suffers as a result. In fact, the insurance industry has been mired in a most significant regulatory debate since well before the current recession.

Accordingly, the creation of a federal regulatory authority for insurance, in some form, continues to gather steam. Even some state regulators recognize the importance of a more coordinated regulatory structure.

Those involved in the insurance industry who historically have opposed regulation want it further deregulated, and seek the involvement of direct federal oversight. Those who think regulation is necessary support improved modernized and effective reforms to the current state system.

Caught somewhere in the middle are those who deal with insurance regulators on a regular basis and seek a blend to produce a more efficiently regulated state system.

Recently, the National Association of Professional Insurance Agents' Insurance Foundation asked me to provide a document that accurately communicates to members of Congress, federal authorities and industry participants the status of insurance oversight and the challenges involved in ongoing efforts for reform of that process.

It is critical for federal policymakers to have access to an accurate assessment of the status of insurance regulation, along with an informed evaluation of the range of potential reforms now being discussed in Congress and throughout the insurance industry.

In contrast to the oversimplification offered up by some of those with vested interests in this debate, insurance is not simple. It is complex. There are critical material differences that apply to the business of insurance that do not apply in other financial services areas.

While tempting to believe, a "one size fits all" approach to regulating insurance belies the long history of research, adaptation and evolution that characterizes the existing state system.

To these material insurance character points, state insurance regulators have a strong central argument working in their favor. Should a regulatory system more than 150 years in practice be radically altered via plans crafted by its regulated entities under a variety of incongruous justifications?

Put another way, should Congress give more weight and reform consideration to the restructured insurance oversight system plans of firms in the business of insurance, or give more deference and hearing to the authorized state public officials designated by law to actively oversee the business of insurance in the United States?

The core principle behind regulation is not convenience for regulated entities. The core principle is protection for consumers.

Major change to a complex and sophisticated regulatory structure is not without significant risk, especially in the highly charged political environment in which we find ourselves today.

"Regulatory overreach" is a term that has been used to describe the federal government's interest and discussions of the insurance industry–particularly following what, from an insurance industry and oversight perspective, has been its overreaction to the AIG situation.

The principle danger surrounding the misguided discussion about AIG as "an insurance problem" is that it is factually and functionally inaccurate, and introduces the risk that all insurers will get swept into the vast federal regulatory overhaul of the U.S. financial services industry.

Without proper and deliberate care, at best this would mean insurers being subjected to duplicative, confusing and costly dual regulation. At worst, it holds the real prospect of failed consumer protections and failed insurance markets.

These potential outcomes must be weighed against the track record that state insurance commissioners have demonstrated in their regulation of the U.S. marketplace.

State officials and supporters of the existing state insurance oversight and regulatory system are not resistant to improvement and reform. Usurping state authority, however, is ripe with logistical and operational consequences that would lessen the nation's grasp on good, industry-specific insurance practices.

Much like the American Constitution itself, the sustaining value in the state-by-state regulatory system is its flexibility and adaptability. It can be improved, but the foundation itself is strong and a worthy baseline from which to advance.

It should also be remembered that seeking improvements in a current system is not the same as seeking an entirely new oversight system. Make no mistake, the impact of insurance regulatory changes will be felt for decades.

While a thorough, candid evaluation of the existing state regulatory environment is crucial in determining a proper strategy for future reform, an equally important examination needs to take place concerning the overall ability of the federal government to exercise the substantial increase in regulatory authority sought by proponents of an optional federal charter.

Students of federal government operations would likely find a surprising number of parallels between the proposed creation of a new federal insurance regulatory authority with Congress creating the Department of Homeland Security as an umbrella department from merging numerous already standing federal agencies of existing federal departments.

Would thrusting unprecedented new levels of authority into the maze of existing federal agencies produce a better result than did the creation of DHS? In truth, nobody really knows, and that degree of uncertainty is a serious "red flag."

A variety of arguments, including the proper role of the federal government in facilitating international agreements regarding insurance, have validity and warrant further consideration. But the very nature of the arguments themselves–relatively young, underdeveloped and ripe with disputable logic–render the overall debate a work in progress and desperately needing additional examination.

The public policy process in this country is intended to be inefficient. This natural inefficiency, while frustrating in some instances, has a broader invaluable purpose.

The United States does not take lightly the standards and processes by which government interferes with and monitors the free market. Those issues are debated thoroughly and completely before any real resolution can be achieved.

In the case of insurance regulation, the debate over federal regulation has led to only one reasonable conclusion–the process has only just begun.

Mark Boozell was director of the Illinois Department of Insurance from 1995-1998. He is currently a government policy advisor with the Chicago-based law firm Dykema Gossett PLLC.