Industry Report Criticizes State Regulation; Calls for Greater Federal Role

NU Online News Service, Oct. 21, 2:14 p.m. EST

The current system of state insurance regulation stifles product innovation, limits customer choices, increases costs and inhibits the proper functioning of fully competitive markets, according to a report done for the Financial Services Roundtable's Cluff Research Fund.

The only way to make the industry more competitive is for Congress to establish a federal regulator with the ability to banish all overlap and inefficiency and to act as the first and last authority, according to the report.

The report is particularly critical of rate and form regulation, and says it should be eliminated promptly.

This proposal drew immediate support from the Council of Insurance Agents and Brokers, whose members are large commercial producers engaged in multinational transactions.

"In the sophisticated commercial markets, we see no justification for micro-regulation of rates and forms," says Joel Wood, CIAB senior vice president of government affairs.

The Federal Insurance Office—which is mandated to do a study on how insurance regulation should be modernized—and the National Association of Insurance Commissioners did not respond to requests for comment.

The report does say that financial regulation of insurance is "sound" and functions well as part of the greater market.

"Solvency regulation met the test; it would seem….at no point did insurance activity appear to add systemic risk to the broader financial system or the general economy," the report said.

It adds that, excluding AIG, the major multiline property and casualty insurance company failures that did occur during the past decade did not result in shocks to the insurance market, let alone the larger economy, and there were no major life insurance company insolvencies.

The report, titled Modernizing Insurance Regulation in the United States, was prepared by two partners at Dewy & LeBoeuf  LLP and a law and health sciences deputy dean at University of Pennsylvania's Law School.

It suggests a federal "passporting" system as a mid-range option, before outright federal regulation of insurance, through a network of federal agencies, which would require congressional action and agency implementation.

The report finds no one perfect solution, with both federal and state insurance regulations facing inefficiencies, supervisory overlap, balance-sheet confusion and more lawmaking.

"We work from the basic premise that to the extent there are differences in regulation among states, these differences need to be justified by sound reasons," the report's authors say.

The authors found barriers to market entry and exit in the state-licensing process, from the benign form of unnecessary paperwork to real roadblocks that inhibit the development of fully competitive markets. Significantly, the reinsurance regulatory arena was found wanting, resulting in problems for the U.S. in trade negotiations.

Ironically, "recent reform measures in New York, Florida and New Jersey have created a situation where there is an even greater lack of a uniform approach for the regulation of reinsurance," the report finds.

The authors recommend some specific changes many groups have already advocated:

• Exempt markets from rate regulation.
• Repeal seasoning requirements and state-specific license-application requirements.
•  Improve coordination of examinations among states and decrease reliance on contractors for exam responsibilities.
• Expand the Interstate Compact process to cover all states and other lines of insurance and completely deregulate form-approval requirements for group-insurance products and insurance sold to large commercial buyers.
• Deregulate group and large commercial insurance.
• Consider global best-regulatory standards.