The Federal Insurance Office Presents a Golden Opportunity to Create a Better Regulatory System

The creation of the Federal Insurance Office (FIO) as part of the Dodd-Frank law is a significant breakthrough in one of the country's most vital sectors of the economy: Former Congressman Michael Oxley, R-Ohio, accurately referred to the insurance sector as the “glue that holds our economy together.”

FIO's mandated study on how to modernize and improve the insurance-regulatory system in the United States, which is due to appear soon, is an opportunity to identify solutions to the weaknesses in the current system and to create a better regulatory system that will enhance consumer choice and access.

Until now, federal policy-making in non-health lines of insurance has been piecemeal at best; insurance is the only major industry in our country without a uniform and consistent set of rules that applies across the country.

The structure of the existing insurance regulatory system, a state-by-state scheme with 51 different regulators regulating national and international companies, has several demonstrated drawbacks.

It is costly, duplicative and inefficient as many companies are forced to have their agents licensed and appointed in each jurisdiction, which can cost a national company more than $14 million to set up and $7 million a year to maintain. Undoubtedly, these fees are passed on to consumers.

Companies also have to accommodate each jurisdiction with different training, compliance processes and business practices.

This problem persists as components of the Nonadmitted and Reinsurance Reform Act's provisions are being implemented in divergent fashions by the states.

Furthermore, products offered in one jurisdiction may not be available in others, limiting consumer choice and access.

And given the increasing importance of international issues and international regulatory standards, the lack of a central voice for the largest insurance market in the world threatens to negate our influence.

The state regulatory structure has its foundation in the McCarran-Ferguson Act, passed by Congress during World War II. That legislation contained a limited anti-trust exemption, only applicable when the states occupied the field, and was specifically designed by the bill's sponsors to cause the states to pass rate regulatory laws, which was the states' uniform and rapid response.

That system, while appropriate in 1945, is wholly mismatched to the modern market and deeply harmful to consumers. The market has transformed since that time and is intensely competitive today. The price-control tool morphed from a solvency tool to an affordability tool that has stifled competition with disastrous results.

New Jersey, which was the state that most aggressively attempted to artificially control rates, perversely drove up prices and destroyed supply to the point that four of the country's largest insurers would not do business there. Competition-oriented reforms instituted in 2003 quickly turned around the market, provided vastly more choice and dropped rates for 75 percent of drivers.

The federal policy in favor of rate regulation has led to an overbearing state regulatory system characterized by significant control over the insurance product, including restrictions on underwriting and rate-making that impede carriers' core function of accurately assessing and classifying risk.

Any good regulatory system must keep up with the industry it purports to regulate, but the existing insurance-regulatory system is outmoded and deviates from the international norm. Largely unrecognized, however, is the manner in which federal policy has brought about this negative result.

FIO and Congress should seek solutions that address the structural and substantive weaknesses of the existing regulatory system, which may or may not require the creation of a federal regulator—but will require Congressional action to bring about uniformity and consistency. That presents a great opportunity to build a better regulatory system for consumers.