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last updated on Feb. 15, 2007

INSURANCE REGULATION

THE ISSUE IS...The future of insurance regulation and whether to maintain and strengthen the current state-based system of insurance regulation or shift the regulation to the federal level.

IT'S IMPORTANT BECAUSE...The issue of Insurance Regulatory Reform was among the top legislative issues for NAMIC over the last several years. The debate over whether to reform insurance regulation became more sharply focused in the 108th Congress when on April 5, 2006, Sens. Tim Johnson, D-S.D., and John Sununu, R-N.H., introduced S. 2509, The National Insurance Act of 2006. This bill was later followed by a House companion bill, H.R. 6225, introduced by Congressman Ed Royce, R-Calif. These bills would create an optional federal charter system, under which life and property/casualty insurance companies could choose a federal charter rather than a state charter. Among other things, this bill would completely pre-empt all state consumer protections, eliminate rate and form filings, and allow companies with a federal license to be exempt from any additional state licenses.

In addition to federal regulation, another federal approach to reform the insurance industry is through federal tools. This approach would streamline the current regulatory system by passing targeted federal legislation, while at the same time leaving the day-to-day control at the state level. Last year, Reps. Ginny Brown-Waite, R-Fla., and Dennis Moore, R-Kan., introduced H.R. 5637, a bill that would modernize the regulation of nonadmitted insurance and reinsurance. That bill addressed section's 8 and 9 - the surplus lines and reinsurance sections - of the SMART draft. Both sections of the bill hide widespread support among all stakeholders and passed the House unanimously. However, the Senate was unable to take up similar legislation prior to recessing.

While NAMIC does not advocate the "SMART" federal tools approach, we did support this measure. NAMIC's board believed that this legislation was written in a way that could help improve the system to assist some of our larger companies in dealing with problems of surplus lines and reinsurance.

Why NAMIC Opposes An Optional Federal Charter for Property/Casualty Insurers:

The insurance industry is not a monolith. Life, property/casualty, and health are all distinct businesses with different concerns. Politically, the industry is divided. Most on the life side appears to favor optional federal charter because they sell products (retirement) that compete with bank and securities products. Whereas, the property/casualty side is much more divided, with the vast majority of property/casualty companies opposing an optional federal charter, while many of the large domestic and international carriers favor an optional federal charter.

Property/casualty insurance is more locally based and not subject to competition from banks and securities firms. It would make no sense for the federal government to regulate insurance that is tied to local conditions.

• Different states are prone to different natural perils - such as hurricanes, tornadoes and earthquakes - and people in states without them should not be paying for people in states with them. Moreover, the relevant states understand the risks of these perils far better than the federal government.
• Property/casualty companies do not compete against banks. Unlike in the retirement field, banks and securities firms do not sell products that are similar to auto, homeowner or business insurance.

An optional federal charter would usurp states' rights. States have been the sole regulator of most insurance products since the beginning of the United States. In adopting the McCarran-Ferguson Act in 1945, the Congress recognized the central role of the states in the regulation of insurance, and the states have done nothing to warrant a federal takeover of state regulation of the property/casualty business.

Insurance - particularly property/casualty insurance - is local in nature. State and local laws determine coverage and other policy terms. Reparation laws affect claims. Local accident and theft rates impact pricing. Climate - hurricanes, earthquakes, etc. - differ significantly from state to state. The state regulatory system recognizes and responds to these differences.

The states have made great progress addressing some key issues of concern, such as price controls and company licensing. State regulation has not been perfect, but the states have been working hard to address legitimate issues of concern. In fact, today only 16 states require statutory prior approval of rates. In addition:

• 24 states have established no filing requirements, mostly for large commercial risks;
• 14 states have adopted the more flexible use and file system;
• Nine states have adopted flex-band rating systems for property/casualty products to replace the rigid system of price controls;
• With respect to insurer licensing, the Uniform Certificate of Authority Application (UCAA) is now used in all insurance jurisdictions.

Specific concerns about an OFC for property/casualty insurers:

• The big mistake. When a state regulator makes a mistake, the damage is localized and can be more easily "fixed." But what if a national regulator gets it wrong? In addition, states now serve as laboratories to test out improvements for regulation that can be tested before being tired out in other states.
• Social regulation. Federal legislation invariably comes with strings attached in the form of rules designed to correct perceived abuses in the marketplace. Rather than let markets perform their role of economic efficiency and have the government directly subsidize people they believe warrant special consideration, the government imposes such obligations on business. The effect is to distort economic judgments and harm other insureds. This harm can take many forms, including cross subsidies, moral hazard, and adverse selection.
• Dual regulation. While proponents of an optional federal charter argue that the legislation would simply create an alternative regulatory scheme for those who seek it, their best intentions could well result in dual regulation for insurers. For example, banks can choose either a federal or state charter, but all banks are subject to some regulation by the FDIC regardless of their charter. Congress could well decide, in the context of optional federal chartering, to replace the state guaranty funds with a federal insurer similar to FDIC. That is one way that the legislation could produce dual regulation.
• Increased costs and bureaucracy. If the optional federal charter proposal put forth by the bill's proponents is adopted in the form proposed, with federal chartering and regulation of most aspects of the insurance business and state regulation of guaranty funds, then not only will the bill produce dual regulation for those that select the federal charter, it would inevitably increase costs as insurers would have to comply with the rules of multiple regulators.
• Un-level playing field. By allowing large, federally regulated insurers to bypass all state regulations such as price controls, consumer protections, and market conduct examinations, an OFC would put federal insurance companies at a significant advantage in the marketplace.

The insurance community, companies and agents alike, recognize the need to modernize regulation of the business of insurance. In many respects, the industry is collaborating, informally, and working with the NAIC, NCSL and NCOIL to accomplish the goals of modernization and uniformity. State insurance regulation is well established within state government. The reform process will require some time before the improvements will be enacted and implemented.

Insurance regulation is a complex matter and any change to the process should not be undertaken without thorough review and analysis of the impact of change to the business, companies and agents, but also to the consumers and policyholders the industry serves.

NAMIC POSITION...NAMIC supports reforming the state-based system of insurance regulation through legislation in the state capitals. NAMIC opposes federal regulation of insurance or an optional federal charter. NAMIC neither supports nor opposes a comprehensive federal tools approach. Rather we will evaluate each federal tools bill as it is drafted.