M A T T E R S O F S T A T E

Fundamental Change

Proponents of insurance regulatory reform frequently invoke the need for “uniformity” as justification for their proposals. Indeed, insurance departments across the country are famous for requiring specific fonts, paperclips and staples to perform the same function in one state that they perform in others. While these practices are productivity-sapping nuisances, they certainly should not be confused with fundamental public policies that shape insurance markets.

The loudest advocates of the need for uniformity are life insurance industry executives whose companies offer more or less the same products everywhere. When it comes to substantive legal requirements for licensing and product approval, one can hardly blame the life industry for its desire to be subject to one set of regulatory approvals at the federal level. Their plea is especially understandable considering that banks are able to sell what life companies offer, and can elect to use one-stop oversight to speed up the process.

The issue is different for property/casualty companies. Products differ from state to state, lending themselves to regulatory scrutiny. In many states this is not a substantial issue, but in the states serving the largest markets, it can take a significant amount of time to run the regulatory gauntlet before a property/casualty product can be sold.

A significant impediment can be the pricing of a product. State department of insurance employees sign off on a price in many states after assuring themselves that the pricing structure suggested by a company will not plunge the company into insolvency (the proper role of a state regulator) or that the price will not be too high for a consumer to pay. The pricing approval process can end up being quite political in some cases, resulting in insurance prices that do not reflect what the market will bear. Frequently, this results in prices that are too low to allow a company to cover the cost of the likely losses; and often, they withdraw from a market with restrictive rate regulation.

This is why rather than “uniformity,” the reform cry for property/casualty carriers is more likely to focus on “competition.” A company will gladly accept regulatory surveillance as long as they can make up for delays by being able to price products according to what consumers will pay for the coverage.

Still, achieving uniformity in property/casualty regulation is attractive. States should adopt common regulatory procedures in areas where state needs are similar and can be met by common standards that will significantly reduce the cost of transactions and improve efficiency. Effective communication and coordination among the states is critical. The term has to be carefully defined, however, taking into account the differences between life and property/casualty regulation.

It is not beneficial to subject consumers, insurers and intermediaries to unnecessary vagaries in state regulatory requirements, nor duplicative approval processes that could be performed one time by states working together. At the same time, the authority to enforce regulatory standards should remain with the insurance commissioner in each state, who is in the best position to protect the interests of the consumers in his or her jurisdiction.

When one advocates more uniform standards in certain areas of insurance regulation, it raises the question of what those standards should be and who will establish and enforce them. The standards should protect consumers where they need protection and allow market forces to operate, as they should. Interests of consumers are not contrary to the interests of efficient insurers dedicated to serving consumers in a fair way.

The “rules of the game” should be structured and enforced to maximize the welfare of consumers while allowing insurers to earn a competitive rate of return and a level playing field. The principles that support competitive markets and effective regulation must be balanced.

Roger H. Schmelzer, J.D.
Senior Vice President
State and Regulatory Affairs

Posted: Friday, April 01, 2005 12:00:00 AM. Modified: Wednesday, September 07, 2005 2:54:30 PM.

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We are 1,400 property/casualty insurance companies serving more than 135 million auto, home and business policyholders, with more than $196 billion in premiums accounting for 50 percent of the automobile/homeowners market and 31 percent of the business insurance market. We are the largest and most diverse property/casualty trade association in the country, with regional and local mutual insurance companies on main streets across America joining many of the country’s largest national insurers who also call NAMIC their home. More than 200,000 people are employed by NAMIC members.