Accepting The Challenge: Redefining State Regulation Now
State insurance regulation began 149 years ago in New Hampshire. In the intervening years, state insurance regulators have weathered several challenges to their ability to regulate an increasingly complex and multi-faceted insurance industry.
During the mid-1970s, for example, Congress considered a proposal to enact an optional federal charter for insurance companies in light of solvency and capacity issues facing property/casualty insurers.
In 1990, Congressman John Dingell (D-MI), alarmed by a wave of insurer insolvencies, proposed a federal insurance commission to monitor insurer insolvency. This helped prompt the NAIC to create its Financial Standards and Accreditation Program that required states to improve their financial oversight of insurers. NAMIC believes that this has significantly contributed to a marked decline in the number of insolvent companies in the late 1990s.
Today, as state insurance regulation enters the 21st century, regulators face a new set of challenges as they attempt to regulate a $869 billion industry.
The most significant challenge is the GLB Act. It has eliminated several Depression-era restrictions on how banks, securities firms and insurance companies could compete with each other. With these barriers removed, more convergence is likely among the entities, whether through mergers, acquisitions or strategic alliances. This will place new demands on state insurance regulators to help oversee these activities. Other challenges include:
- State insurance regulators must work cooperatively with federal regulators to draft rules on how financial entities, including insurers, must protect the confidentiality of certain customer information.
- The National Association of Registered Agents and Brokers (NARAB) in the GLB Act requires insurance regulators to create more uniform standards for licensing non-resident insurance producers within three years, or an alternative licensing mechanism (NARAB) is established to accomplish that goal.
- The continued evolution of insurance products and markets, the increasing globalization of insurance markets, the rise of electronic commerce and the role that regulation should play as the Internet becomes a potential new distribution channel for insurers are all new issues facing state regulators.
NAMIC represents companies that write more than 38 percent of all the property/casualty insurance sold in the United States. Since its founding in 1895, NAMIC has been a staunch supporter of state insurance regulation, believing that regulators should be closest to the consumers they serve and to the companies they oversee.
However, NAMIC also has recognized that states need to consider more uniform standards where possible. In 1993, for example, the NAMIC GRIP Task Force identified four areas for possible reforms. They included competitiveness, accountability, solvency and guaranty fund reform. The Task Force concluded competitiveness to be "the keystone of the preferred future regulatory environment."
The major characteristics of this recommendation included:
- Ease of entry and exit into markets;
- Encourage opportunities for new companies to enter the market and develop niche markets;
- Ability to share loss data, as not anti-competitive, when properly regulated; and
- Companies must have freedom to define their markets and pursue them aggressively. This involves pricing freedom.
Last fall, as the GLB Act was about to be enacted, different sectors of the industry began to renew their concerns about whether the states could still regulate insurers. One major concern was whether state insurance regulators could adopt more uniform insurance standards to help reduce administrative costs, improve insurance products and lower premiums for consumers, and make insurers more competitive in the new financial modernization era.
At its September meeting, the NAMIC Board of Directors directed NAMIC staff to examine the possibilities for greater uniformity and to offer recommendations on how certain state regulatory practices could be redefined.
The board's resolution noted, in part, that state insurance regulation costs insurers upwards of one billion dollars annually. It added that while several NAIC initiatives were already underway to create more regulatory uniformity, those efforts were largely voluntary and have not resulted in a significant number of states adopting new, more efficient processes.
This Report represents the collective insights of NAMIC member companies gleaned from a questionnaire that included 14 issues, either describing certain regulatory practices, or public policy issues thought to be important to the membership. Respondents were also asked which of the 14 issues were reforms that were the most politically viable.
The questionnaire was mailed last December to the 1,198 NAMIC member companies domiciled in the United States. Follow up postcards and fax reminders were sent to encourage a higher response rate during the holiday season. In all, 349 responses, representing a total of 390 companies, or 32.5 percent of the membership, were received.
Substantively, NAMIC member companies identified eight regulatory practices for which the establishment of more uniform insurance standards constitutes a priority. The practices are:
- Producer Licensing
- Company Licensing
- Rate and Form Requirements
- Commercial Rate Deregulation
- Annual Statement Filing
- Desk Audit Funding
- Electronic Commerce Requirements
- Financial Examinations
A ninth practice - market conduct examinations - has been added to the list due to the very high level of interest expressed by member companies in the study being undertaken by the National Conference of Insurance Legislators (NCOIL).
Of the nine practices, four are already under scrutiny, producer licensing being the most prominent. These practices have been listed in boldface above. Their status is as follows:
STATUS OF CERTAIN REGULATORY PRACTICES
NAIC has adopted new Producer Licensing Model Act
Twenty-two states and District of Columbia accept the uniform company licensing application form.
Rate and Form Requirements
Fourteen states are licensed under the System for Electronic Rate and Form Filings (SERFF) initiative and are receiving electronic filings.
Commercial Rate Deregulation
Seventeen states have enacted some form of commercial rate deregulation since 1998.
The remaining five practices are only beginning to attract attention within the industry as suitable candidates for regulatory reform.
WHAT DOES "UNIFORMITY" MEAN?
The term "uniformity" has to be carefully defined. We do not believe that it is politically feasible, nor necessary, to establish identical insurance regulatory systems among the states.
Our goal is to encourage the states to 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. Also, NAMIC believes that effective communication and coordination among the states is critical.
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.
Of course, when one advocates more uniform standards in certain areas of insurance regulation, it raises the question of what those standards should be. The standards recommended in this Report would protect consumers where they need protection and allow market forces to operate, as they should. The interests of consumers are not contrary to the interests of efficient insurers dedicated to serving consumers in a fair way.
We want the "rules of the game" to be structured and enforced to maximize the welfare of consumers while allowing insurers to earn a fair rate of return and a level playing field. The principles underlying competitive markets and effective regulation underlie our recommendations.
We also recognize that the insurance laws in a given state reflect social preferences and political factors concerning certain aspects of insurance transactions. We do not expect to overcome all differences in state insurance laws, particularly those that stem from different state preferences with respect to the provisions of insurance contracts.
NAMIC believes that uniformity is beneficial and achievable where state needs are similar and unnecessary regulatory differences significantly impede effective competition.