A representative of the American Insurance Association (AIA) testified before the Senate Banking Committee, alleging that “the outdated, dysfunctional nature” of state insurance regulation does not allow the insurance industry to meet the needs of individual or business insurance consumers.
William H. McCartney, senior vice president of government and industry relations for the USAA Group – an AIA member – told committee members that a “trifecta of regulatory failure” largely defines current state insurance regulation. According to McCartney, former chief insurance regulator in Nebraska as well as former president of the National Association of Insurance Commissioners, this harmful trifecta includes: lack of regulatory uniformity; pervasive government price controls; and entrenched government product controls.
McCartney called lack of uniformity and inconsistency “hallmarks of the state insurance regulatory system.” He cited a limited, nationwide AIA survey that found approximately 350 state requirements dictating the filing and review of insurance rates, and approximately 200 requirements related to new product filing and review. “It is illogical to believe that compliance with more than 500 filing and review requirements will lead to efficiency or consistency,” stated McCartney.
Maintaining that although non-uniformity is an “inherent” aspect of state insurance regulation, McCartney said government price and product controls are not.
“Price and product controls are historical artifacts that have lost their utility,” he noted. “Consumer empowerment in the marketplace should not be replaced by needless regulatory controls.”
In addition, said McCartney, “state focus on government price and product controls discourages product innovation and competition, ultimately denying consumer choice.”
In states with rigid government price controls, insurance premiums are higher, rates are more politicized, consumer choices are restricted, residual markets are larger, and there are fewer insurers competing, according to the AIA.
The AIA told the Senate panel that similar problems arise where state regulators do not allow a variety of product options. In this case, “insurers are left with a stark choice between insuring or not insuring a consumer, and consumers may therefore be left without coverage,” stated McCartney. “In contrast, allowing insurers and consumers maximum marketplace flexibility provides the best opportunity to limit availability problems.”
McCartney also argued that state regulatory attention currently is “misguided,” and that valuable resources are misdirected to “front-end” price and product regulation. As a result, he said, “core functions like financial solvency have taken a back seat. This is both unfortunate and dangerous for consumers, as it provides them with little confidence that their insurers will be around and able to pay claims.”
McCartney asked the panel to “take a hard look at these lapses, and ask hard questions about whether the state system has elevated outdated, unnecessary regulatory elements to the detriment of industry financial condition.”
AIA and its members support an optional federal charter system (based on the chartering system for U.S. banks). Such an approach, claimed McCartney, would not place the federal government in unfamiliar regulatory territory, since there are several examples of federal involvement in property-casualty insurance, including terrorism risk insurance.
AIA represents more than 450 major insurance companies that provide all lines of property and casualty insurance and write more than $115 billion annually in premiums.