Insurers, agents, brokers and state regulators welcome modernization and improvements in the current regulation of insurance, but are not so welcoming of changes that might invite regulation by the federal government.
The U.S. Treasury’s Federal Insurance Office (FIO) yesterday released its highly anticipated report on “How to Modernize and Improve the System of Insurance Regulation in the United States” as mandated by the Dodd-Frank Act of 2010.
In its report the FIO said that in some circumstances, federal involvement is necessary to improve insurance regulation, but recommend insurance regulation is best left to a hybrid model, where both state and federal regulatory bodies play complementary roles.
However, the report also said that limitations in a state-based regulatory system do not make a case for the federal government to displace state regulation completely.
Property/casualty insurers say they are pleased to see issues raised in the report to reform state rate regulation and increase uniformity or coordination between states in a number of areas.
However, Property Casualty Insurers Association of America (PCI) President and CEO David Sampson said many of the “attacks” on state regulators brought up in the report do not reflect the strengths and historical success of the current state-based system.
“There is little if any objective proof that there are critical gaps in state regulation or that it has failed to produce a beneficial market,” Sampson said.
Sampson said that while the 2008 crisis highlighted some gaps in the financial regulatory system, state insurance regulation performed well compared to federal regulation in several areas.
“Federal regulation is not necessarily a panacea modernization solution, particularly if it will be multi-layered and duplicative,” he said. “Any discussion of insurance regulatory modernization needs to start with the recognition that the state-based system has benefited consumers by creating the largest insurance market in the world and one that is innovative, competitive, financially sound and comprehensively regulated.”
While the report is helpful, National Association of Insurance Commissioners’ (NAIC) CEO Senator Ben Nelson says it’s important to remember that the Dodd-Frank Act stipulates that the FIO is not a regulatory agency and its authorities do not displace state insurance regulation.
“While we appreciate FIO’s suggestions for improvement, the states have the ultimate responsibility for implementing regulatory changes,” Nelson said. “In this regard, reports such as this one as well as other comments provided by consumers, industry, and governmental organizations as part of this process are always welcome and are useful tools for assisting regulators in identifying areas that require improvement.”
In general, the FIO report continues to embrace the state-based system of insurance regulation, something state regulators are happy about.
“We are pleased the Treasury Department continues to embrace the state-based system of insurance regulation,” said Louisiana Insurance Commissioner Jim Donelon, who serves as president of the NAIC. “We are in the process of analyzing the report and the recommendations included.”
Some insurers said some recommendations in the FIO report involving modernization of current insurance regulation practices would be “counterproductive” to improving the system.
Leigh Ann Pusey, president and CEO of AIA, said that efforts to identify rate-related regulatory practices that promote more competitive markets for personal lines insurance will be beneficial. “However, any movement toward proposing binding risk classification standards would be counterproductive,” she said.
The FIO report recommends that states should “monitor the impact of different rate regulation regimes on various markets in order to identify rate-related regulatory practices that best foster competitive markets for personal lines insurance consumers.” The report also recommended that states “develop standards for the appropriate use of data for the pricing of personal lines insurance.”
Joel Wood, senior vice president, Government Affairs, with the Council of Insurance Agents & Brokers (CIAB), said the report “hits the right notes of balance.” According to Wood, “the report says, it’s not so much the question of federal versus state, ‘but whether there are areas in which federal involvement in regulation under the state-based system is warranted.'”
Wood said from a business insurance standpoint, there are gratifying recommendations in the FIO report category of “areas for direct federal involvement in regulation.”
He said the FIO’s case for a unified voice in international insurance negotiations is “persuasive and, in many respects, irrefutable,” adding that “the stakes are too high on the international regulatory environment for our industry to be represented in a confusing, disjointed, competitive way. The law empowered the FIO in the international arena, and we strongly support this leadership role.”
But Charles M. Chamness, president and CEO of National Association of Mutual Insurance Companies (NAMIC), said the industry should be wary of changes to the current system of insurance regulation, including international regulatory changes mentioned in the report, and the unintended consequences that could result.
“While the report makes much of the international regulatory climate and the demands to modify our system by non-U.S. regulators, it is worth noting that the U.S. system of state-based regulation consistently has proven itself to be the gold standard of the world — most recently during the economic crisis of 2008,” Chamness said.
“Any move to give the federal government a role in insurance regulation must be taken with extreme care. Even if done with the best intentions, providing federal authority in even a limited sense today could become an avenue to expand that authority tomorrow,” Chamness said. “We respectfully disagree that federal involvement is necessarily the default answer to existing regulatory concerns.”
Some agents and brokers are concerned the report may be driven by assumptions that do not hold up to scrutiny.
“Many of FIO’s assumptions appear to have been contradicted by a Government Accountability Office (GAO) report that concluded that the state insurance regulatory system worked well to help mitigate the negative effects of the 2007-2009 financial crisis on the insurance industry,” said Professional Insurance Agents’ National Executive Vice President and CEO Mike Becker. “As a strong supporter of our successful state-based system of insurance regulation, PIA is concerned that the FIO report may be driven by assumptions and assertions that do not hold up to scrutiny.”
Agents and brokers agree that the FIO’s call to finally enact a uniform of agent and broker nonresidential licensing clearinghouse is good news.
The Independent Insurance Agents and Brokers of America (the Big “I”) supports the National Association of Registered Agents and Brokers (NARAB II) Act, which is such a licensing reform. Charles Symington, Big “I” senior vice president of external and government affairs, says the NARAB’s approach of using targeted federal legislation to address a long-standing, persistent problem in the market is the correct approach for modernizing insurance regulation.
“The Big ‘I’ commends FIO for its call on Congress to pass NARAB II,” Symington said. “This bill is a perfect example of how to modernize insurance oversight without encroaching on state regulation.”
Overall, the FIO report was worth the wait, according to Wood. “We hope and trust that this report will be well-received by Congress.”