Cutting the fat in state regulation

Are we doing things we really should be doing from a regulatory standpoint to cut the cost of regulation? asked Property Casualty Insurers Association of America President and CEO Ernie Csiszar during the International Insurance Society’s 42 Annual Seminar in Chicago in late July. “What factors would make a difference on the overall cost of state regulation?” he asked.

The panel, chaired by Csiszar, addressed the cost cutting issue as well as everything from harmonization and federal oversight to the European Union’s Solvency II initiative. Panel members included Reinsurance Association of America President Frank Nutter; Dr. Bassel Hindawi, director general and vice chairman of the Board of the Insurance Commission of Jordan; Walter Bell, Alabama’s insurance commissioner, and Alessandro Iuppa, Maine insurance superintendent and president of the National Association of Insurance Commissioners.

Cutting the fat

Reaction to the question about cost cutting efforts in the regulatory regime had panelists muttering that nailing down inefficiencies in the system would be a challenge.

Alabama’s Bell responded, “There is a cost to regulation and the better the regulation probably the more it costs. The industry has become very complex as it has become more global in the last 25 years and that creates the need for good regulation. Regulators are dealing with complex security and financial issues in a global insurance world as they never did before. ”

Panelists sparred over which areas of regulation were the ones that could actually be cut.

“For example, if we drop the regulation on collateralization in the U.S. of international companies is that going to create more capacity in U.S.?” Bell asked. “No one can answer that question. If we have just one federal regulator, will that reduce the cost of regulation? No one knows the answer to that question either.”

One panelist responded that the money saved from having just one federal regulator would go back to profit lines, policyholders and shareholders of the companies.

Bell responded by saying, “that’s okay, but how does the consumer benefit from less costs in the system of regulation?”

“I get 30,000 phone calls per year, and no consumer complains about being over regulated,” Bell added. “How will consumers benefit if we reduce the cost of the regulatory system?” he asked.

Side-stepping the consumer angle, panelists agreed that some of the cost of regulation is the actual need for resources and the infrastructure necessary to respond to consumer complaints and in the rate review process.

“I suspect that most of the costs come from companies internally having to deal with multi-state compliance rules and the resources needed to do that,” said RAA’s Nutter. “However, having said that, the NAIC has done a great job of working toward finding efficiencies in the regulatory system. It seems to me that it’s hard to make a case for the type of regulation needed in terms of the cost of the regulators and their offices being too high. I do agree that there may be areas of company compliance where better efficiency could have a real impact.”

NAIC Interstate Compact

Bell countered by saying that on the life side of the industry a giant step had been taken with the implementation of the Interstate Compact.

“Twenty-seven states have joined the Compact and now those companies will have a single point of entry to send their products for approval. And when they receive approval, it will be an approval for all 27 states,” Bell said. He added that over 40 percent of the market share is represented with the 27 states currently in the Compact.

“Creating the Compact has been one of the biggest improvements in achieving regulatory efficiency for the companies, consumers and regulators,” Bell said.

Panelists did not address whether the same type of compact could or should be considered for the property casualty side of the industry where forms, in particular, are not as universal as life insurance forms.

A look abroad

Panelists also debated whether U.S. regulators should look at the European Union’s regulatory system and whether the E.U. should consider having just one regulator, rather than one for each country, as is does now.

“We have raised the question with China and the European Union about the regulatory differences and conflicts,” said NAIC’s Iuppa, who chairs the Executive Committee of International Association Insurance Supervisors.

Iuppa added that the on-going dialogue with the international community has helped the lines of communication stay open, but that regulators can only advise and discuss.

Bell said that many states such as California and New York are bigger than many of the jurisdictions in Europe. Having separate regulators in each country has not stopped business from coming to the U.S. or companies writing abroad, he said.