Industry leaders debate federal versus state regulation with Democratic Congress shift

Could federal regulation of the insurance industry become a reality, now that Democrats control both the House and Senate in Congress?And are consumers and the insurance industry ready for such a scenario? Other financial industries operate under federal regulation, why can’t insurance?

ABC, CBS and MSNBC, recently sought the answers to those questions at the Professional Liability Underwriting Society (PLUS) 19th Annual International Conference held in Chicago in late 2006. As moderator of a panel discussion on the topic, Sawyer targeted his questions to a diverse group of insurance leaders and the Illinois state regulator to create a friendly yet public debate over who should regulate the industry — the federal government or the states.

Speaking on the panel were: William Bowden, managing director, for Promontory Financial Group in New York; Leib Dodell, president and CEO for MediaProfessional Insurance, in Kansas City, Mo.; Johnny Rowell, head of Speciality Lines for the Beazley Group in London; Gerald J. Sullivan, president of The Sullivan Group in Los Angeles; and Michael McRaith, Illinois director of Insurance.

People may generally think that Democrats would favor federal governmental control, while Republicans would favor more state-based regulation — but that may not always be the case, the panelists said. Read on to hear their explanations why not, why the country’s legislative leaders need more insurance information to assist consumers, and to find out what else they had to say about the topic of a federal charter or state-based regulation.

Sawyer: With a new Democratic majority in both houses of Congress, what’s your take on federal regulation and where it is headed?

Sullivan: As the industry grows and expands, as we globalize, as all business moves more rapidly all the time, frankly some of the states are having a difficult time adapting to those changes. Those factors give rise to a lot of things that are happening

in Washington, D.C., that are beginning to have a significant impact on our business. No matter whether you come down on the state side or the federal side, or somewhere in between, you have to watch carefully what’s happening in Washington, D.C., because [Congress is] very active and will probably become even more active in the months ahead.

Sawyer: As the Illinois Insurance director, Mike, would you say you love federal regulation?

McRaith: There’s not a lot of nuance to my position. If we are concerned with the profitability of the largest carriers in the country — federal regulation is a great idea. If we’re concerned about solvency, consumer protections, it’s not something we should consider seriously. The last thing we want is a dual regulatory system where the courts become the “de facto” regulators. That’s exactly what we would have and that’s exactly what we don’t want.

Sawyer: OK, the battle has begun. With the changes in Congress, will there be a small or large impact on the industry?

Leib: I just don’t think the issues that we’re here to talk about fall predictably down party lines. You might think that the Democrats are more inclined to favor centralized federal regulation of the industry. I don’t think that is the case.

The proponent of the actual federal charter regulation is John Sununu, a Republican. Mike McRaith is from a Democratic platform. So I don’t think it’s easy to predict the impact of Congressional shifts on our business.

Sawyer: Do you agree Bill?

Bowden: My own guess is that Leib is probably right. I don’t think an optional federal charter is going to happen quickly because the Democrats have more power. But I do think it doesn’t take much to imagine another crisis, whether it’s a hurricane season like that last one or another terrorist attack, before somebody realizes that the federal government has literally no information about the insurance industry. Yet, Congress has a very substantial interest in both natural disasters and terrorism — that combination that could be very volatile at a federal level.

Sawyer: Mike, why isn’t what was just said an argument that the Democrats should press for more involvement in the insurance industry?

McRaith: In terms of where I think there will be a shift, first of all, I think it will be on a state level, not the federal level. Eliott Spitzer is now the governor of New York. The Attorney General of New York, Attorney General Andrew Cuomo, is going to be every bit as aggressive prosecuting cases in the industry as Attorney General Spitzer was. Interestingly in California, John Garamendi, a noted and passionate consumer advocate, is now the lieutenant governor and was replaced by a Republican. So I think there’s going to be interesting changes more on a state level.

At the federal level I’m not so smart as to speculate. But I would say that money is ultimately bipartisan. There is a lot of money in the federal charter bill.

Sawyer: I think it’s fair to say that Mike would argue that consumer protection is important. From an insurance industry standpoint, does this look like too much meddling and does it limit the ability to do business and to be competitive?

Sullivan: The biggest problem for us is that when you take consumer protection too far, insurers begin to get hamstrung in the ability to provide products that insureds are seeking. This is where problems begin. That doesn’t mean that consumer protection isn’t important. It is tremendously important. One of the great strengths of state regulation is that regulators can look at local issues and react quickly. On the federal side, the [federal government has] never been very good at dealing with that in different locales. [It] just sets ground rules.

Sawyer: You all grew up in the state system. Why not just keep the state system and reform it and drive on?

Dodell: There is nothing wrong with it [a state-based system]. I do not think the issue is so much who is doing the regulating, but how it is being done. In the environment that a lot of us practice in, we have to be fast both to protect our own capital and also to get products to our customers quickly. We need an efficient system, and the current structure makes it very difficult for us to get products out to the marketplace quickly.

Sullivan: There is another aspect to this. Mike correctly addresses the issue of automobile and homeowners [insurance], which constitute about 50 percent of premium volume in the country. However, many of us have handled relatively few automobile and homeowners coverages.

Most of us are heavily involved in dealing with commercial coverages of one sort or another. If you are dealing with a risk that has locations in multiple states, the way things are set at the moment, it is impossible to write multiple state risks and comply with all the laws because the laws are so contrary. Insurers end up breaking the law somewhere.

This is not a new issue. I personally argued this at the National Association of Insurance Commissioners level for about 35 years. And so far they [NAIC] has been totally unsuccessful [in resolving the issue].

Bowden: I suppose one of the answers to this question would be that we are not talking about mandatory federal insurance. It is optional federal insurance, and if Mike is right, then surely his position would prevail in the marketplace. Most of the industry will not take advantage of federal preemption, and things will continue to be regulated the way they are. However, most of us understand that the industry would jump at the chance to be regulated at the federal level because there are advantages to that system that Mike is not addressing.

I look back at history and what happened in the banking industry. All of the concerns that Mike mentions when talking about protecting individuals has happened in the banking industry over time — both through the federal supervisory agencies and, indeed, through the states. Essentially, with consumer protection and licensing being left to the states and with registration and exchanges being regulated by the federal government, I am not sure that there is anything to talk about.

McRaith: Insurance is totally unique from banking, securities and analogies to those financial sectors are strategically misleading. In securities, the consumer assumes the risk. To buy a security, we know it could go up or down. You are hoping it goes up. In insurance, you are transferring the risk.

In insurance, you are seeking to protect the most important parts of your life:your health, your life, your family, your home, your car. That is the uniqueness that has to be recognized. Regional and local differences make a difference. There is a difference between the property/casualty market in Florida versus Illinois, and from Chicago versus Marion, Ill. Those differences need to be recognized.

There is nothing more important for a consumer than the benefit of state regulation in regard to solvency. There are more than 5,700 insurance companies operating right now, and operating profitably. There are more companies being formed now than at any other time in our history. Less than 0.66 of 1 percent of those companies are insolvent or subject to some kind of receivership. The industry is working. It is competitive.

We can do better on a state level. We are trying to do better with initiatives such as the Interstate Compact, SERFF (System for Electronic Rate Form Filing), NIPR (National Insurance Producer Registry) and others. We have outliers, and unfortunately we have to deal with them.

The bottom line is that historically, the industry is doing better than ever before.

Sawyer: To summarize then the heart of the argument you make is that insurance is not like the securities business because of the transfer of risk. Also, the problems in each one of these states is different from the others, and therefore cannot be put under some large umbrella or one-size-fits-all. Correct?

McRaith: Yes, that summarizes the issue.

The PLUS International Conference was held Nov. 8-10, 2006, in Chicago. To download other speakers’ presentations from the event, visit www.plusweb.org.

Topics New York Legislation Leadership Illinois Market Politics