The National Association of Mutual Insurance Companies (NAMIC) is convinced that insurance regulatory reform at the state level is the best and safest course for consumers and insurers alike, said a Namic witness in testimony before the Senate Banking Committee here today.
Namic Chairman Robert A. Wadsworth, chairman and CEO of Preferred Mutual Insurance Company of New Berlin, N. Y., testified before the Senate Banking, Housing, and Urban Affairs Committee hearing on “Insurance Regulation Reform.”
“The present system of state regulation is too slow and cumbersome and often denies consumers the benefits of competition,” stated Wadsworth. “Consumers and insurers have a shared interest in a modernized system of regulation that will facilitate the bringing of new products to market in a timely fashion and ensure that they are competitively priced.
“NAMIC believes that reform at the state level is more likely to produce better results than federal involvement in insurance regulation.
“Unlike banking and other financial service industries, the property/casualty insurance industry is primarily a state-based business. While some of our products cover interstate activities, most of our products that directly affect your constituents – auto, farm, and homeowners insurance – are single state products. Namic believes that state-level regulators have the best understanding of our products and the people for whom they provide protection.”
While the state regulatory structure has worked well for years, it has not always kept up with changing times. Insurers, large and small alike, need several changes in the regulatory structure in and among the states if they are to provide customers with the products they need at the lowest possible prices:
First and foremost is an end to price regulation in all lines of property/casualty insurance. Insurance is the only product in America with multiple sellers whose price is regulated by the government rather than by the marketplace.
Second, states should adopt uniform practices with respect to routine matters such as producer licensing and form filing.
Third, states should eliminate underwriting restrictions that prevent insurers from accurately assessing risk.
Fourth, states should end blanket coverage mandates that force insurers to provide coverage for particular risks they may not wish to cover, and for which consumers may not be willing to pay.
Finally, states should reform arbitrary and redundant procedures that govern “market conduct examinations,” which cost insurers enormous sums that could otherwise be used to pay claims.
“Notwithstanding the misguided laws and regulations that plague insurance markets in many states,” stated Wadsworth, “the decentralized system of state-based insurance regulation has inherent virtues that would be lacking in a national insurance regulatory system.” These include:
State insurance regulation has the capacity to adapt to local market conditions, to the benefit of consumers and companies, and affords states the opportunity to experiment and learn from each other.
A state insurance commissioner is able to develop expertise in issues that are particularly relevant to his or her state.
Property/casualty insurance is tailored to the risk found in that state.
State insurance regulation is able to take account of these state and regional variations in ways that federal regulation would not.
Insurance consumers directly benefit from state regulators’ familiarity with the unique circumstances of their particular states. Compared to a federal regulator, state regulators have a greater incentive to deal fairly and responsibly with consumers.
Is there a need for federal regulation?
“No, NAMIC does not believe there is a need to create a new federal agency or an optional federal charter to regulate the property/ casualty insurance industry. At the same time, states must enact reform,” said Wadsworth.
Wadsworth noted that states have made significant progress in addressing antiquated rules, such as those involving price controls and company licensing restrictions, and the results in recent years have been encouraging.
Wadsworth described many options that federal policymakers could consider, from broader approaches such as a complete federal takeover or an optional federal charter to the narrower approaches pursued by the House Financial Services Committee in different SMART bill drafts and in H.R. 5637, the Nonadmitted and Reinsurance Reform Act.
“However, NAMIC is deeply concerned that the optional federal charter proposal embodied in S. 2509 could lead to negative outcomes,” said Wadsworth.
NAMIC’s greatest concerns include:
Federal regulation has proven no better than state regulation at addressing market failures or protecting consumer interests and, unlike state regulatory failures, federal regulatory mistakes can have disastrous economy-wide consequences.
Under S. 2509, there could be a negative charter competition between the Office of National Insurance and state regulators.
The likelihood that the new regulatory structure could lead to disastrous social regulation. Social regulation socializes insurance costs by spreading risk indiscriminately among risk classes. Without risk-based underwriting, the insurance enterprise cannot operate. By weakening the link between expected loss costs and premiums, underwriting restrictions create cross-subsidies that flow from low-risk insureds to high-risk insureds.
Wadsworth ended his testimony by stating, “NAMIC believes that the states have not acted as rapidly and as thoroughly to modernize insurance regulation as we believe is necessary, but we are encouraged they have picked up the pace of reform and are headed in the right direction.
“The states need more time and perhaps a federal prod to complete the job. Given this recent progress and the risks associated with creating an entirely new federal regulatory structure, NAMIC is convinced that reform at the state level is the best and safest course for consumers and insurers alike.”
Wadsworth’s testimony can be accessed at NAMIC Online at http://www.namic.org/pdf/060711WadsworthInsRegTestimony.pdf
Source: National Association of Mutual Insurance Companies
Founded in 1895, NAMIC is a full-service national trade association with more than 1,400 member companies that underwrite 43 percent ($196 billion) of the property/casualty insurance premium in the United States. NAMIC members account for 44 percent of the homeowners market, 38 percent of the automobile market, 39 percent of the workers’ compensation market, and 31 percent of the commercial property and liability market. NAMIC benefits member companies through effective advocacy, strategic public policy and valuable member services. Information about the association, its member companies and the property/casualty insurance industry can be found at NAMIC Online, www.namic.org.
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