Three's company: for now, incremental change is the only chance for insurance industry reform coming out of Washington. Given the fractious nature of the industry and the archaic laws which govern it, that may end up pleasing no one

Risk & Insurance, May, 2004 by Lisa Sandberg

The insurance industry, whether it likes it or not, is facing the most far-reaching regulatory reforms since the end of World War II. Globalization, the Internet and vicious internecine competition within the financial services sector, is forcing Congress to take up regulatory reform this spring, but the road to reform may be bumpy. Three camps, each with their own vision of what it means to reform archaic insurance industry laws, have emerged.

One camp, packed with regulatory stalwarts, favors the status quo: an industry regulated by the states without any intervention by the federal government.

Chief backers of the states regulating the insurance industry include the usual suspects: the National Association of Insurance Commissioners, the National Association of Mutual Insurance Companies, the National Conference of State Legislatures and the powerful Property Casualty Insurers Association of America.

The second group favors a stronger federal influence over the state system through the creation of a so-called Optional Federal Charter. Those taking a staunch federalist position include the American Insurance Association, the Council of Insurance Agents & Brokers and the American Bankers Insurance Association.

Then, there are those who favor the "third way," or those who believe that federal standards for state regulations are the answer to insurance reform in an age when banks are allowed to compete against insurers.

THE FEDERALISTS

Those who favor the optional charter say it would put the insurance industry in a better position to grow and compete against banks. Banks have made significant forays--though not always successful ones--into the insurance industry by buying agencies in the wake of the liberalization of the financial services industry with the passage of the Gramm-Leach-Bliley Act.

An optional charter would allow insurance companies to choose whether they wish to be regulated at the state or the federal level. This could, in theory, revitalize the marketplace by lowering transaction costs and making it easier to introduce new products and better services--at rates that are more competitive.

As things now stand, it can take an insurer a year or more to introduce a new product to the national market. There are mountains of forms to fill out for different states and a cumbersome control regime, including so-called "prior approval" rate laws, which are still on the books in many states.

There are also problems in the market conduct examination process, and with the licensing of companies and insurance agents.

The American Insurance Association calls the current system "fundamentally misguided" and "archaic." This has led it, along with the American Council of Life Insurers and the American Bankers Insurance Association, to draft the so-called Optional Federal Charter a few years ago.

An optional charter plan also has the backing of industry giants Zurich North America and American International Group Inc.

FEARS OF ENCROACHMENT

Not everyone in the industry sees the OFC as a silver bullet. Most agree that certain state regulatory reforms are critically needed, but many fear that an optional charter would open the floodgates for the federal government to encroach on the rights--and the success--of states in regulating one of the nation's most powerful industries.

"I don't think you can call the dual banking regulatory model a success," says New York Insurance Superintendent Greg Serio, who is also the chairman of the NAIC's government affairs task force "There are many days when it sounds as if the industry is looking for an optional federal charter as a way toward less regulation, but I think they are really looking for lesser standards and less consumer protection."

"We are deeply committed to working with individual state insurance commissioners, the NAIC, state legislators and Congress to encourage reform where needed," says Carl Parks, senior vice president for government relations at PCI, the Property Casualty Insurers Association.

PROSELYTES OF A THIRD WAY

Then there are those who would cast their lot with the "third way,"--what Robert Rusbuldt, CEO of the Independent Insurance Agents & Brokers of America, calls "the 'Big I's camp."

"We want to have federal standards for state regulation, but not an Optional Federal Charter," he says.

Backers of the "third way," it would appear, recently got a big boost--from none other than U.S. Pep. Richard Baker R-La., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The congressman appears to have east his lot with the "Big I" camp and the forces of compromise.

Since 2002, his subcommittee has held a series of hearings concerning state regulatory reform--including an OFC alternative--but it wasn't until February that Baker publicly acknowledged, according to BestWire, that there was little chance of getting an OFC proposal approved any time soon. The trade news wire reported that Baker is "keeping state-level insurance commissioners in place to uphold enforcement and consumer concerns."