Pax NAIC 2003

Rough Notes, Oct 2003 by Hennosy, Kevin P

Can the regulators do it again? Will they really need to?

The nation's state insurance commissioners were scheduled to converge on Washington, D.C., recently-on September 29 and 30. Their mission was two-fold: preserve premium tax revenue and regulatory jurisdiction over insurance.

The National Association of Insurance Commissioners (NAIC) will once again try to bring national order to the parochial side of state insurance regulation. The NAIC has assured Congress and other very interested observers that a uniform and efficient system of market regulation is possible at the state level.

State officials' hold on jurisdiction over insurance has always been tenuous ever since the Supreme Court ruled in 1944 that insurance was interstate commerce and constitutionally subject to federal oversight. Congress delegated the responsibility to the states contingent upon state action.

Over the past half-century, a series of inquisitors/ tormentors with names like O'Mahoney, Proxmire, Hart, Metzenbaum, Brooks and Dingell, have threatened to take back the state's borrowed jurisdiction. Some argued for federal regulation; others asked for the application of antitrust law or Federal Trade Commission oversight; but most just prodded state regulators to do their jobs more effectively.

More often than not, serious challenges to the states' jurisdiction started in the state capitals themselves. Scandals arose that called into question whether state officials were up to the job.

On many occasions they were not. The history of insurance regulation is peppered with stories of graft, corruption, incompetence and negligence. (The people on McGee Street in Kansas City should be wincing now.) People lost money, and trust, in the insurance industry because regulators and the regulated failed to keep their word.

The current challenge may be different. This is not to say that the current College of Commissioners is any more virtuous, brilliant or responsible than those who came before. In every era there are a few rogues holding regulatory authority who make life more difficult for those who want to serve the public interest.

The current round of congressional interest in insurance is not about regulatory effectiveness as were those investigations that punctuated the 20th century. This round of congressional interest focuses on regulatory efficiency.

Does this mean there were no scandals for Congress to investigate? (Anyone remember something called Reliance Insurance?) No Virginia, there are still bad guys and incompetents out there in both the public and private sectors. Congress just does not care much about going after crooks and kooks anymore.

No, this round of congressional interest is purely 19th century. Several sectors of the insurance industry have run to Washington to beg for federal oversight because they believe it would be weaker than state oversight. In this case, the congressional investigation is the true scandal.

One faction of Congress-a very small faction-is considering establishing an optional federal charter for insurers. The federally chartered insurers would be highly capitalized, lightly regulated and unhindered by antitrust law or FTC oversight. This proposal seems designed to help the nations' largest insurance companies and brokers dominate local markets.

A second proposal calls for federal legislation to force states to reduce oversight of premium rates and policy forms. The proposal would also make it easier for producers to operate across state lines by making producer licensing more uniform.

If you are a local agent, a small insurer or average policyholder, neither of these proposals holds much good news for you. Congress seems unwilling to address consumer concerns with the cost of personal lines insurance, draconian cancellation and non-renewal practices or the dark arts of credit-based underwriting and rating. Local producers and small companies will find immediate competition from financial giants. That competition will have far less oversight.

The NAIC has thus far eschewed strategies that would diametrically oppose these proposals. The association has not picked up the banner of consumers and local producers. The NAIC membership have skinned up their knees trying to prove that they serve the interest of the same giant financial institutions that enamor Congress.

Lobby days

So the NAIC has organized a trip to Washington for its membership to make the rounds on Capitol Hill. Such lobbying days are not uncommon events for interest groups to stage. Political consultants and Washington-based trade association staff love to stage these events. The effectiveness of these events, even with powerful messages to deliver, is debatable.

These "Washington insiders" love to bring in CEOs and "state people" to parade around the congressional office complexes. It makes the outsiders who pay the bills feel needed. Lobby days stress the importance of having a "Washington presence"-often expensive Washington presences. Furthermore, lobby days place the people who foot the bills in an unfamiliar environment where they will look to the staff and consultants for direction-consultants love clients to feel inadequate.