Rewarding bad behavior
Hennosy, Kevin P
PUBLIC POLICY ANALYSIS & OPINION
NCSL will take its turn dealing with calls for federal regulation
On December 11, 2002, a task force of the National Conference of State Legislatures (NCSL) will meet in Washington, D.C., to discuss insurance regulation. The NCSL established the Task Force to Streamline and Simplify Insurance Regulation in August 2001, to address pressure from insurers and the Congress for federal regulation.
When insurers start talking about seeking federal regulation, they get the attention of regulators and legislators. The preservation of jurisdiction over insurance is not only a turf issue for the states-it’s a money issue. If states do not regulate insurance, officials have grave doubts as to whether they can tax insurance, charge fees or levy fines.
Jurisdiction over insurance brings with it considerable income to state coffers. The NCSL, using National Association of Insurance Commissioners (NAIC) data, estimates that states collected $10.5 billion in taxes, fees and fines from insurers in the year 2000. This revenue far exceeded the cost of regulation, which was estimated at $880 million. The vast majority of the remaining $9.6 billion dollars went into state General Fund accounts.
Risk transfer, investment and employment aside, it’s no wonder that insurance is an important subject in state capitals. State officials like to keep insurers happy. States have 10.5 billion reasons to try to convince insurers to stay put.
On October 4, 2001, the NCSL task force released a report to the NCSL executive committee. The report outlines the task force’s work to date and establishes three objectives for the its work:
1. To preserve the primacy of state insurance regulation against congressional and industry efforts to establish a federal insurance regulator and preempt state insurance and consumer protection laws;
2. To consider reforms that would allow insurance companies to compete more effectively in the integrated financial marketplace and to respond with innovation and flexibility to evermore demanding market forces;
3. To maintain and improve strong consumer protections, which are the hallmark of the state regulatory system.
Forgive the NCSL if the association did not include a fourth objective: “To secure a revenue stream to the states that are uniformly hard pressed for money.”
The American Council of Life Insurers (ACLI) political experts know that the states will oppose a federal regulator out of fear of losing revenue. Testifying during congressional hearings in June, Joseph J. Gasper, chairman of the ACLI and president and CEO of Nationwide Financial Services, Inc., addressed the concern. To support the claim that a federal charter would not reduce state tax revenues, Gasper said, “All versions of optional federal charter legislation expressly provide for the continuation of the states’ authority to tax national insurers.” State officials were not convinced.
On the whole, the states have offered more honey than vinegar to the insurance lobby. The collective focus of state officials has centered on removing regulatory impediments to insurers’ activities as a means to dissuade support for federal oversight. Over the past two years in particular, states have pruned away parochial rules that have long been the bane of insurers. The states also have introduced technological efficiencies and, in some cases, coordinated networks and data.
No one reasonably argues that insurance regulation had not become a bit overgrown for its own good over the past 150 years. Some of the dead canes needed to be pruned back for the betterment of the stand. Nevertheless, some states have cut away more than what can justifiably be called pruning. Many states have taken an Agent Orange approach to the regulatory framework, particularly on the commercial lines property/casualty side of the business.
Since deregulation is not an option for the states under the federal McCarran-Ferguson Act, the state officials have become masters of nomenclature worthy of George Orwell. Since 1995, these efforts have been conducted under a series of misleading names: harmonization, reregulation, regulatory reengineering, speed-to-market and others. If the state officials were held to truth-in– labeling laws, these efforts would be called deregulation.
The NCSL task force is the latest and perhaps the most contemplative initiative taken by state officials in an attempt to preserve state regulation of insurance. The task force has reviewed proposals from the NAIC, the National Conference of Insurance Legislators (NCOIL) and numerous insurance company and producer groups. It also has reached out to consumer groups but has not received much input in response.
At the task force level, the NCSL membership appears generally supportive of even the more radical approaches to deregulation. These state legislators tend to work closely with the industry, and many also belong to the unabashedly pro-insurer NCOIL.
The task force report provides an overview of “speed-to-market” proposals meant to streamline product approvals for both property/casualty and life insurance sectors. In addition, the report outlines “market regulation reforms” aimed at addressing insurer concerns on regulatory examinations of consumer protection activity.
The NCSL task force describes the speed-to-market initiatives as “reforms to allow insurance companies to market products nationally within a reasonable time period to compete more effectively in the integrated financial marketplace.” The belief that underlies these initiatives is that state-by-state approvals place insurers at a competitive disadvantage with financial institutions supervised by one federal agency. The aim is to harmonize, merge or suspend insurance regulatory rules.
Regarding life insurance, the NCSL task force will review an NAIC proposal for an interstate compact to govern certain advertising, rates and form review of life insurance, annuities, disability income and long term care insurance. This proposal has received only lukewarm support from life insurers. Consumer groups have generally opposed it, but regulators believe that they can buy off enough support from major consumer groups to nullify any opposition on the left. Consumer groups have been offered a vague level of representation on the compact commission.
While several members of the NCSL task force have expressed early support for the compact proposal, it is unclear whether that support extends to the group’s Executive Committee. The Executive Committee is more representative of the general population of state legislators. The task force planned to make a recommendation on the compact to the executive committee prior to the December 11 meeting in Washington.
Property/casualty speed-to– market initiatives focus on moving regulators away from the prior approval system initiated in the 1940s and 1950s. The NAIC adopted a model rating law for commercial lines that directs state officials to assume the existence of competitive markets and reserve authority to regulate only if the markets prove to be uncompetitive.
What the NCSL report does not mention is that the NAIC proposal might run afoul of federal law. At some point this approach will be tested in federal court against the provisions of the McCarran– Ferguson Act. The act does not provide for deregulation or allow states to reserve regulation in competitive markets. The framework is simple: If a state regulates insurance, then insurance is exempt from most antitrust and Federal Trade Commission oversight; but where states do not regulate, federal law and oversight applies. This is not the type of federal regulation that most insurers want.
Property/casualty trade associations have pressured NAIC and the NCSL to extend the speed-to– market initiatives to the personallines sector. In today’s hard market and sour political environment, this proposal is dead on arrival.
The NCSL discussion of Market Regulation Reform initiatives opines, “Market regulation reform represents a key component of `market-based’ systems-as states shift regulatory emphasis from product approval process to greater oversight of how companies conduct themselves in the marketplace.”
The state officials are now placing an unheard of level of emphasis on the regulatory discipline that was known as “market conduct regulation.” Market conduct divisions are notoriously understaffed and under-funded in most states. Just as the faltering Ottoman Empire was once known as the “sick-man of Europe,” market conduct could be called the “poor man of insurance regulation.”
If one assumes that the McCarran-Ferguson framework does allow for a “market-based” approach, then the states will need to beef up market conduct regulation. According to the report, “The Task Force continues to explore possible legislative action to help regulators monitor market competition and company practices; to promote more efficient, effective and uniform market conduct exams; and to coordinate market conduct activities in an effort to reduce redundancies and stretch resources.”
For all the political goodies being thrown at insurers by state insurance regulators, political pundits may expect that insurers might back away from its “federal flirtation.” The infatuation never really affected the property/casualty industry, but it still burns strong in the hearts of life insurers.
Property/casualty insurers have had their trick-or-treat bags open when visiting state insurance departments, but a federal regulator for personal lines property/casualty insurance should not be a credible threat to state officials. A few of the old-line stock companies mull over the idea of a federal regulator from time to time, but they never really push hard for it. The last time that a federal charter bill had wide– ranging property/casualty sector support, Andrew Johnson was in the White House.
The property/casualty industry has little use for federal regulation. These insurers enjoy being big fish in little ponds at the state level. In addition, federal officials have little stomach for dealing with responsibility for auto and homeowners insurance. If the Congress thought it needed to act against property/casualty insurers, it would simply apply the antitrust laws and let the federal courts sort it out.
Life insurers are another species entirely. The life insurance sector launched many national charter proposals in the early 20th century. With the coming of the New Deal, the Glass-Steagall Act, and rather shoddy treatment from Congress in the late 1930s, life insurers’ interest in a federal regulator subsided for a long time.
Interest revived as life insurance became less about insurance and more about tax-avoidance and investing. The passage of the Gramm– Leach-Bliley Act made life insurers eligible for purchase by banks for the first time since The Great Depression. Life insurers knew that bankers do not like the idea of regulation-banks receive supervision not regulation. So the war on regulation was declared to attract commercial suitors for life insurance companies.
Of course, there is good reason to build separate frameworks to oversee and support banking and insurance. The two financial sectors serve different purposes. As the NCSL report observes, “Where the other financial services of banking and securities are about access to capital and risk-taking, insurance is about guarantees-promising to pay claims if and when benefits are due, years into the future, no matter what.”
This fight is not about what life insurers want; it is about what bankers want. State officials can-for whatever reason-continue to throw political goodies at insurers-and insurers will take them-but the states will lose using that approach. In a political sense, the states continue to reward bad behavior on the part of insurers.
Kevin Hennosy, an insurance writer specializing in the history and politics of insurance regulation, covers the proceedings of the NAIC (National Association of Insurance Commissioners) for Rough Notes readers. Hennosy began his career with Nationwide Insurance Companies and then served as public affairs manager for the NAIC. He has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States.
Copyright Rough Notes Co., Inc. Dec 2002
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