Federal Insurance Regulatory Proposal Draws Fire, Support

In a matter of days, Representatives Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) are expected to introduce a new proposal for federal insurance regulation. Known as the National Insurance Consumer Protection and Regulatory Modernization Act (NICPRMA), the bill has drawn both praise and derision from the traditional adversaries on either side of the optional federal charter (OFC) debate. While the language of the bill addresses the threat of "systemic risk" associated with the financial crisis, NICPRMA also calls for the ability of insurers to select between state and federal regulatory regimes.

On Feb. 12, the American Council of Life Insurers (ACLI, Washington, D.C.) issued a statement by president and CEO Frank Keating calling for a federal regulatory regime for insurance and insisting that, "an optional system is not a euphemism for 'no regulation.'" The ACLI declines to comment on NICPRMA specifically but spokesman Whit Cornman says the organization looks forward to introduction of the bill. "Congress should preserve state regulation as an option for companies that would be better served by it," Cornman comments.

The Property Casualty Insurers Association of America (PCI, Des Plains, Ill.) agrees with the need for a federal monitor of systemic risk but sees resurrected calls for OFC as irrelevant to the challenges raised by the financial crisis. "If OFC is an answer, it's to a different question," says Ben McKay, SVP, federal government relations, PCI.

Renewed OFC advocacy demonstrates belief in the axiom that "a good crisis is a terrible thing to waste," according to McKay. "Here, very smart people are seizing on the situation and trying to say that their plan, which has been around for years and is going nowhere, is the solution," he says.

Some kind of federal role is inevitable, and OFC is by no means off the table, in the view of Howard Mills, chief advisor, national insurance group, Deloitte. However, Mills concedes, "it may wind up that there will be a federal entity regulating insurance companies but there will be nothing optional about it."

Mills says some kind of compromise including OFC is far from unthinkable but that such a proposal is likely to run up against criticisms of fostering labor arbitrage, or the ability of companies to opt for the least onerous regulator.

In the wake of the financial crisis, Congress is in no mood to tolerate regulatory arbitrage, asserts Jimi Grande, vice president, federal and public affairs, at the National Association of Mutual Insurance Companies (NAMIC, Indianapolis). "Optional charter was always going to prove illusory for its supporters; now it's absolutely not politically viable," he says. "No policy maker would plan to create regulatory competition whereby insurers can choose their regulator."

Grande also disputes the need for federal regulation of the P&C industry aimed at addressing systemic risk, given the fact that P&C companies emerged strongly from the financial crisis, in part due to the rigors of the state-based regulatory system. Grande takes issue with the ACLI statement wherein Keating refers to the need to "monitor the insurance marketplace and identify risks to consumers, the industry and the broader financial system before they reach the crisis stage." The problem with Keating's language, insists Grande, is that "there is no crisis and there's not going to be a crisis. Multiple banks may have become insolvent but P&C insurers remain strong and solid."

Effectively addressing systemic risk is a question of correcting failures in the federal regulatory system, not the state-based regime, asserts Kenneth R. Auerbach, president of the National Association of Professional Insurance Agents (PIA, Washington, D.C.).

"The state regulatory system has performed well in safeguarding insurance companies and their stakeholders, including consumers, compared to the crisis in the federal regulatory system," Auerbach says, "Why would we let this success story be dismantled in favor of a federal regulatory system that has proven itself to be a failure?"

Auerbach characterizes NICPRMA as an attempt to shoehorn "the same tired, old proposal" of OFC into the current financial crisis. "This is not a reform bill, it is a deregulation bill," he comments. "Congress and the Administration should be very wary of those who would try to pull a fast one on them." The Independent Insurance Agents & Brokers of America made a similar point in a Jan. 26 open letter to President Obama, stressing the strength of insurers under the state-by-state regulatory scheme: "IIABA believes that any financial services regulatory reform efforts must comport with two basic tenets. First, the Administration and Congress should attempt to fix only those components of the regulatory system that are broken, and second, no actions should be taken that would in any way jeopardize the protection of the consumer."

However, the notion that state-based regulation favors consumers has its critics. The stability demonstrated by state-based regulation does not necessary equate to superiority over federal regulation, according to Jonathan Steiman, an analyst with Datamonitor (New York).

"The IIABA's reasons for opposing the development of an effective federal regulator are simple: a federally regulated insurance commission would accelerate the amount of premiums sold direct over the Internet or through call centers," Steiman claims. "This is good for both insurers and consumers, but terrible for agents and brokers."

The current regulatory system constitutes a "classic barrier to entry," Steiman argues. "Enterprising players with hopes of selling direct cannot achieve the requisite scale," he says. "Furthermore, existing national insurers with agent forces do not have great fears of new entrants selling direct, therefore they do not have the incentive to take the risk of moving away from their agent force towards a direct-to-consumer strategy."

Currently North American P&C insurers are equally focused on the agent and online channels, according to 2008 Datamonitor research, but a move to federal regulation would tip the balance in favor of the Internet, Steiman asserts. "This has happened in Europe, where less disparate national regulations have enabled greater direct sales," Steiman says. "The U.K. is especially advanced in terms of direct sales of personal lines insurance."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio