Illinois freshman regulator McRaith gives insurance view from Midwest
Question: What is the specific impact of the 2005 catastrophes on the Midwest?
McRaith: There are three identifiable impacts on Midwestern residents. First, since the cost of reinsurance has gone up so significantly because of these catastrophes that cost is going to be shared by homeowners around the country regardless of whether they are in the catastrophe prone areas or not. In the Midwest there has already been a slight increase in rates by some of the larger companies.
Secondly, one of our Illinois domestic companies, Allstate, has embarked on a plan to more conservatively underwrite in catastrophe prone areas and has announced publicly that it will not renew earthquake coverage anywhere in the country. That decision has had a direct impact on 28 to 30,000 Illinois policyholders as well as thousands of policyholders in Tennessee, Kentucky, Arkansas, and Missouri–all states with residents living along the New Madrid fault. This is another major ramification of the catastrophes in 2005 as well as in 2004.
Thirdly, and most important in my opinion, Federal taxpayers throughout the country are going to be paying the cost of rebuilding the Gulf. Under the National Flood insurance program, premiums are subsidized by Federal taxpayers. There is a reform effort in the U.S. Senate right now to bring premiums paid to acquire the flood insurance coverage into line with what is the actual exposure. Whether the taxpayer lives in Chicago, Illinois or Pierre, South Dakota–we are all going to be paying for years for the rebuilding of the Gulf region because of the catastrophes of the last year. And unfortunately given the lack of any comprehensive national approach to this problem, we all could be paying the bill for this year’s hurricanes too.
Question: What other factors have contributed to the costs taxpayers will be paying?
McRaith: Well, we need to look at the issue comprehensively and that includes pre-loss mitigation efforts like improving building codes. Louisiana, for example has adopted building codes for the first time only for the areas that are along the coast. They really didn’t have building codes that made sense given their exposure to hurricanes. At the same time homeowners are going to be given grants of up to $130,000 and those will be federally funded. Ninety billion dollars has already gone into the region. By the time this is all paid up it is going to cost every taxpayer in every region thousands of dollars.
Question: Will there be specific reform efforts as a result of the 2005 catastrophes?
McRaith: Nationally, at the NAIC level in terms of reforms, we worked to develop a framework for a national approach to natural catastrophes that would call for state or regional catastrophe funds and then add a third layer of privately funded monies, but managed at the federal level. Whether that framework itself is the framework that would ultimately solve the problem is open to question. There will be a resolution introduced at the NAIC meeting that will call for the establishment of a national commission to look at all of these issues. (*Interview took place prior to NAIC Meeting in June).
I think one encouraging development that has taken place is the successful use of mediation programs when there is a coverage dispute. I think that mediation gets benefits to consumers more quickly and it helps insure that benefits paid are appropriate for the policy which is another way of saying that policyholders should get the benefit of the coverage’s for which they have paid.
Question: Moving to another area, will the NAIC Broker Activities Task Force, of which you are a member, make additional recommendations on the issue of compensation disclosure?
McRaith: The NAIC Brokers Activities Task Force was a task force established to review the national conversation on broker compensation practices. Generally, the task force generated the NAIC model act that calls for compensation disclosure and what specifically should be in those disclosures. The task force has drafted national regulatory settlement agreements and continues with that process.
The issue, as you may know, has now shifted from the brokers to the carriers. I am sure you are familiar with recent settlements with AIG, Zurich and the recent lawsuit filed against Liberty Mutual by Attorney General Spitzer and the Connecticut attorney general. The focus in recent months is on the carriers.
The Task Force will continue to try to direct the industry toward a responsible approach to dealing with a conflict of interest. In the absence of a corporate culture of misconduct or anti-competitive practices, the disclosure of the contingent commission arrangements to the consumer is the most appropriate way to deal with that question. In certain instances where there is a corporate culture of anti-competitive practices and in those cases a ban has been to some extent appropriately proposed. We will continue to work to generate disclosure as the standard, and we’ll do that by fashioning national regulatory settlement agreements with various companies and national brokers. So the Task Force continues to be very actively and aggressively involved in this issue.
Let me add that insurance producers are exceptional assets in their communities and to consumers and the regulatory community respects and understands that. Regulators understand that commissions are based on volume and profitability and are really an inherent dynamic within the marketplace, not just in insurance market, but in any marketplace. There is not a regulatory desire to eliminate contingent commissions. There is a regulatory desire to disclose the conflict of interest because it is in that scenario that the consumer can be hurt, when the conflict is resolved in the favor of the producer rather than the consumer. So disclosure is the appropriate why to deal with that conflict.
Question: Do you think the Optional Federal Charter is a possible reality in the future? What is the role of the NAIC and state regulation in the next five years?
McRaith: The Optional Federal Charter is a bill that leaves many gaps and raises more questions than it answers. In the absence of more detail on that bill I will not comment other than to say that the notion that a federal regulator funded by the insurance industry could serve the industry or consumers better is a notion that is not supported by historical facts. It is interesting to note that the same groups that support an Optional Federal Charter oppose the establishment of a national commission on catastrophes because they don’t want the federal government involved. It is important to understand that certain segments are picking and choosing their interests on what serves them best. However, I can promise you that the interested parties that are proposing the Optional Federal Charter have much better access to their state regulators than they will ever have with a regulator in Washington.
Having said that, the industry, the life industry in particular, has asked for greater uniformity and greater efforts for national collaboration by regulators. They (life industry) are not so concerned what the standards are as much as there is a concern about uniformity. Current leadership of the NAIC, at least in the 15 months that I have been involved, has taken an aggressive approach at dealing with issues collaboratively, uniformly and nationally.
With all the talk of uniformity and modernization there is a reason why insurance regulation has remained state by state regulation and that is because it provides the greatest benefit to consumers and ultimately has fostered competition. Over 5,000 insurance companies are operating in this country right now. There are less than 300 of those companies that have more than 500 employees. So in Washington D.C., Senators Sununu and Johnson are hearing from those companies that have a voice and a place in D.C., but they are not hearing thousands of smaller companies that serve smaller communities and often have niche markets.
Yes, we (NAIC) have the need to have high standards and uniformity, the regulators I have spoken with are committed to that as a vision for the NAIC. Effective leadership, not driven by political motives, not industry driven, but balanced leadership that recognizes the need for uniformity and modernization and that prioritizes the consumer, but respects the business realities is the right direction for the NAIC.
Prior to his appointment as the Illinois Insurance Director, Michael McRaith spent fifteen years in private practice as an attorney in Chicago. Director McRaith represented national and regional financial institutions, including insurers, in finance and finance-related litigation. He defended lenders and securities and commodities brokerage firms in commercial claims, including class action litigation, trials, mediation and arbitration. With his peers from Florida, California and New York, McRaith convened the U.S.’s first National Catastrophe Insurance Summit.