NAIC President Csiszar Tells All

Insurance Journal sat down with incoming President Ernst Csiszar, South Carolina’s Insurance Commissioner, at the National Association of Insurance Commissioner’s Winter Meeting in Anaheim, Calif. Below are excerpts from that interview. The full video interview can be viewed on Insurance Journal’s Web site, as well as video interviews with NAIC’s Vice President Joel Ario, Secretary-Treasurer Jim Poolman, and outgoing President Mike Pickens. To view the interviews in their entirety visit www.insurancejournal.com/events/naic.

Insurance Journal: You have been a harsh critic of the current regulatory environment in some states, calling it the last bastion of socialism in the U.S. Why is the current state regulatory environment so archaic, and do you feel there is a place for some kind of federal regulation?

Csiszar: Well … I’ve always felt the true sign of an economic system is who sets the prices. In our insurance environment, it seems to me that when you have markets that are seemingly competitive, then a government, essentially a regulator like myself gets himself inserted into the price making process through the pre-approval of rates. My reference to socialism has everything to do with the fact that this is exactly how a socialist economic system works and it reminds me very, much of what I grew up with. So my comment is driven as much by personal experience in Romania as it is with the way the system works.

I’ve always felt that we are mischaracterizing this whole debate when we make reference to the regulatory system as either a state system or a federal system. To me, the debate is whether it is a good regulatory system or a bad regulatory system. Or a regulatory system that may have started out with good intentions and all that good has outlived its usefulness. So when I say we need change in the system, it is not that in any shape or form necessary to be driven by a governmental level. I think it is as much of an issue to allow competition to drive that change, as much as it is [to determine] where does government stop and the market begin. I think that is a debate that is left wide open by everything we are doing in this organization.

IJ: The NAIC recently testified in Washington on this issue. Do you think that a federal charter will gain traction next year, or will the states with their renewed commitment to make a change beat Washington to the punch?

Csiszar: I can only give you my own speculation at this point because the legislation process is one that doesn’t lends itself to any great predictability. But from my experience, and my sense of direction of where this is all going, I am hopeful that we do not have to reach the stage of federal charter. I do think however that within the next 12 months we will see a renewed effort in Washington to instill the sense of urgency that is needed to get this finished and accomplished.

IJ: What is going to be the most difficult challenge for states to move towards modernization in their reform efforts?
Csiszar: Just getting it accomplished in 55 jurisdictions. Getting it implemented. I think our challenge is less in the arena of substance. I think we will develop, for instance, national standards just as we’ve developed a compact. We’re where the rubber meets the road in the proverbial expression. How can we get all the states to implement national standards and a compact? It takes both because the compact leads to uniformity whereas the standards provide the substance for your product evaluation. In that sense, we will have a real challenge because there are many states where it is in doubt to what extent this can be achieved. Larger markets signed a MOU [memorandum of understanding]. California, Texas and Florida [signed] another memorandum for a common unified approach to product evaluation … We’ll see how that works, but for us to do this in 51 plus jurisdictions … that is the true challenge.

IJ: In your role as president, what do you think you will be able to do to encourage the states to move in that direction more quickly?

Csiszar: Well clearly we are going to encourage states and this includes my own state. The first place to start is to educate the legislators in this process. The process begins with educating legislatures, and it only ends when the legislature implements that. To give you an example, one of the individuals attending our meeting [NAIC Winter] is the chairman of my insurance committee in South Carolina. There is a good reason why he is here. I want him to hear what is going on in the industry, and why there is a need for uniformity, and why the old ways of each state doing its own thing, and making its own rules and so on, has become outdated. The most difficult problem will be implementation; not just implementation but implementation in a uniform manner. You saw what happened with the producer licensing model. You had one model, but yet when it rendered its way through the legislature and the different states, the urge to make changes was there. And what you ended up with was something that is less uniform than you thought you were going to get.

IJ: You have been the director of insurance in South Carolina for five years now, and under your leadership, your state has become a highly competitive free market state for insurers. When you stepped into office there were very few insurers in the market. So what would you recommend to other states and how might they be able to copy your model?

Csiszar: Well in our case, the state of affairs in our state was pretty miserable a few years ago. I’m particularly talking about personal lines. We probably had a little more competition in commercial lines but very little competition in homeowners and automobile. The way we fixed that was by shifting to a more market driven type of system, and there is still room for improvement. We still have rate bands, but eventually I am very hopeful we will do away with those rate bands and just go to a complete, unrestricted type of file and use system. The file and use system is necessary to make the market transparent. I think the price that companies pay in order to compete in a market environment is disclosure, transparency and accountability. And I think we’ve evolved into that type of a system in South Carolina. Next year, for instance, we are going to do this with our homeowners, hopefully the same type of approach.

Is this something that can be copied? Well I have to ask myself if it isn’t, why not? So I would turn the question around to anyone who would argue this isn’t going to work in my state. I would respond to that with a question, ‘Explain to me why not?’ There may be some differences in markets. But all I know is this, even behind the Iron Curtain, market driven systems seem to be working. So why can’t they work in our country with just this one product [insurance]. What is it that is so different about this product that an open market environment would never work? My response to that is, it’s not so different. Yes it has its unique characteristics, but competition can provide the same discipline and still provide the regulator with a sufficient degree of oversight in areas that are significant.

I am not advocating any kind of libertarian position here. Doing away with regulation entirely, or to describe this as deregulation is a mistake. What it is, is reforming existing legislation to fit the market. Concentrate on solvency for instance, concentrate on risk assessment, concentrate on the investments that companies make in exotic derivatives, concentrate on transparency and accountability. I think our accounting rules could use strengthening. So there are issues that are truly regulatory that are significant and cry out for regulation. Instead what I think our system does is over-regulate the trivial and under-regulate some essentials.

IJ: So how do you plan to change the way some states feel there is a need to be involved in the regulation of rates?

Csiszar: Well there is no magic wand. Obviously some people have very determined views with respect to this. Nonetheless, there is a role for a preacher sometimes and I will be speaking out on these issues as director of South Carolina where I clearly have proof in my own backyard that it’s working. Sometimes I won’t be able to speak as an officer of the NAIC because … this is in some ways still taboo within the organization. But that isn’t necessarily going to stop me from pointing to our experience and to Illinois’ experience. New Jersey has passed some reforms and Louisiana has passed some reforms, so it ought to make people think about how to cure an illness in a market. If you have perfectly functioning markets I suppose you don’t have to worry about it. In South Carolina our markets were sick, so we were looking for remedies and it turns out this is a remedy for the problems we experienced.

IJ: Would you like to comment on any other goals you have in store?

Csiszar: I view a sort of a three-pronged approach on where our focus really needs to be. I think it’s a mistake to have too many things to focus on because you end up diluting your efforts. Clearly, we have to address market conduct and fix market conduct. Secondly, the product review process with respect to the life and annuity side of the business, and that means the interstate compact and standards. Thirdly, I also think that the time has come for us to make some progress or at least come to grips with the real issues in solvency regulation.