N.Y.’s Serio Defends States as Federal Oversight Debate Begins
State insurance commissioners stood their ground last month at hearings in Washington where they opposed an expanded federal role in insurance regulation and withstood a withering attack on their performance from a leading insurance trade group.
Claiming that progress is already underway toward building a stronger state-based system of insurance regulation, the National Association of Insurance Commissioners (NAIC) told the Senate Committee on Banking, Housing and Urban Affairs that creating a federal oversight entity as has been suggested would do more harm than good.
In stark contrast, an insurance company trade group leader blasted state regulation as “outdated and dysfunctional” and characterized the system as a “trifecta of regulatory failure.”
Gregory V. Serio, New York’s Superintendent of Insurance and chair of the NAIC’s Government Affairs Task Force, told the committee that state regulators, consumer groups and state legislators are moving forward on several reform fronts. Providing federal preemption or an optional federal charter now would only impede that progress, he said.
“We strongly believe that an effective system of national regulation does not mean federal regulation,” Serio said. “While we have enjoyed a very productive dialogue with Congressional leaders on the innovations made in state-based regulation, involving the federal government in dual regulation will not simplify the complexity of insurance issues, nor diminish the number of issues, nor smooth the process of regulation. More likely, it would simply add layers of uncertainty, confusion and cost for policyholders and claimants.”
SMART proposal
Serio and the NAIC were commenting following circulation of the so-called SMART proposal by House Financial Services Committee Chairman Mike Oxley (R-Ohio), and Capital Markets Subcommittee Chairman Richard Baker (R-La.). The State Modernization and Regulatory Transparency Act (SMART) aims to make states more uniform in their regulatory requirements and procedures in market exams, financial surveillance, licensing, product approvals and other areas. To achieve this, SMART calls for the creation of a seven-member regulatory oversight panel. This state-national partnership would “promote uniformity and efficiency in government policies that affect the insurance marketplace.” It would be responsible for identifying whether uniformity requirements have been met by the states, resolving conflicts, and facilitating financial and international trade issues that affect insurance.
The seven members would include insurance commissioners from a small, medium and large state, as well as designees from the Securities and Exchange Commission, the Department of the Treasury, and the Board of Governors of the Federal Reserve System, plus a seventh member nominated by state commissioners and appointed by the president to act as chair and break any tie votes. This partnership would have no office and minimal staff.
Serio cited the NAIC’s plan, titled A Reinforced Commitment: Insurance Regulatory Modernization Action Plan, and the NAIC’s more recent “road map” for regulation that included specific goals and accomplishments in several key areas such as consumer protection, market regulation, speed to market for products, solvency regulation and licensing. The plan sets out specific goals and timetables for accomplishment of each, he maintained.
“Significantly, our specific regulatory program targets were developed with extensive input from industry and consumer representatives,” he said. “We have an aggressive timetable, and we believe our plan satisfies every legitimate complaint regarding inefficiency and redundancy in the state system. Even if a federal system were set up tomorrow, there is no way it could achieve these same improvements on a schedule that comes close to ours.”
Serio contrasted insurance with the banking industry, which some have pointed to as a system that works under a “dual” state and federal chartering system. Insurance is not the same, he said.
Serio told lawmakers that:
During 2002, state insurance departments across the country handled approximately 4.2 million consumer inquiries and complaints regarding insurance policies or companies.
Nationwide, state insurance departments employed more than 13,000 people and spent approximately $947 billion on solving insurance problems. States helped consumers collect tens of millions of dollars in claims payments.
The entire state insurance system is authorized, funded and operated at no cost to the federal government.
Current natural disasters, including hurricanes in Florida and Alabama, and fires in California, highlight the advantages of state insurance oversight. State officials are in the best position to respond quickly, and to fashion remedies that are responsive to local conditions, Serio claimed.
“There is no way the federal government could possibly replicate the expertise of state legislators, regulators and courts to successfully interpret the laws of 50 states and the District of Columbia,” Serio said. “Moreover, there is no reason for the federal government to do so when the states have a modernization plan and timetable in place to get the job done.”
‘Trifecta of failure’
Serio’s words did little to dissuade one of the harshest critics of state regulation. Speaking out in favor of a federal role was a representative of the American Insurance Association (AIA) who alleged that “the outdated, dysfunctional nature” of state insurance regulation does not allow the insurance industry to meet the needs of individual or business insurance consumers.
William H. McCartney, senior vice president of government and industry relations for the USAA Group—an AIA member company—told the committee that a “trifecta of regulatory failure” largely defines current state insurance regulation. According to McCartney, former chief insurance regulator in Nebraska as well as former president of the NAIC, this trifecta includes: lack of regulatory uniformity; pervasive government price controls; and entrenched government product controls.
McCartney called lack of uniformity and inconsistency “hallmarks of the state insurance regulatory system.” He cited a limited, nationwide AIA survey that found approximately 350 state requirements dictating the filing and review of insurance rates, and approximately 200 requirements related to new product filing and review. “It is illogical to believe that compliance with more than 500 filing and review requirements will lead to efficiency or consistency,” McCartney stated.
Maintaining that although non-uniformity is an “inherent” aspect of state insurance regulation, McCartney said government price and product controls are not. “Price and product controls are historical artifacts that have lost their utility,” he noted. “Consumer empowerment in the marketplace should not be replaced by needless regulatory controls.”
In addition, McCartney said, “state focus on government price and product controls discourages product innovation and competition, ultimately denying consumer choice.”
States ‘misguided’
McCartney argued that state regulatory attention currently is “misguided,” and that valuable resources are misdirected to “front-end” price and product regulation. As a result, he said, “core functions like financial solvency have taken a back seat. This is both unfortunate and dangerous for consumers, as it provides them with little confidence that their insurers will be around and able to pay claims.”
McCartney asked the panel to “take a hard look at these lapses, and ask hard questions about whether the state system has elevated outdated, unnecessary regulatory elements to the detriment of industry financial condition.”
AIA and its members support an optional federal charter system (based on the chartering system for U.S. banks). Such an approach, McCartney claimed, would not place the federal government in unfamiliar regulatory territory, since there are several examples of federal involvement in property/casualty insurance, including terrorism risk insurance.
NAMIC and PCI caution
Other property/casualty insurer groups, while agreeing with much of the criticism of state regulation, have been less enamored of a federal role as defined by SMART, preferring to see states take more initiative toward uniformity and deregulation.
The National Association of Mutual Insurance Companies (NAMIC) views SMART as a useful road map that can illustrate for states where they must improve.
“Congressmen Oxley and Baker have done this industry and the NAIC a tremendous service by outlining a path for reform for state insurance regulation,” Peter Bisbecos, NAMIC director of legal and regulatory affairs told a recent NAIC gathering. “NAMIC generally agrees with the identified reforms and strongly suggests that the individual members of the NAIC focus their time on helping their respective state legislators understand the complex issues involved and to persuade them to enact reforms in areas identified in the SMART Act.”
Bisbecos credited SMART with recognizing and addressing “the key barriers to reform that have kept the insurance industry mired in an outdated command and control style regulatory regime.”
Chief among these, according to Bisbecos is price regulation, one of the more controversial aspects of the SMART Act as drafted. “Time has shown that regulators, despite their best efforts and good intentions, have not found the proper regulatory balance that can be achieved by a more competitive market. Illinois’ three decades of success in providing its residents with competitive prices has proven this point,” Bisbecos asserted.
Sounding a cautionary tone, Bisbecos said that while the SMART Act would maintain and improve the state-based foundation of insurance regulation if enacted in its present form the initiative would not be “the final word on insurance regulation from Washington.”
“Despite the best of intentions, federal programs and regulation have a tendency to expand. Pursuit of any federal solution to the problems of state regulation will inevitably invite additional mandates that could serve to undermine the principles of risk sharing on which this industry is based,” Bisbecos asserted, challenging the NAIC to join with state lawmakers and others to enact provisions contained in the SMART legislation as a way to forestall federal legislation applied to property/casualty insurance.
Effective coalition
“Now is the time to show the effectiveness of that coalition,” Bisbecos said. “If it is not demonstrated, it is certain the “next” federal proposal coming out of Washington, D.C. will not go to the lengths that Congressmen Oxley and Baker have gone to preserve the present state framework.”
In its statement, the Property Casualty Insurers Association of America (PCI) seemed to favor the goals of SMART while stopping short of endorsing the federal formula for achieving them. PCI encouraged the committee to investigate regulatory options that further rate competition and streamline the often-cumbersome regulatory process. PCI urged the committee to find solutions that improve and simplify state regulations while increasing uniformity.
“While other areas of reform are important, the single most significant element overshadowing all other reform proposals is the goal of ensuring truly competitive marketplaces with open rate competition,” PCI wrote the committee. “PCI encourages the committee to take an aggressive position with respect to rate and form regulation and to make this element the prime focus of any reform effort.”