Updating regulatory system would remove hurdles, benefit customers

The current state-based insurance regulatory system is a dysfunctional relic that has stifled property/casualty product creativity for years. This patchwork regulatory system is filled with wasteful inefficiency that is costly to individual states, insurance companies and to consumers. It is embedded with hurdles to introducing new insurance products to the marketplace — hurdles so high that they amount to a ban on innovation.

Frequently, insurance customers cannot carry their policies with them when moving a home or business across state lines.

Why not?

Because of idiosyncrasies and inconsistencies within the state-based regulatory system. Depending on geographical location, a customer may only move across a river, or a line on a map. But in too many instances, his or her policy is not portable because a product approved in one state may not be approved in another (even neighboring) state.

That unfortunate, completely unnecessary situation has existed for years. In many instances, blame for the resulting problems has been wrongly assigned to insurers. The real culprit, however, is the patchwork quilt that comprises state-based regulation; the dysfunctional system continually confounds, frustrates and inhibits insurers who want to respond to the ever-changing needs of consumers.

Modernizing insurance regulation does not mean sacrificing consumer protection. In fact, the American Insurance Association (AIA) and its allies support a modernized system with a federal regulator focused on maintaining insurer solvency and monitoring insurer market conduct.

Consumers clearly are best protected when regulators are making sure insurers’ finances are managed responsibly so that insurers are around to pay claims, and that bad actors in the industry are quickly identified and dealt with. Rather than tolerating arbitrary and conflicting regulatory requirements that do not serve the best interests of consumers, a modernized insurance regulatory system should be built on uniform, operational requirements for insurers.

Similar to the current dual regulatory system for banking, insurers then would have the option, depending on what best serves their customers, of being regulated at the federal or state level. An optional federal charter is just that — an option. The state regulatory system (including state premium taxes and guaranty funds) would not go away.

Such an updated insurance system would promote more competition and creativity in the marketplace by letting consumers, not government officials, determine what insurance products are available in the market. Insurance customers would receive added value if the insurance market were allowed to take advantage of new technologies, such as electronic signatures. The federal “e-signature” law has made electronic transactions as legally valid as those executed on paper, but that option is not available to all property/casualty insurance consumers. If it were, insurance consumers would be able to get a customized, portable and state-of-the-art insurance policy within minutes.

The speed of change in the financial services realm is ever-increasing, and marketplace barriers imposed by the current, outdated state-based insurance regulatory system are simply unacceptable and inexcusable today. Change has been promised for decades at the state level, but the glacial pace and remaining resistance carries an unnecessary price for consumers and insurers.

A broad, bipartisan group in Congress knows that the U.S. insurance regulatory system needs modernization, and AIA is looking forward to being a part of those timely and important discussions. Everyone who wants to remove obstacles to economic growth and empower consumers in the marketplace should also welcome and participate in that dialogue.

The insurance marketplace needs an alternative to the current state-based regulatory system, and a well-constructed optional federal charter is the best choice for a sound economic future.

Gov. Marc Racicot is president of the American Insurance Association. He joined AIA from the law firm of Bracewell & Giuliani LLP, where he had been a partner in the Government Relations and Strategy section. He served as chairman of the Republican National Committee from January 2002 to July 2003. He also served two terms as Montana’s governor.