Industry leaders debate federal vs. state regulation with Democratic Congress shift

The Professional Liability Underwriting Society (PLUS) held its international conference in Chicago in late 2006. Moderating the panel was television journalist Forrest Sawyer, a 24-year veteran of ABC, CBS and MSNBC, who targeted his questions to a diverse group of insurance leaders and the Illinois state regulator on the debate over who should regulate — the federal government or the states. Noting that the Democrats now control both Houses in Congress, Sawyer sought input on how that change would impact whether federal regulation would become a reality.

Panelists: William Bowden, managing director, Promontory Financial Group, New York; Leib Dodell, president, CEO, MediaProfessional Insurance, Kansas City, Mo.; Johnny Rowell, head of Speciality Lines, Beazley Group, London; Gerald J. Sullivan, president, The Sullivan Group, Los Angeles; Michael McRaith, Illinois director of Insurance.

Sawyer: With a new Democratic majority in both houses of Congress, what’s your take on federal regulation and where it is headed?

Sullivan: As the industry grows and expands, as we globalize, as all business moves more rapidly all the time, frankly some of the states are having a difficult time adapting to those changes. Those factors give rise to a lot of things that are happening in Washington D.C., that are beginning to have a significant impact on our business. No matter whether you come down on the state side, or the federal side, or somewhere in between, you do have to watch carefully what’s happening in Washington D.C., because they are very active and will probably become even more active in the months ahead.

Sawyer: As the Illinois Insurance director, Mike, would you say you love federal regulation?

McRaith: There’s not a lot of nuance to my position. If we are concerned with the profitability of the largest carriers in the country — federal regulation is a great idea. If we’re concerned about solvency, consumer protections, it’s not something we should consider seriously. The last thing we want is a dual regulatory system where the courts become the “de facto” regulators. That’s exactly what we would have and that’s exactly what we don’t want.

Sawyer: Okay, the battle has begun. With the changes in Congress, will there be a small or large impact on the industry?

Leib: I just don’t think the issues that we’re here to talk about fall predictably down party lines. You might think that the Democrats are more inclined to favor centralized federal regulation of the industry. I don’t think that is the case. The proponent of the actual federal charter regulation is John Sununu, a Republican. Mike McRaith is from a Democratic platform. So I don’t think it’s easy to predict the impact of Congressional shifts on our business.

Sawyer: Do you agree Bill?

Bowden: My own guess is that Leib is probably right. I don’t think an optional federal charter is going to happen quickly because the Democrats have more power. But I do think it doesn’t take much to imagine another crisis, whether it’s a hurricane season like that last one or another terrorist attack before somebody realizes that the federal government has literally no information about the insurance industry. Yet, Congress has a very substantial interest in both natural disasters and terrorism — that combination that could be very volatile at a federal level.

Sawyer: Mike, why isn’t what was just said an argument that the Democrats should press for more involvement in the insurance industry?

McRaith: In terms of where I think there will be a shift, first of all, I think it will be on a state level, not the federal level. Elliott Spitzer is now the governor of New York. The Attorney General of New York, Attorney General Cuomo, is going to be every bit as aggressive prosecuting cases in the industry as Attorney General Spitzer was. Interestingly in California, John Garamendi, a noted and passionate consumer advocate, is now the lieutenant governor and replaced by a Republican. So I think there’s going to be interesting changes more on a state level.

At the federal level I’m not so smart as to speculate. But I would say that money is ultimately bipartisan. There is a lot of money in the federal charter bill.

Sawyer: I think it’s fair to say that Mike would argue that consumer protection is important. From an insurance industry standpoint, does this look like too much meddling and limiting the ability to do business and be competitive?

Sullivan: The biggest problem for us is that when you take consumer protection too far insurers begin to get hamstrung in the ability to provide products that insureds are seeking. This is where problems begin. That doesn’t mean that consumer protection isn’t important. It’s tremendously important. One of the great strengths of state regulation is that regulators can look at local issues and react quickly. On the federal side they’ve never been very good at dealing with that in different locales. They just set ground rules.

Sawyer: You all grew up in the state system. Why not just keep the state system and reform it and drive on?

Dodell: I think there is nothing wrong with it (state system). I do not think the issue is so much who is doing the regulating, but how it is being done. In the environment that a lot of us practice in we have to be fast both to protect our own capital and also to get products to our customers quickly. We need an efficient system, and the current structure makes it very difficult for us to get products out to the marketplace quickly.

Sullivan: There is another aspect to this. Mike correctly addresses the issue of automobile and homeowners which constitute about 50 percent of premium volume in the country. However, many of us have handled relatively few automobile and homeowners coverages.

Most of us are heavily involved in dealing with commercial coverages of one sort or another. If you are dealing with a risk that has locations in multiple states, the way things are set at the moment, it is impossible to write a multiple state risks and comply with all the laws because the laws are so contrary. Insurers end up breaking the law somewhere.

This is not a new issue. I personally argued this at the NAIC level for about 35 years. And so far they (NAIC) has been totally unsuccessful.

Bowden: I suppose one of the answers to this question would be that we are not talking about mandatory federal insurance. It is optional federal insurance and if Mike is right then surely his position would prevail in the marketplace. Most of the industry will not take advantage of federal preemption and things will continue to be regulated the way they are. However, most of us understand that the industry would jump at the chance to be regulated at the federal level because there are advantages to that system that Mike is not addressing.

I look back at history and what happened in the banking industry. All of the concerns that Mike mentions when talking about protecting individuals has happened in the banking industry over time — both through the federal supervisory agencies and indeed through the states. Essentially with consumer protection and licensing being left to the states and with registration and exchanges being regulated by the federal government — I am not sure that there is anything to talk about.

McRaith: Insurance is totally unique from banking, securities, and analogies to those financial sectors are strategically misleading. In securities the consumer assumes the risk. To buy a security we know it could go up or down. You are hoping it goes up. In insurance you are transferring the risk.

In insurance, the most important parts of your life you are seeking to protect. Your health, your life, your family, your home, your car, that is that uniqueness that has to be recognized. Regional and local differences make a difference. There is a difference between the property casualty market in Florida versus Illinois, and from Chicago versus Marion, Ill. Those differences need to be recognized.

There is nothing more important for a consumer than the benefit of state regulation in regard to solvency. There are over 5,700 insurance companies operating right now and operating profitably. There are more companies being formed now than at any other time in our history. Less than .66 of one percent of those companies are insolvent or subject to some kind of receivership. The industry is working. It is competitive.

We can do better on a state level. We are trying to do better with initiatives such the Interstate Compact, SERFF, NIPR and others. We have outliers and unfortunately we have to deal with them.

The bottom line is that historically the industry is doing better than ever before.

Sawyer: To summarize then the heart of the argument you make is that insurance is not like the securities business because of the transfer of risk. Also, the problems in each one of these states is different from the others and therefore cannot put under some large umbrella or one size fits all. Correct?

McRaith: Yes, that summarizes the issue.