Thomas Hampton, District of Columbia, Commissioner, Department of Securities, Insurance and Banking

Thomas Hampton, commissioner of the District of Columbia Department of Securities, Insurance and Banking. Hampton, who was reappointed to his post by Mayor Adrian M. Fenty in January, discusses the District’s campaign to attract captive insurers, the renewal of the federal terrorism reinsurance program, the prospects for a federal backup for natural disasters and the use of credit scoring by insurers in this exclusive interview with Insurance Journal. The interview is part of the series, The Commissioners 2007, Part 1, in which Insurance Journal speaks with 15 state insurance regulators. Hampton’s video interview can be viewed in its entirety at www.insurancejournal.com/broadcasts.

The District has become an active captive participant. How is this going and what are your plans to differentiate the District from other states that are looking to grow their captive industry?

Hampton: The captive industry in the District of Columbia has been going very well. In 2000, we initiated our captive law. We didn’t get our first captives until 2002. We had two that year. Since that time we’ve grown from two to 70, which we’ll have at the end of this year. That’s a big growth spurt for us.

How we differentiate ourselves from other jurisdictions is two-fold. We originally started because the District has all these associations that we are headquarters of, associations in the country. We were trying to focus in on dealing with association captives and risk attention groups that were owned by associations. As we started out with that process, we found out that these types of captives, or these types of organizations, weren’t cost effective in terms of how much money we were getting in terms of tax dollars and revenues from these companies as compared to the amount of work it took to regulate these companies.

We’ve changed our focus somewhat. And we’re dealing a lot with the hospital systems and allowing the liability companies that want to do business. We’re trying to get more involved with medium sized corporations, corporations with $50 million in capitalization to $100 million in capitalization. Sarbanes-Oxley and other types of corporate governance rules require these companies to deal with the enterprise risk management focus. As they deal with these initiatives, they’re using captives as a mechanism to, more or less, control their risk, as well as do these organizational self-funding mechanisms.

What about the availability of property insurance in the District?

Hampton: Availability and affordability of property insurance isn’t as bad in Washington as it is in the Gulf Coast and some of the Northeast. We’re very fortunate there. We are concerned, though, that our consumers understand their policies and understand the type of risk that they are insuring. …What we’ve been doing and trying to focus on is educating consumers on their policies, their homeowners policies, as well as the auto policies.

In terms of the rating process, dealing with these products, we have a competitive rating process. When companies do have a major catastrophe or loss in Washington, they can then go back and readjust their products to deal with the losses that have occurred. We do actuarial reviews of these rates. It’s good that we don’t have a prior approval process and it’s more of a competitive rating process. That way the companies can adjust quickly and still provide coverages to our constituency, which is the most important thing.

Is part of your job to encourage insurers to write in your state?

Hampton: It’s a very important part of my job. After we do a market analysis of our different lines of coverages, if we see situations where companies aren’t providing like in the case of homeowners aren’t providing homeowners coverages, or we don’t have a competitive marketplace, that’s a major concern to us. We go out and try to encourage that. But beyond that we also try to have them deal with niche markets. In essence, right now in Washington, what we’ve been trying to do is have companies that provide coverages to small businesses to make sure they understand the small businesses that operate in Washington. It might be unique from some of our surrounding jurisdictions. We try to set up meetings and other types of informational gatherings where we get the small businesses and the companies in the same room, have them discuss some of the issues that they may have, so that we can try to find ways to have coverages provided by these companies.

You oversee banking and securities as well as insurance. What is your opinion of federal versus state regulation?

Hampton: Federal versus state regulation for a securities and banking arena has worked out relatively well. On the banking side, the majority of our companies are federally regulated by the OCC or the FDIC in conjunction with us. We do joint examinations on safety and soundness with the banks that are chartered within the District. We handle complaints in a conjunctive manner. That works out well.

Similarly, the same situation in securities. We work with the SEC on our broker-dealer firms that are doing business in the District as well as our investment advisor and investment advisor reps. We do a lot of issues dealing with consumer complaints, fraud issues; we work in conjunction with the SEC. That’s a good thing as well.

Insurance is a little unique because insurance is more parochial. Each state has mandated coverages. There’s mandated coverages in auto. We have different issues as far as homeowners are concerned than may have in the Gulf Coast or other places. Nationalizing insurance, especially on a property/casualty side, is going to be a challenge. I think if we do have a national system, this national system will still have to incorporate a lot of the parochial laws and different customs in the states and jurisdictions that are operating in the United States now. You really can’t have a one rate fits all process, a one policy form fits all process, in insurance. But you can have that process in banking and securities.

What is the District’s policy on the use of credit scoring in personal lines?

Hampton: The District of Columbia permits companies to use credit scoring in developing their underwriting standards. What our auto companies have done is they have used credit scoring to develop rating classes. The more rating classes that are out there, the higher chance that our constituency, our policy holders in Washington, can pay rates that are more reasonable and not excessive. The one thing that we are concerned about and we are going to be working on as one of our agenda items in ’07 is to make sure that this credit scoring is not unfairly discriminatory to certain groups of folk. We want to go out into our marketplace to do market analysis to make sure that the under-served communities who may have bad credit ratings aren’t … it’s not a de facto way of charging those guys more to do business than people who have great credit rating. That’s not the case in what I’m hearing from the companies but we want to verify that.

How important is the federal Terrorism Risk Insurance Act to D.C.?

Hampton: TRIA is very, very important to Washington D.C. Obviously when 9/11 occurred, New York and Washington — even though it was Northern Virginia — but New York and Washington were the main two jurisdictions that were being hit. The key to us was after the event occurred, the insurance companies started putting exclusions for terrorism insurance coverages in their commercial property and other types of products. That caused our real estate market and a lot of our construction folks to start having concerns, because the bank said you have to have the terrorism coverage option before we would permit the buildings to keep being built and before we’ll sell you the commercial property coverage. These companies needed that. That has been relaxed in the last two or three years after 9/11.

If we have a situation where TRIA isn’t extended past Dec. 31, 2007, we believe that the District is going to be adversely affected. A majority of the companies right now, the only reason they are providing the option is because the TRIA extension has moved toward ’07. … I’m not sure TRIA is going to be extended. We’re hearing great encouragement from Congress that this may be extended in the new congressional session that’s happening in January. Hopefully that will happen.

Do you think that a national catastrophe plan would be a good idea?

Hampton: National catastrophe and TRIA came up through the processes of the NAIC (National Association of Insurance Commissioners) almost simultaneously and people tie the two together. I look at terrorism and terrorism insurance a little bit different from national catastrophes. Most of the terrorists who are attacking America are attacking America and not necessarily the District of Columbia, not necessarily New York, but some of the major trophy buildings that we have in Washington, New York, San Francisco. I think this is something that the nation … it’s an attack on the nation. We all should be a part of this. That’s why I believe that TRIA should be extended. …

The national catastrophe is a little different in the sense that some of the people in certain jurisdictions, especially in the Florida area and others, are staying mostly on the coastline. It causes problems when that happens. These people choose to stay in that very vulnerable area. I know a lot of people in the Midwest and other places who don’t have these types of risks would say they need to pay an additional premium for the additional risk that they have in the marketplace.