Until last month, the strongest positions regarding modernization of insurance regulation have been proposals for an optional federal charter for insurance companies. But another compelling-and opposing-perspective entered the debate in August, when the Alliance of American Insurers published a report that firmly argues against federal regulation for property/casualty insurance."Optional federal chartering entails a significant risk of adverse and unexpected consequences, no matter how carefully and narrowly initial legislation is crafted," the report concludes. "The better and more prudent policy is to reject federal chartering and encourage and support further modernization of state regulation."
Ever since the Gramm-Leach-Bliley Act of 1999 removed barriers between banks, insurers and securities firms, enabling them to compete with each other, insurance regulation had been under intense scrutiny. Because insurance is regulated solely by the states, several groups and a few large carriers have claimed they are competitively disadvantaged because they are forced to comply with an inefficient, patchwork system, which prevents them from bringing products to market quickly.
Speed to market issue
As a result of such regulatory inefficiencies, the American Council of Life Insurers, the American Bankers Insurance Association, and the American Insurance Association all have presented model bills in the last year to Congress-supporting an optional federal charter for insurers.
Both life and property/casualty insurers want a more efficient regulatory system that enables them to bring products to market more quickly, says Ann Spragens, chief counsel and senior vice president for policy development at the Alliance of American Insurers, Downers Grove, Ill.
"Everybody agrees that speed-to-market is the area of state regulation that has been the most problematic," she says. The differences arise in how to best repair the system.
Life insurers, which sell products that are very similar to financial products, have a broader consensus favoring the optional federal charter approach to modernization, Spragens notes.
On the P&C side, however, "the issue is a very divisive one," she says. P&C products are based on local conditions, such as geographical conditions, weather patterns and congestion in cities, she notes. "P&C products are not homogenized."
She also notes that even though the life and the P&C sides of the industry agree that efficiency improvements are necessary, the Alliance research found that federal regulation will not create them.
In fact, the federal government may not have a hands-off attitude toward rates and forms, which is one of the key objectives of the optional federal charter proposals, Spragens says.
In addition, federal banking regulators have been more aggressive than state insurance regulators in restricting competition and mandating disclosure under the guise of discouraging unfair discrimination, the report notes.
"There will also be some significant negative impacts on the state guaranty fund system-and an undermining of the integrity of statistical data, which is essential for P&C insurers," Spragens says.
Antitrust litigation
The study also points out that a decentralized state regulatory system is less risky than a centralized system, since regulatory mistakes tend to be localized in the state system.
Finally, Spragens says, the proposals for the optional federal charter include a repeal of the McCarran Ferguson Act of 1945, which would expose insurers to antitrust litigation.
"We'll have treble damages sitting at the end of the road, and a lot of new case law that will be developed," she says. In fact, transition litigation costs could reach into the billions dollars, according to the report.
