After several years of sitting on the sidelines, insurance carriers are now getting up to speed in selling products over the Internet. However, dealing with the state-based regulatory system, which requires carriers to jump through multiple hoops to engage in e-commerce on a national basis, threatens to slow their efforts to a crawl.

Unlike banks and securities firms, which are regulated at the federal level, insurers currently have no choice but to comply with a myriad of state laws that regulate their businesses. Different states have different requirements for everything from company licensing to producer licensing, to rates and forms, to advertising, payment methods and document formatting, presentation and delivery.

"Insurance companies live in the same world as the rest of us-the world of speed," says James Schacht, former Illinois insurance director and national director of the Insurance Regulatory Solutions practice at New York-based Pricewaterhouse-Coopers. "They want to do things quickly, but the way the regulatory system is set up, they can't."

State insurance regulators admit that the insurance regulatory system is out of synch with technological and economic conditions of the 21st century, and are working to modernize it.

"We recognize that consumers and industry want the benefits of e-commerce," says Lee Covington, director of the Ohio Department of Insurance and chairman of the electronic commerce and regulation working group of the National Association of Insurance Commissioners (NAIC), Kansas City, Mo. "But there are inefficiencies in the system today. We recognize that it needs to be modernized, and we're working very closely together to do that."

A motivating factor

Although the NAIC had been addressing regulatory reform since the mid- to late 1990s, many industry experts believe that the Financial Services Modernization Act-passed in November 1999-accelerated the states' reform efforts. That's because it introduced the threat of a national system for producer licensing that would undermine their authority.

Under the law, also known as Gramm-Leach-Bliley (GLB), a majority of states must enact uniform or reciprocal producer licensing laws by November 2002. If they do not, the National Association of Registered Agents and Brokers (NARAB) will form-under NAIC oversight-to establish uniform licensing, appointment and continuing education requirements for insurance agents.

At press time, nine states-Arkansas, Kentucky, Missouri, Nebraska, New Hampshire, North Carolina, South Dakota, Utah and Wyoming-had passed all or essential parts of the Producer Licensing Model Act, which the NAIC adopted in January 2000 to create uniformity in agent licensing procedures. And at least 27 states have introduced legislation this year. The NAIC is committed to having all states be a part of this system, not just the majority as required by GLB, Covington says.

Producer licensing isn't the only area of regulation that the NAIC has targeted for reform. The commissioners are trying to move in the direction of "national treatment" for companies by attempting to streamline company licensing, solvency monitoring, holding-company transactions and market conduct. And they're working to improve "speed to market" for new insurance products and changes to existing ones.

A federal option

"I've never viewed state regulation as an impediment to companies succeeding in the marketplace," says PWC's Schacht. "But the world we live in is a very demanding one. Everything moves a lot faster. There's no question that 'speed to market' and 'national treatment' are the right buzzwords. But now the states have to deliver."

The licensing of insurance companies is a problem that has been around longer than the Internet, he says. "It's really an embarrassment to the state regulatory system that it takes years and years for an insurer to get licensed around the country."

That needs to change, Schacht says. "But I just don't see a lot of progress. I can see why people get frustrated, and a single regulator, like somebody in Washington, D.C., looks awfully attractive compared with this state-by-state system."

Indeed, the proposal for a National Insurance Commissioner-drafted by the Washington, D.C.-based American Bankers Association Insurance Association (ABAIA)-attempts to resolve the frustration insurers face in trying to operate on a national basis and across the Internet.

The ABAIA draft bill, dubbed "The National Insurance Act of 2001," would establish a dual chartering system modeled after the regulation of the banking industry. Under such a law, an insurer could choose whether to be regulated at the state level or by a single regulator at the federal level. Such a dual system fosters competition between the regulating bodies, thereby improving the system, the ABAIA contends.

Testifying in favor of the proposal before a Congressional subcommittee last September, Glen Milesko, chairman and CEO of Milwaukee-based Bank One Insurance Group, argued that the state-based system of insurance regulation hinders e-commerce.

"Many insurance firms . . . are engaged in the business of insurance in every state and in other countries around the globe," he said. "Complying with different rules and regulations in more than 50 different jurisdictions is both difficult and costly . . . E-commerce delivery cannot be encumbered long-term through state-by-state differences."

A touchy issue

Needless to say, the optional federal charter for insurance companies has created quite a stir in the industry. Similar to the GBL threat of NARAB, the ABAIA proposal is putting pressure on policymakers to modernize the insurance regulatory process-or be modernized.

"The optional federal charter is a touchy issue," says Maria Berthoud, vice president, federal government affairs for the Alexandria, Va.-based Independent Insurance Agents of America (IIAA). "We're trying to work closely with people on this issue-not to alienate people. But were trying to make our position clearly known."

The IIAA opposes the ABAIA proposal on the grounds that it would create a new federal bureaucracy, and that it would be unfair and expensive for most insurance agencies-which would be required to be licensed as national insurance agencies if they wanted to sell products from a federally chartered insurance company.

But the American Council of Life Insurers (ACLI) and the American Insurance Association (AIA)-which have reservations about ABAIA's proposal-are open to a federal chartering option. In fact, they are drafting their own proposals.

"We've been working closely with the NAIC for more than a year now to improve state regulation, and we will continue to do that," says Herb Perone, spokesperson for the ACLI, Washington, D.C. However, "we would be irresponsible if we did not take a look at optional federal chartering," he says. "Our goal is to improve life insurance regulation-so that life insurers can remain competitive in the new financial services marketplace."

The Washington, D.C.-based AIA also is approaching reform from both sides. "We're working very hard with the states at this point to try to accomplish (our) principles, and when we've got a more fleshed-out proposal, we'll do the same thing at the federal level," says Phil Schwartz, vice president for financial reporting and associate general counsel.

Free-market push

Among the AIA's principles for electronic commerce are uniform regulation and open and competitive markets. With e-commerce, it may be difficult to determine where a commercial transaction takes place and which jurisdiction may have regulatory authority, according to the AIA.

The AIA's position is that electronic transactions involving commercial insurance should be unregulated to help promote e-commerce, and, with respect to personal lines insurance, no additional regulations should be imposed.

Commenting on the fact that some states are moving to deregulate commercial lines, Herm Brandau, associate general counsel for State Farm Mutual Automobile Insurance Co., Bloomington, Ill., suggests that such reform should extend to personal property/casualty lines as well.

"Life insurance rates are not regulated, and life contracts are certainly as complicated as auto insurance contracts," he says. "We think regulation should be redirected toward solvency and protecting the public from fraud and abuse, rather than regulating rates."

In addition to rate regulation, critics cite inconsistent state requirements for forms, filing and advertising as impediments to competitiveness. Currently, the states review the introduction of new insurance products, Bank One's Milesko said in his testimony. "If an insurer plans to offer a new product in every state, this review process can take months, even years," he said.

"When we decide we want to make changes, we want to make them nationwide," State Farm's Brandau says. "If there is no reason why one state should (have different requirements) from another, we're looking for more uniformity-more ability to get to the customer as fast as possible with changes."

Despite the state-based system's inefficiencies, many believe it best protects consumers in an industry that-unlike banking and securities-deals with loss rather than gain, and products tailored to regional risks.

According to the NAIC, state insurance departments handle approximately 4 million consumer complaints and inquiries every year.

In addition, from a solvency standpoint, the record of the state-regulated insurance industry is better than banks, credit unions and savings and loans, PWC's Schacht notes. "When 50 states are looking at a company, if one misses something, chances are another will catch it," he says. "I wonder if we had a federal system, who's going to check the feds?"

Just the beginning

To be sure, the debate over insurance regulation has only just begun, and observers say an optional federal charter will not be enacted for several years. "This is a waste of time with a Republican Congress," says IIAA's Berthoud.

Regarding the ABAIA proposal, "I don't think anything is going to happen for quite awhile with any major legislation affecting banks," says Rick DeLotto, senior research analyst at Stamford, Conn.-based Gartner Group Inc. "Bank management is going to be fully focused on economic conditions for the foreseeable future."

Still, the world is different than it was in the 1940s and 1950s when state insurance regulations were established, and the system needs to change, Schacht says. "Everybody wants things to happen in a nanosecond, and that's the reality." If the states are unable to adapt, he predicts the federal alternative will eventually be passed. "Not because it's better, but because it's different and it's one regulator-and people will think it will be better."

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