Insurance industry lobbyists acknowledge that the financial services industry could come under some expensive and restrictive privacy compliance rules next year if Congress follows through on plans to hold extensive hearings on the issue.Indeed, Congress could decide to write new laws mandating that consumers be allowed to "opt-in" to sharing of financial data given to one unit of a financial services company with another unit. Currently, the policy at both the state and federal level is that consumers have the right to "opt-out" of companies' cross-marketing programs.

Such legislation, or even regulation by federal or state agencies mandating such an approach, would be difficult for most financial services companies, but "enormous" for insurance companies because of the so-called "legacy" issue, warns Bill Paukovitz, chief of privacy for Firemen's Fund Insurance Co., Novato, Calif.

The legacy issue deals with the fact that most insurance companies are financial conglomerates in themselves, an amalgamation of many smaller insurance companies, all of which are "issuing companies." This means that once a company is acquired, it continues to write insurance under its own name, and its book is therefore not consolidated into one big issuer.

Technology hurdles

This problem is exacerbated by the fact that the individual company systems have not been programmed to talk to each other, and because insurance contracts are tailored to each state.

"To get the systems to talk to each other is impossible," Paukovitz says. "Our privacy policy is that we don't share information with third parties beyond the exceptions allowed by law -because if we did so, we would have to support an opt-out option that is too costly to build."

The extent of the industry's problems are difficult to predict. The industry can count on the fact that no matter which party controls the Senate, extensive hearings and perhaps legislation will be the outcome, as Sens. Paul S. Sarbanes, D-Md., chairman of the Senate Banking Committee, and Richard Shelby, R-Ala., ranking minority member, said recently at a hearing on the issue.

Extensive hearings on the privacy issue could be used to build public support for "opt-in" provisions, or merely to embarrass the companies. Sarbanes had a bill several years ago, demanding far more restrictions on information-sharing than those that currently exist, according to Jim Pitts, executive director of the Financial Services Coordinating Council, an umbrella group financed by members of the four main financial services trades.

However, even if a restrictive bill passes the Banking Committee and the Senate itself, its prospects will rest on who controls the House in November. If the Democrats win, Rep. Barney Frank, D-Mass., would be chairman of the House Financial Services Committee, and he would support greater restrictions on financial information sharing than current chairman Rep. Mike Oxley, R-Ohio, a conservative with strong ties to business interests, Pitts confirms.

Even considering identity theft concerns, the financial services industry would ironically be taking the fall for a problem in which it is a victim, Pitts explains. That's because most identity theft occurs through mailbox rifling, lost items and stealing Social Security numbers.

Tough sledding

If the Sarbanes/Shelby initiatives become law, Pitts and Paukovitz say, the need to revise software and product services marketing would send costs soaring for financial services firms, especially insurance companies. The economies of scale would be reduced, Pitts says, and financial services firms would lose their ability to target-market. "Who is going to ultimately pay for this? The consumer," Pitts says.

In any event, a spate of activity as Congress prepared to end the 107th Congress last month presaged tough sledding next year. One Senate committee chairman held a hearing on an online privacy bill, and the head of a House subcommittee held a hearing on another bill, one that would establish federal laws for Internet privacy; currently, it is governed by state laws.

And the Sarbanes/Shelby comments on financial privacy sent clear signals of a difficult year ahead.

"All the activity set the same tone for a global debate on the scope of appropriate financial privacy laws next year," Pitts explains, "a debate delayed a year by the Sept. 11, 2001 terrorist attacks."

Pitts notes that both Sarbanes and Shelby voiced support for an opt-in regime. "But we don't know how far into the corporate family the opt-in would extend," he says.

Arthur D. Postal is Washington, D.C. bureau chief for Insurance Chronicle, a Thomson Financial Insurance Solutions publication.

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