Washington, D.C. - In the first of in a series of government meetings on modernizing insurance regulation, the focus on whether insurers should be given the option of being federally regulated took center stage this week at a U.S. Senate Committee On Banking, Housing, and Urban Affairs hearing on "Insurance Regulation Reform."
While several committee members and insurance organization constituents weighed in on the subject, no one doubted that a review is needed.
"The status quo is unacceptable," Sen. Tim Johnson (D-SD) said at the hearing, adding that the current system is "redundant, inefficient, burdensome, complicated, duplicative, costly, dysfunctional, anachronistic, balkanized, contradictory, deficient, and counterproductive."
Such statements opened the topic to debate.
Joseph Beneducci, president and chief operating officer of Fireman's Fund Insurance Co., Novato, Calif., called for an optional federal charter, stating the current industry structure inhibits innovation and actually perpetuates commoditization of insurance products to the detriment of consumers. Beneducci represented the American Insurance Association (AIA), Washington D.C., and spoke to the committee about the urgency of overhauling the insurance regulatory landscape to empower consumers by having a more innovative insurance marketplace that meets their ever-expanding needs for product and pricing options.
"Government regulation should focus on those areas where government oversight protects consumers in the marketplace, such as financial integrity and market conduct, rather than on those activities that distort the market, such as government price controls and hostility to innovation," Beneducci said. Regulation should also be "uniform, consistent and efficient."
A vehicle for accomplishing the necessary federal regulatory changes was introduced by Sens. John Sununu (R-NH) and Johnson, said Beneducci. "We strongly support the bi-partisan National Insurance Act of 2006, S. 2509. This legislation provides insurers the option of being nationally regulated, while preserving the current state regulatory system." It also would preserve critical elements of the current state system, such as state premium taxes, the state guaranty fund system, and certain local prerogatives with respect to workers' compensation and motor vehicle insurance coverage requirements, says the AIA.
Insurance regulatory reform has been the topic of discussion by the National Association of Insurance Commissioners (NAIC) for more than a century, noted Beneducci, and such reform "is critical to providing a solid foundation for underwriting the risks necessary to advance a strong U.S. economy."
Although the NAIC has been and continues to be sincere in their efforts, "no one has come close to delivering a modern system that empowers consumers and focuses on real consumer protections," Beneducci stated.
"The practical difficulties of trying to comply with 51 sets of regulations, ... it's a nightmarish way to have to do business," said Johnny Johns, the chief executive of Birmingham-based Protective Life Corp. who testified on behalf of the American Council of Life Insurers, Washington, D.C. The group has endorsed legislation sponsored by Sens. Johnson and Sununu to create an independent Office of National Insurance within the U.S. Treasury Department.
But Robert Wadsworth, chairman and CEO of Preferred Mutual Insurance Co., New Berlin, N.Y., said he is convinced that insurance regulatory reform at the state level is the best and safest course for consumers and insurers alike.
"Unlike banking and other financial service industries, the property/casualty insurance industry is primarily a state-based business," said Wadsworth, chairman of The National Association of Mutual Insurance Companies (NAMIC), Indianapolis. "While some of our products cover interstate activities, most of our products that directly affect your constituents - auto, farm, and homeowners insurance - are single state products. NAMIC believes that state-level regulators have the best understanding of our products and the people for whom they provide protection ... and reform at the state level is more likely to produce better results than federal involvement in insurance regulation."
The Gramm-Leach-Bliley Act of 1999 substantially deregulated the financial services industry, noted Sen. Johnson. Additionally, insurance regulatory reform has not been on the docket in Washington since 2004, and "very little progress has been made in this area on either the state or the federal level since that time," he said.
Although committee members were unable to reach consensus on a move to federal regulation, most agreed on the need for further, thoughtful discussion.
"We need to move with extreme caution when talking about reversing the entire history of insurance regulation in this country," said Sen. Jim Bunning, (R-Ky.)
"There should be a high hurdle for expanding the federal bureaucracy and imposing new regulations," Sen. Bunning said.
Once involved in a new area of regulations, Congress has a tendency "to create monsters of bureaucracies that only grow and never go away," he said.
Sources: American Insurance Association, National Association of Mutual Insurance Companies, Birmingham News, National Association of Insurance Commissioners.
