Risk Management

How Regulation Drives up Insurance Costs

Why should companies care who regulates their insurers? Because, say corporate risk managers, state-by-state regulation causes paperwork to soar, c...
David KatzJuly 13, 2006

Assistant treasurers and corporate risk managers are linking up with the insurance industry to try to get Congress to strip the current insurance regulatory system of red tape. The effort, if it succeeds, could offer companies the chance to buy coverage from a federally regulated insurer rather than one ruled by as many as 50 state commissioners.

Two bills currently before high-profile Congressional committees are seeking to “modernize” the insurance regulatory bureaucracy by making it more efficient and bringing it up to snuff with an increasingly agile global industry. One, now being contemplated by the Senate Banking Committee, would provide insurers with the choice of being federally or state chartered. The other, currently being mulled by the House Financial Services Committee, would bring the often divergent insurance commissions into greater regulatory harmony.

Still, the question remains: Why should companies care how their insurers are regulated?

The answer is that the current system gums up the issuance of insurance policies, boosts the risk of lawsuits, ensnarls tax collection, and adds costs, according to corporate risk managers. Shouldering a big part of the burden are companies covered by multi-state property/casualty policies, says Janice Ochenkowski, senior vice president and director of global risk management at Jones Lang LaSalle, a Chicago-based real estate and financial services company.

Unlike companies that operate in a single state, such organizations must wait while their brokers haggle out the details of their policies with a bevy of regulators with differing agendas. Ochenkowski recalls seeing insurance brokers haul a stack of papers two-and-a-half feet high into a Congressional hearing. The stack consisted of the regulatory documents one company had to file in connection with a single policy covering its operation in 37 states.

Such back-and-forth doubtless has something to do with the extensive administrative foot-dragging that insurance companies are famous for. Risk managers have long complained that insurers routinely take 30 to 60 days and sometimes as much as year after an insured’s purchase or renewal date to issue the policies.

In the interim, insurers provide their clients with summaries of their coverage. Nevertheless, consulting the actual insurance policy “is the way in which we know what in fact we have bought,” says Ochenkowski. “Having a summary is useful, [but] when there is an issue to be examined we need the actual language.” Not having it on hand can open the door to coverage disputes and lawsuits, she adds. That’s a point that was dramatically illustrated not long ago by litigation over insurance coverage of the World Trade Center towers after they were destroyed by terrorist attacks on September 11, 2001.

Working with one set of regulations, as the Senate bill would allow some insurance companies to do, could speed up policy issuance, says Joe Beneducci, president and chief operating officer of Fireman’s Fund Insurance Company. While it hasn’t been proven that such compliance streamlining inevitable leads to timelier printing of policies, he adds, “I don’t see how it could hurt.”

Testifying on behalf of the Risk and Insurance Management Society (RIMS) before a House Financial Services committee hearing last month, Ochenkowski cited another point in favor of regulatory harmonization: allaying the confusion and cost of the current premium tax allocation system. Under the current regime for certain lines of insurance, confusion reigns because states have a panoply of tax remittance rules.

In some states, brokers can calculate the premium taxes owed by the insurance buyer for those lines and send the payments along to the state as part of their transaction services, the risk manager testified. “In other states, the broker may calculate the tax due, but I must send it; while in a third type of state I must calculate and send taxes,” she said.

At Jones Lang LaSalle, which operates in over thirty states and arranges the insurance for the properties it manages, the system breeds a tortuous payment chain. Ochenkowski’s department collects premiums from each property and sends hundreds of checks to the company’s broker, since the Employee Retirement Income Security Act doesn’t allow licensed advisers like Jones Lang to commingle funds from clients.

The checks each include a tax payment and a payment for the insurance. In states where the broker can’t pay taxes on behalf of the client, it divvies up the tax and insurance payment, sends a check to the real estate company for the taxes, and advises the firm on how much tax to send to each state. The firm then issues a third series of checks to pay the taxes of the various states. “We’re taking our money and sending it all around before it ends up in the state,” Ochenkowski says, noting that process adds internal administrative costs and insurance brokerage expenses.

Under the House bill, which RIMS supports, corporate taxpayers would only have to send payments to their headquarters state. That state would then distribute the payments among all the states where taxes are owed.

Insurers also make the case that buyers are losing the benefit of a large number of innovative products because some state commissioners balk at them. Fireman’s Fund, for example, has been trying to introduce a product that includes the client’s use of a data backup facility as well as insurance coverage, says Beneducci, who was wary of providing more details and thus revealing a trade secret.

The insurance company has had discussions with insurance commissioners on the product, but it’s been tough going. If only one or two states give the product the go-ahead, the company won’t be able to produce it because it would then lack economy of scale, according to the insurance executive. The current regulatory regime “flies in the face of creating a new product,” Beneducci complains. “The system favors a commoditized approach.”