Risk Management

Insurers Seek Freedom from States

Insurance executives tell Congress that having a single federal regulator, or at least the option of one, could result in lower premiums than they ...
David KatzJuly 11, 2006

Property-casualty and life insurers should be able to take their pick between federal oversight and the current 50-state insurance regulatory system, top insurance executives told the Senate Banking Committee Tuesday.

Speaking in support of the National Insurance Act of 2006, a bill sponsored by committee members John Sununu (R-N.H.) and Tim Johnson (D-S.D.) witnesses spoke strongly in favor of having the choice of being regulated under a federal charter. The current system of regulating insurance companies is inefficient, overly controlling, and ill-equipped to function in today’s global economy, they said.

Risk managers working for companies that have multi-state P/C policies have previously been critical of the state regulation, contending that it can delay the issuance of insurance policies by as much as a year and spawn coverage disputes and litigation. They also feel that having that many more regulators to contend with builds added insurance-marketing costs into their policies.

At the hearing, insurers were sharply critical of the divergence of strictures from state to state. “A patchwork quilt of rules and regulations adds up to a bureaucratic nightmare that creates delays and roadblocks for companies to expand into new states, reduces the flow of capital to certain markets, increases the cost of regulatory compliance, and limits consumer choice,” said Jaxon White, chairman president and chief executive officer of Medmarc Insurance Group, which sells product-liability coverage to makers of medical devices.

For example, he said, most states accept the same affidavit from insurance company directors and officers to affirm their backgrounds. Florida, however, performs in-depth background checks and fingerprints all directors and officers, including boards and managements “all the way up the chain of ownership (even for companies that are not wholly owned subsidiaries),” White testified. “Fingerprints are routinely rejected if not perfect, causing some officers and directors to be fingerprinted multiple times.”

Having the choice to operate under the proposed federal system, which would be run by a single national insurance commissioner, would help corporate buyers while still giving people who purchase insurance from smaller carriers adequate protection, advocates of the bill argued. “A market-based optional federal charter can benefit consumers by reforming regulation and encouraging innovation, while retaining the state regulatory system for companies who wish to remain there,” said Joe Beneducci, president and chief operating officer of Fireman’s Fund Insurance Company, speaking on behalf of the American Insurance Association, a P/C industry trade group.

Not every insurance group supports the federal charter option. Speaking on behalf of the National Association of Mutual Insurance Companies, a trade group made up of mostly single-state insurers, Robert Wadsworth, chairman of Preferred Mutual Insurance Companies, pointed to the savings-and-loan debacle of the 1980s as an example of federal regulatory failure. “Federal regulation has proven no better than state regulation at addressing market failures or protecting consumer interests and, unlike state regulatory failures, federal regulatory mistakes can have disastrous economy-wide consequences,” he said.