More Regulatory Storms Brewing
Insurance Experts' Forum, February 2, 2012
It may be overkill to start drawing up plans for an ark when the first raindrops fall, but it might make sense to know exactly where your umbrella is.
Insurers already buffeted by the swirling storms of regulatory reform, accounting convergence, slow to nonexistent growth in Europe and the United States, and a debt crisis that keeps resurfacing like a zombie in a bad horror movie may be tempted to hunker down and ignore distant signs of more concerns to come, but that may not be the wisest course to take.
I thought of this as I read the newest proposals from the federal Department of Housing and Urban Development (HUD) – not normally the place for regulations that affect insurers. But HUD is proposing a rule that would “prohibit housing practices with a discriminatory effect, even where there has been no intent to discriminate.”
That means, according to a comment letter sent to HUD by the National Association of Mutual Insurance Companies (NAMIC), that: “If adopted, the rule would effectively force insurers to abandon the use of risk-based underwriting factors if they have a “disparate impact” on particular racial and ethnic groups. The disparate impact, or discriminatory effects, theory of discrimination holds that a business practice is unfairly discriminatory if the percentage of a group’s members that is adversely affected by the practice is higher than the percentage of another group’s members that is adversely affected – notwithstanding that all individuals were treated equally without regard to racial group membership, and despite the fact that there was no intent to discriminate.”
The NAMIC letter goes on to say that the rule could cause insurers to run afoul of state insurance regulators who require decisions be made only on the basis of risk by having to take race into account.
But without addressing the merits of the proposed rule, consider one possible consequence. Among the charges given to the Federal Insurance Office (FIO) is that it monitor all aspects of the industry, including the availability of affordable insurance to traditionally underserved, low to moderate income, and minority persons and communities. It could be that after all my years in government, I see connections where none may exist, and the FIO’s track record so far has been respectful of both state regulators and the industry, but my history tells me that where power exists, eventually it may be used.
Consider for a minute an election year a few years in the future when one candidate or another decides to attack insurers for discriminatory actions. How could any regulator or overseer not respond?
Couldn’t happen, you think? Insurers would be protected by the fact they were just following state law and regulations, you say. Let’s move from P&C over to the life industry and see how that works. Some life companies have argued recently that their payment practices with regard to life insurance claims are fully compliant with both law and the insurance contracts, and their use or non-use of the Social Security Death Master File to actively seek out deceased insured was certainly not a requirement and was never common practice.
How’s that working, do you think? Companies have had to increase reserves, regulators all over are looking into the issue, some law enforcement officials like New York’s Attorney General are investigating, and lawsuits are being filed. How long will it be before some enterprising attorney or politician wonders if perhaps low income or minority beneficiaries may have been the most likely not to be aware of policies and thus may have been disproportionately impacted by what seems to have been a standard practice?
This may well turn out to be a tempest in a teapot, with some reputational damage perhaps the most lasting impact, but why take a chance. In this regulatory and political environment, insurers and producers need to examine their existing practices with a fresh eye, looking for the risks that may emerge.
“Be prepared” is not just a motto for Boy Scouts and Noah any more.
Howard Mills is a director and chief advisor of the Insurance Industry Group of Deloitte LLP and can be reached at firstname.lastname@example.org.
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