Consultants' Corner

More Regulatory Storms Brewing

Howard Mills
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 hmills@deloitte.com.

Readers are encouraged to respond to Howard using the “Add Your Comments” box below.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

The opinions posted in this blog do not necessarily reflect those of Insurance Networking News or SourceMedia

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Insurance Networking News, please use the form below to login. When completed you will immeditely be directed to post a comment.

Forgot your password?

Not Registered?

You must be registered to post a comment. Click here to register.

Blog Archive

The Other Auto Insurance Telematics Shoe Drops

Progressive's decision to charge Snapshot drivers more if their driving data indicates higher risk has started the industry down a road of data-driven adverse selection.

Core Transformation – Configuring in the Rain

The whole point of core transformation is that changes at the micro level can be used as a stimulus for changes at the macro level.

6 Ways to Develop a Productive IT-Business Dialog

Relationship management 101 for keeping IT and business on the same page.

Unified Digital Strategy: Succeeding in the Digital Revolution

A unified digital strategy recognizes that all business strategies and technologies touch the customer in some way and that a one-size-fits-all channel model is obsolete.

Agile and Continuous Delivery in a Regulated Environment

Just because a development team is doing continuous delivery or packaging releases into two-week sprints doesn’t mean that code is being moved to production.

Dealing with the COBOL Brain Drain

Documentation on aging systems often is akin to tribal knowledge, and the potential for things to go bump in the night increases as these environments face generational transition.