Regulatory Issues Impel Advance on the Hill
Insurance Networking News, January 1, 2009
Even if one discounts the calamitous months that ended the year preceding it, 2009 was already shaping up to be an eventful year for insurance companies. Long-standing regulatory disputes regarding issues such as agent licensing, and the establishment of an optional federal charter were already percolating. So it's not much of a stretch to assume that given the subsequent meltdown of the financial services market - and the proclivity of politicians to pass sweeping legislation in the wake of such events - that such issues will likely come to a full boil in 2009.
While insurance regulation has traditionally focused solely on solvency - the concern was that companies had the financial wherewithal to make good on claims - new regulations will likely take a more holistic, enterprisewide approach. In light of recent events, in addition to protecting consumers from misconduct by insurers, insurance regulators will now be charged with protecting insurers from themselves.
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"I think we are absolutely going to see increased regulatory activity across the board," says Daniel Wright, VP and chief compliance officer for Jackson National Life Distributors, a subsidiary of Lansing, Mich.-based Jackson National Life. "The nature of the financial markets and the amount of turmoil that's existing there is going to necessitate some activity. Where exactly that's going to fall is going to be the challenge."
REACTION AND OVERREACTION
Obviously, this impetus for action also carries the peril that the resulting legislation, conceived in haste, will have unintended consequences. This is the charge often leveled at the Sarbanes Oxley Act, which was passed in the wake of the Enron and World Com bankruptcies.
"[Congress] either does nothing or they overreact," says Jimi Grande, VP, federal affairs, for National Association of Mutual Insurance Cos. (NAMIC), adding that it's possible to streamline and improve the current insurance regulatory system without launching a complete overhaul.
Until the new Congress convenes, the legislative landscape is still subject to conjecture, as bills introduced in the previous Congress are reintroduced. What hasn't changed is the central cast of characters. House Financial Services Chairman Rep. Barney Frank (D.-Mass.) retains his seat, as does Rep. Paul Kanjorski (D.-Pa.) who introduced the Insurance Information Act (H.R. 5840), which calls to establish an Office of Insurance Information (OII) within the U.S. Treasury Department.
In the upper chamber, Sen. Chris Dodd (D.-Conn.) decided to retain the gavel of the Senate Banking Committee, instead of opting to replace Vice-president elect Joe Biden as chairman of Senate Foreign Relations Committee. The decision by Dodd, whose home state hosts many insurance entities, to stay put was welcomed. "Senator Dodd has a strong working knowledge of insurance and the insurance marketplace," says Marc Racicot, president of the American Insurance Association. "As Chair, we are confident he will continue to legislate in a way that provides the type of effective regulation that protects consumers, and ensures the safety and soundness of the insurance industry."
KNOWNS AND UNKNOWNS
While the legislative intentions of Dodd, Frank and Kanjorski are well known, the priorities of the incoming administration are less defined. As a candidate, President-elect Obama proposed requiring insurance companies to cover pre-existing conditions, establishing a national health insurance exchange, and lowering the cost of malpractice insurance.
However, the new administration has yet to articulate a grand plan for regulation of the insurance industry. This was not the case with the Bush Administration, which reignited the debate over an optional federal charter (OFC) in March when Treasury Secretary Henry Paulson released his sweeping blueprint for regulation of the financial services industry, which made an explicit appeal for an OFC.
Indeed, of all the legislative battles involving insurance, the efforts to establish an OFC is one of the longest running and most contentious. The anti-OFC camp includes associations such as NAMIC, the National Association of Insurance Commissioners (NAIC), the National Conference of Insurance Legislators (NCOIL) and the Independent Insurance Agents & Brokers of America, while OFC proponents include the American Insurance Association, American Council of Life Insurers and the Council of Insurance Agents & Brokers.
A greatly simplified analysis would hold that the issue splits the industry along the axis of size, with mostly large insurers expressing support for an OFC, and small and mid-sized carriers largely in opposition. Smaller carriers contend an OFC would put them at competitive disadvantage.
"It's not going to be an optional federal charter - it's going to be a mandatory federal charter," Grande says. "A lot of companies can handle more regulation. Well, guess what? A lot of them won't be able to."
Conversely, large insurers say it is they who are currently at a disadvantage in an increasingly global insurance marketplace, burdened by a redundant, federated system. "Our industry would operate much more efficiently without the constant changes to products, prices and practices foisted upon us by 50 separate state legislatures and 50 regulators," says John Degnan, vice chairman and COO of Warren, N.J.-based Chubb Corp.
OLD FAULT LINES
In addition to matters of size, the OFC also exposes a fault line over regulatory philosophy, pitting proponents of federal regulation against those who favor state-based insurance oversight. OFC backers, including Paulson, contend the global nature of insurance requires federal oversight and that the current patchwork of regulation and regulators is outdated and in need of modernization. OFC backers contend the law is a necessity to achieve uniformity and harmonization.
Opponents of a federal regulator say proponents of federal regulation are using the financial crisis for cover to advance an OFC after initiatives withered in previous legislative sessions. "We have to be very vigilant - more so than ever before - because there will be those that will use this financial crisis as an excuse for federal regulation of insurance," says New York State Senator James Seward, the incoming president of NCOIL.
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