Financial Times (London, England)
It has taken two dozen congressional hearings since the start of the decade, but Washington may finally be starting to take action on an issue that has long troubled insurance companies: how they are regulated in the US.
Since 1945, insurance has been regulated along state lines. That makes it an exception in financial services, which is mostly federally regulated.
Domestic insurance companies have long complained that new products have to go through state-specific approval and licensing processes. They also balk at multiple enforcement requirements.
They have been pushing for the creation of an “optional federal charter”. This would provide a single federal regulator that companies could pick as an alternative to state oversight.
Last week, the House of Representatives sub-committee on capital markets, chaired by Pennsylvania Democrat Paul Kanjorski, held the first of a new round of hearings into insurance regulatory reform.
Opponents argue that offering insurers a choice would allow them to pick the most lenient regimes. But the industry has a new argument, coupled with political backing, that it hopes may win the dispute this time.
It argues that there is more at stake than enabling insurance companies to operate more efficiently. Unless they are freed from the constraints of state regulation, insurance companies say, US capital market competitiveness will suffer.
“The current state-based regulatory system has hurt the US insurance industry’s ability to compete globally,” says Melissa Bean, an Illinois congresswoman who has co-sponsored one of two bills in recent months in support of the charter.
Ms. Bean argues that the state system hampers companies’ ability quickly to roll out products on a national scale because they have to be tailored to each state’s regulatory environment. That adds to US companies’ costs as they compete with foreign insurers.
Non-US re-insurers, meanwhile, balk at the state-based system because it requires that they post collateral in each state they want to do business in, regardless of their overall business’s credit quality.
Albert Counselman, chief executive of Baltimore insurance broker Riggs, Counselman, Michaels and Downes, says the state system made sense when risks and the impact of losses was concentrated in small areas.
But globalization has changed that. “By artificially making each state an individual marketplace, it constrains the ability of carriers to compete and thereby reduces availability and affordability,” he says.
The American Council of Life Insurers adds that the system “imposes unnecessary costs” on consumers such as retirees, who are increasingly mobile and face costs as they move across state lines.
However, some consumer groups say a federal charter could threaten state consumer protection laws.
Carmen Balber, spokeswoman for the non-profit Foundation for Taxpayer and Consumer Rights, also notes that Mr Kanjorski’s renewed interest in regulatory reform comes as insurance companies are among his top corporate donors.
Other defenders of the status quo say states have been reforming and there is no need for a federal solution.
Walter Bell, president of The National Association of Insurance Commissioners, a voluntary organization of the chief regulatory officials in 50 states, argues that the system is “equal if not superior to” systems abroad.
Mr. Bell highlights efforts to streamline the system, including establishing an “interstate compact” to develop uniform national product standards. In June, the NAIC also launched a centralized system that insurers can use to register new products, bypassing state-by-state bureaucracy.
“Even well-intentioned and seemingly benign federal legislation can have a substantial adverse impact on existing state protections for insurance consumers. Modernize, don’t federalize,” he says.
