Even with state uniform licensing laws,
federal insurance regulation is a possibility
By Phil Zinkewicz
"We must strike a balance between the need for national uniformity in standards and the demands of our emerging multi-state markets, within the framework of state regulation."
-- Patricia A. Borowski, senior vice president, of government affairs, National Association, of Professional Insurance Agents
This year will very likely decide whether we have federal regulation of the insurance business, whether we will retain state regulation or whether we will have a hybrid of federal and state regulation. In 1999, when the Gramm-Leach-Bliley Act (GLBA) became law, the stage was set for a race to the finish. State regulators had until 2002 to establish some uniformity in terms of insurance regulation--uniformity of agents' licensing, company licensing and privacy rules. As things stand right now, everything is still up in the air, and those industry segments that favor a dual regulatory system might just get their wish, if only by default on the part of the states.
True, the requisite number of states have passed uniform agents' licensing laws, and theoretically the federal government will not have to set up a watchdog facility for agent licensing at any rate. But whether those laws will satisfy GLBA is still open to question. Also, according to Patricia A. Borowski, senior vice president of government affairs for the National Association of Professional Insurance Agents (PIA), independent agents will probably not be satisfied with just having the required number of states with uniform licensing laws. They prefer, she says, that all 55 jurisdictions have uniform laws.
As for company licensing, factions within the industry still would like to see insurance companies have a choice between being licensed federally or within state jurisdictions. And the privacy issue is still up for grabs. Does anyone really know where everyone stands?
Recently, the Independent Insurance Agents of America (IIAA) announced a "new policy position" advocating the use of "legislative tools" to foster uniformity and streamline the state-based system of insurance regulation. The IIAA, fearing outright federal regulation of insurance or a dual regulatory approach such as the one being put forth by Representative John LaFalce (D-N.Y.) and Senator Charles Schumer (D-N.Y.), suggested that "federal tools" should be employed to address "producer licensing, rate and form filing/speed-to-market, privacy and consumer protection, as well as priority issues such as company licensing, transaction reviews, corporate governance, market conduct examinations, audits, solvency and guaranty associations."
"Although the need for greater efficiency and uniformity in the state insurance regulatory system is clear," says IIAA President Thomas B. Ahart, "federal regulation goes too far--equivalent to throwing the baby out with the bath water." The Schumer bill, called the National Insurance Chartering and Insurance Act, would establish an optional federal insurance charter and proposes to create the Office of the National Insurance Commissioner, patterned after federal banking regulators that would fall within the Treasury Department. The powers of the national insurance commissioner would include oversight of all lines of insurance--solvency, company and agent licensing, and the entire spectrum of insurance regulation. IIAA is opposing Schumer's proposal.
"IIAA strongly believes that what is needed to improve insurance oversight is a system that builds on, rather than dismantles, the states' inherent strengths to meet the challenges of a rapidly changing insurance environment," says Ahart, president of Ahart, Frinzi & Smith, Phillipsburg, New Jersey. "Yes, there is an urgent need to respond to marketplace and economic circumstances. But we must not cast aside skill and experience that the states have as regulators of the insurance industry."
Ahart says that the IIAA's new policy "embraces a middle-ground" approach that would use federal legislative tools to reform insurance regulation while, at the same time, preserving the state-based insurance regulation infrastructure, according to Robert A. Rusbuldt, IIAA CEO.
"Ours is a pragmatic approach that--through the use of federal legislative action to overcome the structural impediments to reform at the state level--attempts to improve rather than replace the current state system of regulation to promote a more efficient and effective regulatory framework," says Rusbuldt.
"Rather than employ a one-size-fits-all regulatory approach, a variety of legislative tools could be employed on an issue-by-issue basis to take into account the realities of today's marketplace and to achieve the same level of overall reform as the imposition of a federal regulator." The "legislative tools" of which Ahart and Rusbuldt speak would include minimum standards, national reciprocity or multi-state uniformity, incentives or a carrot-and-stick approach, and preemption of certain state laws.
"The advantage of this approach is that it offers the best of all worlds. It will promote the establishment of more uniform standards and streamlined procedures from state to state, protect consumers, while enhancing marketplace responsiveness, and emphasize that the primary goals of insurance regulation can best be met by improving, not abandoning, the state-based system that has been in place for more than 150 years," says Rusbuldt. "Much of what we advocate can be found in the model laws of the National Association of Insurance Commissioners (NAIC), except that we believe Congress can play a role in implementing what the NAIC has proposed," he says. For example, under the IIAA's "federal tools" approach, a more efficient producer licensing system could be accomplished by establishing a reciprocal licensing system and adopting standards that promote greater consistency and uniformity in the licensing process, explains Rusbuldt.
Borowski of the National PIA says that her association is absolutely in tune with IIAA on this issue. In fact, PIA and IIAA have been meeting with other agent organizations, regulators and representatives of Congress to refine this approach. "It's a challenge; there's no doubt about it," she says. "But the problem with all the proposals that favor a dual regulatory approach--LaFalce, Schumer, the American Insurance Association, the American Council on Life Insurance--is that they are looking at regulation from the top down. We insurance agents are down at ground zero level looking up. Agents represent all lines of insurance and we know what the public and our clients need and we want to structure a system of uniformity that doesn't just add another layer of jurisdictional approval on top of a system where there are already 55 jurisdictions to deal with.
"We must strike a balance between the need for national uniformity in standards and the demands of our emerging multi-state markets, within the framework of state regulation," continues Borowski. "To his credit, Rep. LaFalce's bill responds to some of the criticism raised toward previous federal charter options. Unfortunately, he takes the wrong approach by using a fatally flawed concept--optional federal charter in a dual regulatory system. I defy any one insurance carrier to say it can be able to insure all of our agency members' clients for the entire life cycle of the insureds. It can't be done. It's just the nature of the business that people will have different life and health and property/casualty carriers throughout their life cycles. Everyone is concerned about the speed of the marketplace, but the issue is how do we recreate the regulatory configuration without adding more bureaucracy. We do need uniformity in our regulatory system, but our challenge is to come up with a way of doing that while still supporting public policy and the interests of our policyholders. Dual regulation just doesn't do that."
For those who have supported the idea of offering a federal charter option, Borowski has words of warning. "They had better make sure they genuinely love the idea of being federally regulated, because once they choose that route, they're stuck with it. And the federal government sometimes moves quickly, in a knee jerk response to a situation, and sometimes moves too slowly. Look at September 11. If anything demonstrated clearly the need for a federal backup of the insurance industry, September 11 did. And, still, Congress has not acted on a federal reinsurance program," she explains.
The Alliance of American Insurers (AAI) is also critical of Congress for not addressing the issue of a federal reinsurance program for terrorism. "While Rep. LaFalce and the House Financial Services Committee acted promptly on terrorism insurance, we are not done with the issue," says Ken Schloman, Alliance Washington Counsel. "The Senate has not yet voted on a measure and anything passed is likely to be significantly different, requiring further attention in the House. I believe the issue of federal chartering for insurers requires a thoughtful approach and time, which we cannot spare now. In addition to the time needed for thoughtful consideration of the entire issue, states need to be given sufficient time to implement Gramm-Leach-Bliley modernization provisions before we seriously consider adding new federal layers of bureaucracy and regulation." *