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Public Policy Analysis & Opinion The Tao of incrementalism Duct tape and string used to craft changes to insurance regulation By Kevin P. Hennosy After the Clinton Administration admitted defeat in the battle for health care reform a decade ago, a new “conventional wisdom” took hold of the policy wonks who define what “conventional wisdom” is in Washington. The think tanks and political consultants established a new mantra: “incremental change.” The Tao of Incrementalism deemed that the health care system would not be reformed in broad strokes of policymaking; rather, policymakers would nudge, clip and duct tape the existing system. With this clear piece of guidance in mind, not much has happened in the health care reform arena in the past decade. It appears that the same thing has happened to the reengineering of insurance regulation. The proponents of wide-ranging reengineering of insurance regulation have lost the advantage they once commanded. The proponents based their campaign on a deregulation plan carried by an unchallenged Republican leadership that dominated Congress from 2001-2004. When New York Attorney General Eliot Spitzer held a news conference in October 2004 to announce enforcement actions against anti-competitive behavior in commercial insurance markets, deregulation became a tough sell. The lobbying and fundraising scandals that focused on former Representative Tom Delay and his lieutenants weakened the Republican framework in Congress. While both news stories have long ago fallen from the front pages, the damage was done. So now, those of us who live boring enough lives to follow the chit-chat sometimes referred to as “policy circles,” have heard a familiar refrain. Now we hear calls for incremental change to insurance regulation. Nonadmitted One of the primary areas targeted for “incremental change” is the so-called nonadmitted and reinsurance markets. In June of this year, two members of Congress, Representatives Ginny Brown-Waite (R-Fla.), and Dennis Moore (D-Kan.), introduced The Non-admitted and Reinsurance Reform Act of 2006 (H.R. 5637). The legislation is designed to address concerns that advocates for nonadmitted insurers and reinsurers have expressed for many years. The bill seeks to clear away local laws governing commercial insurance and reinsurance. In most cases this means deregulation of business practices or awarding extraterritorial jurisdiction to domicilary regulators. In addition, it seeks to establish a revenue neutral framework for surplus lines taxation, to calm the fears of state officials. The legislation addresses tax concerns in Title I. Under this provision, insurers will owe premium tax only to the home state of the insured entity. States may enter into compacts or other agreements to distribute the proceeds to other states, but the broker or insurer will need to make only a single payment to the insured’s home jurisdiction. States may still require brokers or insurers to file reports of premium tax liability, so this provision might still invite controversy. A second provision of H.R. 5637 establishes the exclusive regulatory authority of the insurer’s state of domicile. This authority extends to broker licensing. Only the broker’s home state may require a license to oversee activities related to the sale, solicitation or negotiation of nonadmitted insurance. The National Association of Insurance Commissioners (NAIC) and its affiliate, the National Insurance Producer Registry (NIPR), stands to make money on a third provision of Title I of the bill. This provision requires that states use the NAIC system for collecting broker licensing fees, or some similar system that does not exist, within two years of the passage of the act. The NAIC/NIPR organization already receives millions in fee revenue from agent and broker licensing. The NAIC receives a grant of quasi-regulatory authority as well. A fourth provision of Title I grants the states two years to adopt statutory frameworks consistent with Section 5C(2)(a) of the NAIC’s Non-admitted Insurance Model Act. In addition, state officials may not deny the ability of any broker to place business with a nonadmitted insurer that receives a listing on the NAIC’s Quarterly Listing of Alien Insurers, a notoriously simple act of compliance. The bill will also eliminate state laws that require a diligent search for admitted coverage in certain circumstances. According to an analysis of the bill published by the law firm of LeBoeuf Lamb, the bill: waives State “diligent search” requirements with respect to “exempt commercial purchasers” if (1) the surplus lines broker has explained to the purchaser that such insurance may or may not be available in the admitted market that may provide greater protection and (2) the purchaser has requested in writing that the surplus lines broker procure the coverage from the nonadmitted market. For this purpose, “exempt commercial purchaser” means a person or entity that employs or retains a qualified risk manager and meets at least two of the following criteria: (1) net worth in excess of $20 million; (2) greater than $50 million in annual revenue; (3) more than 500 full-time employees or part of an affiliate group with more than 1,000 full-time employees; (4) more than $100,000 in annual insurance premiums; (5) nonprofit or public entity with $30 million budget; and (6) municipality with a population of more than 50,000. Reinsurance Title II of the bill deals with reinsurance issues. Once again, the approach taken tends to concentrate authority in the hands of a few states, by restricting regulatory authority to the reinsurer’s state of domicile and the NAIC. The first section of Title II establishes that if a state of domicile is accredited by the NAIC’s Financial Regulation Standards and Accreditation Program, then that jurisdiction will serve as the sole regulator for a reinsurer. (It is interesting to note that New York State has never earned accreditation.) This regulatory activity includes credit for reinsurance- and solvency-related oversight. In addition, the bill will restrict states from requiring the disclosure of financial information that is not required by the state of domicile. It also prohibits the imposition of standard definitions of terms by states that differ from those contained in the contract. The bill also makes special provision for arbitration, in cases where there is a question whether the dispute is consistent with the provisions of the Federal Arbitration Act. This includes the removal of jurisdictional choice—or choice of law—decisions. Deregulation H.R. 5637 is basically a deregulation bill, but one that Hill leaders and lobbyists believe will not attract too much opposition because it ignores personal lines. Congress remains fearful of ever engaging the general angst of home owners and drivers—they prefer leaving that burden to state officials. To understand the bill, one must once again look at it in the context of the larger political battle over state vs. federal insurance regulation. The leadership of the life insurance sector remains staunchly committed to Optional Federal Charter legislation, but they need at least some property/casualty supporters to move the bill through Congress. Personal lines insurers would rather keep insurance regulation at the state level because they find it easier to politically dominate state capitals. The political interests of commercial lines insurers are closer to those of the life insurance sector, while they share business ties with the property/casualty sector. H.R. 5637 is an attempt by the supporters of the state-based system to keep commercial insurers and brokers in their ranks. In addition, some advocates for personal lines insurers hope that if commercial insurance is successfully deregulated, then it may be easier to argue for the deregulation of their own sector. When the bill was introduced, it received strong support from the American Association of Managing General Agents (AAMGA). Bernd G. Heinze, Esq., executive director of the AAMGA, testified: “This Act is an important step in sustaining the nonadmitted insurance market’s effective, efficient and economical services to the public and private sector, while streamlining the processing, licensing and compliance components of insurance transactions. Most importantly, it will develop and create a uniform and consistent foundation on which essential state-based regulation can continue without restraining the creativity, investment and security provided by the surplus lines market.” Scarce opposition If opposition to the bill does arise, it might come from groups that represent investors. The lack of regulatory oversight might make investor groups nervous, if the bill ever advances far enough to end up on political radar screens outside the insurance sector. At present the bill appears to be designed to draw discussion and contributions from interested parties. It is highly unlikely that the bill would move forward in the short election year session. Congress will not be in session for most of the fall, so any serious consideration of the bill is not likely until the new Congress takes office in 2007. * |
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