NU Online News Service, May 9, 4:55 p.m. — New York

Wall Street securities analysts clashed with insurance regulators here Wednesday over the cost and value of state insurance regulation.

Terri Vaughan, president of the National Association of Insurance Commissioners, Kansas City, Mo., and New York Superintendent Greg Serio defended state insurance regulation at an executive life insurance conference organized by PricewaterhouseCoopers L.L.P., New York.

Consumers need extra help at the state level because insurance “is opaque to the average consumer,” Vaughan said.

Consumers file only a few thousand complaints each year about the banking industry, but they file half a million complaints each year about the insurance industry, Vaughan noted.

Regulators and former regulators at the conference criticized current efforts to give insurers the option of sticking with state regulation or going with a new, federal regulator that would be similar to the Office of the Comptroller of the Currency.

But 80% of the conference attendees who participated in an electronic survey said that, given the option, they would opt out of state regulation in favor of a federal charter.

Joan Zief, managing director of Goldman Sachs & Company, New York, criticized the economics of the current insurance regulatory system and suggested that consumers would be better off if regulators left more to market forces.

“State regulation is detrimental from a cost standpoint,” Zief said.

Why, she asked, is there such a willingness to pay for regulatory protection when “the free market does a great job?”

Zief also recommended letting the market respond to “crummy” policies.

“Aren’t state guarantee funds sufficient?” Zief demanded.

Some insurers may continue to support the current system because “it provides protection,” Zief said. “Management doesn’t need to produce high returns as long as there is an umbrella of state regulation.”

Zief added that, given the competition from other sectors of the financial services industry, “one of my biggest fears is that it [the insurance industry] will slowly find itself becoming less and less relevant.”

There should be a “framework of ethics” but not an “overlay” of regulation when there are other safeguards, such as litigation, Zief said.

She said the current regulatory system is actually unfriendly to consumers, because it increases the cost of premiums.

Another analyst, Michael Weinstein, a senior vice president in the New York office of Putnam Investments, noted that state regulation is a profit center for many states.

At least one attendee in the audience supported the need for state regulation, arguing that consumers would not read insurance forms.

But an analyst, George Cochran, co-founder and managing director of Cochran, Caronia & Company, Chicago, suggested eliminating the guarantee funds would help consumers, by forcing consumers to pay more attention to details such as insurance ratings.

“The consumer would be a lot better off if we got rid of protective measures,” Cochran said. “All they do is let the weak companies survive longer than they should.”

Speakers at the conference also talked about the Coordinated Advertising Rate and Form Review Authority, a pilot NAIC initiative designed to create a single, national system for reviewing new insurance products.

Eighty-eight percent of attendees said that their companies or companies that they represented had not used CARFRA. However, 88% said the program should be expanded.

Vaughan reported that a third draft of an interstate CARFRA compact is almost complete and could be adopted by the NAIC as early as September.