Is ‘Speed To Market’ Impossible Without Regulatory Reform?

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News item: Recently, at the urging of state and federal regulators, a Congressional panel voted to ease regulations on banks, thrifts, credit unions and other federally insured institutions.

In other news, the National Association of Insurance Commissioners has been working on a system to provide insurers with a mechanism (“Speed to Market”) to bring new products to market more quickly in order to compete with banks, thrifts, credit unions and other federally insured institutions in the global marketplace.

Speed to Market is a great concept that is doomed to fail as long as insurance companies are burdened with layers upon layers of outdated and duplicative regulations and laws. In other words, there is no speed to a market in the absence of regulatory relief.

The first step is to avoid the need to dig out from under all of those layers in the first place. This can be done by avoiding the creation of even more additional layers. The NAIC has finally begun to coordinate new model laws and regulations with the hundreds of existing models. While some work has been done that deserves special recognition in this area, the problem remains systemic.

However, what is the larger answer to this problem? One answer may be provided by a system utilized by the National Conference of Insurance Legislators (NCOIL): Sunsetting.

The NCOIL system provides for models to automatically sunset every two years. This process forces the NCOIL committees of original reference to review all models and determine whether they are viable and readopted, amended or be allowed to sunset (expire). The system mandates an ongoing, comprehensive review of all existing laws.

Given the astounding number of committees, task forces, working groups, subcommittees, etc. at the NAIC and the hundreds of models currently in place, a rigid system may not be workable if it is based on a two-year cycle. However, the concept must not be dismissed as unworkable simply due to the size of the task. The issue should be discussed openly.

Is there really a problem? You may ask why we should care if the NAIC creates new models to replace others without actually replacing the original models. The impact on all insurance companies and insurance departments is clear: insurers must comply with the new and old models, irrespective of whether the old models will stay on the books or be repealed, until the department actually repeals the old model, if ever.

This system drives up the already high and ever spiraling cost of compliance, and, thus, the ultimate cost of insurance to the consumer. From the insurance department standpoint, the regulators must implement all old and new models, a costly proposition in a time of shrinking state budgets.

A case in point is the effort to create a new Life Insurance and Annuities Suitability Model Regulation and Act. There are at least four other models, which have the same–or strikingly similar–Purpose Statements as enunciated by the draft model regulation. The drafting process for the Model Act and Regulation continues without any real consideration of the duplication of regulation or the failure to enforce the existing laws and regulations. This case calls for review and sunsetting.

Similarly, the work of the NAIC Life and Health Actuarial Task Force includes so many tests of insurers ability to pay claims and hold proper reserves that it will soon be impossible for the smallest of insurers to compete due to the costs of complying with the actuarial mandates alone.

Many of these tests have been created without the repeal of any previously adopted tests. An illustration of this problem is the revised Actuarial Opinion and Memorandum Regulation, which will require even the smallest insurers to perform a Section 8 Opinion (Gross Premium Valuation). The use of review and sunsetting in connection with the actuarial requirements alone may allow some smaller insurers to compete and remain independent entities.

Why does this matter if these are only “models?” The models that are adopted by the NAIC come with an air of approval from the ultimate large national organization, which, incidentally, has the boss (Commissioner, Superintendent, Director, or other Chief Insurance Regulator) as a voting member. Therefore, if the boss wants it to be adopted

It may be argued that the NCOIL system is unworkable due to the sheer number of models to be reviewed. If this is the case, why not use a hybrid system of review and sunsetting? If a new model came to the states, it could come with a repeal or sunset of the old model attached. The hearings on these proposals could be held together. Compliance with only one model would be required, thus saving time, and money for all parties involved, especially the consumer.

Yes, it is true that each state insurance department is capable of performing a comprehensive review of all regulations on the books to determine whether models are outdated, duplicative or conflicting. In addition, the insurance regulators may work with their legislative counterparts to perform a similar review of all insurance laws. In the past 12 years, however, no more than a handful of states have undertaken this exercise.

Moreover, a comprehensive and coordinated review of all insurance laws and regulations is even more rare. Why? Unlike the NAIC, which has a very large staff and a nearly unlimited budget, most state regulators and legislators are constrained by budget and personnel limitations and cannot spare the time and bodies to perform such a comprehensive review.

What is really at stake if we fail in fixing this layered system of state regulation? For the regulators, it could be their very ability to continue to regulate the business of insurance. For the bigger players, it is competition in the global insurance market. For the smaller insurers, it is nothing short of survival.

At the current rate of regulatory proliferation, the smaller companies will continue to be forced from the marketplace as independent entities, to the detriment of the consumer, the insurers employees, and the towns in which the companies are located.

The failure of any insurer is the death of someones dream. The failure of a smaller company due to its inability to defend its niche is a form of economic Darwinism that most people can accept. However, forcing smaller companies from the marketplace due to the cost of over-regulation is not acceptable.

Until the constant layering of additional regulatory burdens is removed from insurers, “Speed to Market” will only be a partial remedy for a system in need of a real cure and only a distant dream for the smaller insurers.

was until recently executive director of the National Alliance of Life Companies. He is now the executive director of the Life Insurers Council, in Atlanta, Ga. He can be reached at cipinko@loma.org. This article represents his personal opinions.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 10, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.