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Industry Divided On Federal Chartering

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NU Online News Service, June 12, 5:12 p.m. — Washington

The stark divisions within the insurance industry over optional federal chartering erupted at a congressional hearing yesterday, with one member of Congress suggesting that a “tiered” system, which would apply OFC only to certain categories of business, might be in order.

The hearing, organized by a House Financial Services Subcommittee, revealed industry differences on two levels.

The first was between the life insurance industry and the property-casualty industry, as even the p-c opponents of OFC acknowledged that life insurers have different problems than p-c insurers and might have a better case for OFC.

The second level was within the p-c industry, with some p-c representatives saying that OFC is necessary for the future competitiveness of the industry, and others insisting that it could make insurance regulation even more burdensome and expensive.

Joseph Gasper, president of Nationwide Financial Services Inc., Columbus, Ohio, and chairman of the American Council of Life Insurers, Washington, called the current state regulatory system, a “competitive albatross.”

He noted that the system was designed when the life insurance industry was much different that it is today. Life insurers, Gasper said, no longer focus simply on traditional life insurance products.

The business today, he said, is about retirement security and long-term savings. In addition to competing against each other, life insurers must also compete against banks, mutual funds and securities firms, Gasper added.

Unfortunately, he said, these competitors have an advantage over life insurers in that they can develop products and bring them to market quickly, whereas life insurers might have to wait 18 months or more to get approval for new products from all jurisdictions.

Even then, he said, local variations may force life insurers to tweak a new product in a way that effectively transforms it from a single, national product into 30 or more different products.

“The current system is not designed to accommodate national companies, and it doesn’t,” Gasper said.

Tony Nicely, chairman of GEICO, Washington, said he understands Gasper’s concerns.

Nicely, who spoke on behalf of the National Association of Independent Insurers, Des Plaines, Ill., said that while he could not speak for NAII on the issue of establishing a life insurance-only federal charter, he personally would not oppose it.

But Nicely said he does oppose establishing OFC for p-c insurers.

While acknowledging that the state system needs reform, Nicely said that OFC would have severe consequences for p-c insurers.

“We believe that geographic and state conditions are such that customers’ needs differ from state to state,” he said.

Moreover, Nicely said, an OFC system could have a devastating effect on small and medium-sized insurers.

Under the current OFC proposals, he said, insurers would not be required to report loss data to advisory organizations such as Insurance Services Office, and indeed, might even be restrained from doing so because of federal antitrust exposure.

“Without the availability of aggregate-loss cost data, these smaller and mid-sized insurance companies would not have credible data and would be unable to compete with larger companies that can rely solely on their own data,” Nicely said.

He said he believes even the toughest states for p-c insurers, such as New Jersey, are starting to see the light on regulatory modernization and are moving towards reform.

When Rep. Richard Baker, R-La., chairman of the subcommittee, asked Gasper how long Congress should wait before acting, Gasper said more action will be needed if there is no progress on state regulatory reform.

But, for life insurers, congressional action is already 15 years too late, Gasper said.

Rep. Paul Kanjorski, D-Pa., discussed proposals to create a tiered system. A tiered system might apply only to life insurers, or perhaps to life insurers and certain large commercial risks.

Nicely replied that, if certain segments of the industry, such as life insurance, were carved out, setting up a tiered system might be possible.

“I can see Mr. Gasper’s arguments,” he said.

But the p-c business is so complex that it could take several years just to understand the implications of OFC, Nicely said.

For his part, Gasper also acknowledged that the two industries are very different. But he noted that Nationwide is also a major p-c company, and even from that perspective, Gasper said that insurers should have a choice.

If Nicely believes that state regulation is better for GEICO, he should have that choice, Gasper said. Nationwide’s institutional view, on both the life insurance side and the p-c side, is for choice, he said.

A representative of a major p-c group, the American Insurance Association, Washington, agreed.

Robert Restrepo, president of Allmerica Property & Casualty Companies, a unit of Allmerica Financial Corp., Worcester, Mass., said the level regulatory playing field created by OFC is critical to the long-term viability of the insurance industry.

“The current state regulatory system imposed significant costs on insurers and, ultimately, our customers, as well as the economy at large,” Restrepo said.

Moreover, he said, the challenges facing the p-c industry are increasingly national and international in scope.

“Terrorism, natural catastrophes, fraud and asbestos litigation are just some of the major issues the industry faces,” he said. “But the current decentralized regulatory system lacks the tools to address these issues in a comprehensive manner.”

While AIA also supports reform of state regulation, Restrepo said the process has been slow and uneven.

“For every incremental movement toward greater state regulatory efficiency or uniformity, there are many new state-specific regulatory requirements that result in cost, delay and frustration for insurers with little, if any, consumer benefit,” he said.

But Paul Mattera, senior vice president of Liberty Mutual Insurance Company, Boston, said a federal system could undermine the best characteristics of state regulation, including diversity, innovation and responsiveness.

“It is difficult to imagine a single regulatory system working in harmony with the diversity of underlying reparation laws and differing public expectations about the role of insurance regulation,” he said.

Mattera raised several questions:

  • Will an open and competitive rating law work in a state with a tradition of subsidizing urban driver?
  • How responsive will a federal regulator be to market dislocations in individual states caused by extreme weather or seismic activity?
  • Can market conduct be fairly assessed by a federal regulator unfamiliar with the underlying state law or court interpretations?

Mattera said efforts to achieve OFC are likely to lead to dual regulation. For example, he said, congressional interest in preempting state solvency regulation in favor of uniform financial requirements enforced by a federal regulator might not extend to rate and form regulation.

This separation of financial regulation from market regulation would present the worst of dual regulation, he said.

The state system needs improvement, Mattera said, but he contended that there is no reason to believe a federal system would be any better.


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