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Regulation and Compliance > Federal Regulation

Federal Regulation: A Specious Goal

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Recognizing that unity is all-important in legislative matters, the American Council of Life Insurers and the National Association of Insurance and Financial Advisors are again working hard to achieve a unified voice on Capitol Hill. This is a laudable goal and they are to be commended for it.

However, there will always be issues where company interests differ from those of the field, and I believe it is important that each side understands those differences and respects the sensitivities of the other.

Because the debate regarding federal vs. state regulation has resurfaced, I am re-running a column on this subject that I did some years ago with the hope that all parties will fully understand the concerns of the field.

An orderly marketplace will always be one of the highest priorities of the field force. One of the reasons I entered the insurance business was to escape the chaos that developed in my former business when the federal government overturned the “fair trade laws,” deeming them to be anti-competitive. The loss of anti-rebate laws and replacement regulation would most assuredly bring chaos to our marketplace.

With great regularity the subject arises as to whether or not the insurance industry should be regulated by federal agencies rather than state by state. Arguments pro and con tend to be the same, only the players are different. Given the long history of this issue, it seems incredible to me that so much energy should be put forth in these periodic reexaminations.

Proponents of federal regulation usually point to the potential savings in the administrative costs associated with policy filing and licensing as their primary justification for such a change. Added to this is the frustration often felt because of the slowness in getting approval in some states. Overlooked is the fact that a federal agency may act no swifter and this would impair operation in all states rather than just in the few tardy states.

Recently, proponents have added a new weapon to their arsenal of reasons to change. They argue that we need a federal champion to counter the aggressive action of bank regulators who seem to expand the activities of banks in the marketplace. I suspect that if they looked beyond bank regulation, they could find a good many industries that do not look upon their federal regulator as their “good buddy.”

As seductive as their arguments may be on the surface, I believe that further inquiry will reveal that on balance, we are still better off with state regulation. Certainly, this was the case the last time a move in this direction was attempted. About 10 years ago, there was a proposal put forth to repeal the anti-trust provisions of the McCarran-Ferguson Act, perhaps as a first step to repeal of the entire act. While individual companies may have operated as if the anti-trust exemptions did not exist, such was not the case with the industry as a whole. Careful examination revealed that such a repeal could cause the loss of certain practices the industry has used to the benefit of all parties, particularly the public.

Perhaps more importantly, the question should be: What would federal regulation look like? How would it likely differ from current state regulation? For starters, it is not likely such regulation would contain either replacement regulations or anti-rebate statutes. Such provisions, which are in some measure protected by our anti-trust exemption, would almost certainly be deemed anti-competitive, bringing us further into the jungle.

In fact, the entire area of market conduct could change in a way that might not be in the public interest.

What would be the level of scrutiny provided by the feds? Would they adopt the level of the New York code, which already excludes hundreds of companies because of its extra-territoriality provisions? Or would they adopt a level that mirrors that of a state with the lowest degree of control over its insurers?

My guess is that it would be neither and instead would be a compromise position between these 2 poles. Thus, the bar of protection of our customers would be lowered. I say this because as it now stands, companies tend to operate nationally by rising to the highest level of regulation in all of the states in which they do business. It is not practical for a company to operate one way in a state with tough regulation, then lower their standards in other states where regulations may be less stringent.

What we have created through state regulation is a network of differing laws that is stronger than a single federal code weakened by necessary compromise.

I would also be curious as to what the role of the Federal Trade Commission in a federal scheme might be. We have had a sample of its approach to our business and we did not like it one bit. As one who helped to remove the FTC from our business, I would be skeptical of any move that would negate our previous work with Congress and open that door again.

Additionally, can we be sure that the states will end their regulation just because the feds enter the picture? If not, then we will be saddled with dual regulation. The states are not likely to relinquish the revenue they presently extract from us and given the fact that the feds will want to be paid for their trouble, the result will be double taxation.

The industry had a brief look at this issue over 20 years ago when a group of large companies floated the idea of a company being able to opt for either state or federal regulation. The proposal died and I suspect it was because they concluded they would wind up with dual regulation.

At present, we have 50 laboratories to try new ideas and approaches to regulate. Jim Longley tried some years ago when he was governor of Maine. As plausible as his idea was, it did not work and only Maine was affected. Other ideas have been tried in various states; some worked, some didnt. But only those states were affected by the failures, and the successes ultimately found their way into other states. With a federal system, there is little chance for such experimentation at minimal risk.

The trend today is to move government away from Washington rather than toward it. A move to federal regulation would certainly be bucking that trend. There is another practical political problem also which must be considered. A New York senators vote is worth exactly the same as a senator from Wyoming or South Carolina. Some small states have a fairly extensive domestic insurance industry. It is hard for me to imagine a senator from such a state voting for legislation that would put his or her constituents out of business. This is one more reason a federal code is not going to look like New York.

It seems to me that the industry would be far better advised to support the National Association of Insurance Commissioners to the fullest in correcting the problems now existing rather than venturing into the unknown in pursuit for that which is probably unattainable.

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 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.


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