Insurance Regulation

Is Not A Moral Issue

BY

This is my first personal commentary for the National Underwriters life insurance edition and Im afraid many readers will end up hoping it is my last. Thats because Im going to present a radical thesis: The venue of insurance regulation, whether state or federal, is an economic issue, not a moral issue.

That thought comes courtesy of Robert E. Vagley, president of the American Insurance Association, a major property-casualty company group, but its one the life insurance industry needs to consider as debate over insurance regulatory reform gets under way in the House Financial Services Committee.

The visceral reaction among many, particularly in the agent community, against any thought of creating a federal insurance office may run contrary to the industrys own business interests. The issue should not be cast in terms of state vs. federal, but rather which level and type of regulation is best suited to the task.

I understand why a lot of people oppose federal regulation and I agree with the oft-stated view that not all wisdom resides inside the Washington, D.C.-area beltway. But keep in mind the background of that sentiment.

It exists because a bunch of ivory tower bureaucrats with a myopic view of the world try to impose one-size-fits-all government mandated solutions on problems that are local in nature.

With life insurance, the concern is exactly the opposite. Life insurance products are essentially national in nature. An annuity is an annuity, from Maine to Hawaii, from Florida to Alaska.

But too often, the marketing of this national product is hampered by local regulations that are idiosyncratic in nature and not at all related to solvency or consumer protection.

A product that is national in nature calls for some type of national regulation. The next question is how that can be achieved. The states, working through the National Association of Insurance Commissioners, have been trying to achieve national uniformity, while maintaining individual state jurisdiction, but that is proving to be a tough nut to crack. The pace of change has been too slow for many.

House Financial Services Committee Chairman Mike Oxley, R-Ohio, proposes to assist the states and speed up the process by using the machinery of the federal government to encourage, if not mandate, uniformity. But the system he seems to be proposing may create more problems than it solves.

At this writing, the details of his plans have not yet been released, but based on a recent speech Oxley gave at a NAIC meeting, it appears that what he has in mind is unprecedented. He wants to create a federal-state advisory council that will address insurance regulatory reform but that does not have any enforcement authority. It will simply issue recommendations.

There will also be a federal bureaucrat who will, in Oxleys words, “stamp yes or no on the recommendations,” but this person will also lack any enforcement authority.

So, how will uniformity be imposed on states and who will determine compliance? Who will decide whether the differing interpretations of any federal mandates that will inevitably crop up are valid or not?

The courts? Is this going to be yet another windfall for trial lawyers?

The Financial Services Committee? Will Congress have to legislate on every variation of state application of the federal standards in order to assure true uniformity?

As far as I can tell, there is no existing model for the type of regulatory system Oxley seems to be proposing. Again, we will have to wait for the details, but I cant help but get the feeling that he may be creating a monster.

I do not mean this to be a clarion call for federal insurance regulation. All I am saying is that the substance and efficiency of regulation are more important than the location. Federal regulation strikes me as being logical for a product that is national in nature, such as life insurance, but a poorly designed federal system may be worse than the status quo.

But at the same time, a well-designed federal system may be far better. And it should not be dismissed simply for emotional reasons.


Reproduced from National Underwriter Life & Health/Financial Services Edition, March 25, 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.