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Martian Invasion Or Fundamental Industry Changes?

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Regulators’ Own “War of The Worlds”

On the threshold of the big summer movie release, “War of the Worlds,” insurance regulators may well wonder if they have their own siege underway.

Is a flaming object catapulted from Washington and aimed at Kansas City threatening to destroy the insurance regulatory world as we know it?

The issue of the State Modernization and Regulatory Transparency Act received discussion among commissioners during the recent summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo. By one account the Commissioners Roundtable session included “a lively discussion” on the issue. The regulatory strategy session preceded a Congressional hearing on June 16 on SMART and the effectiveness of state insurance regulation.

But before regulators, insurers and the consumers who buy insurance lace up their running shoes or pack their kids in their cars and take flight in panic, they might want to consider what they are witnessing. Are they seeing a Martian invasion or more precisely a series of fundamental shifts in the industry that presage change rather than doom.

High priority issues discussed during the summer NAIC meeting suggest fundamental change in the way the business is viewed.

And rather than portending calamity, issues including a principle-based approach for reserving and risk-based capital may offer tremendous opportunity if executed properly. The dialogue is taking place both in discussions of reserving for universal life products with secondary guarantees and for the development of a project, the C3-Phase II effort.

Arguments made during NAIC discussions, suggest that a more flexible approach to reserving could make for better use of capital and make it possible to offer new products.

Another issue that continues to be debated is the implementation of changes to the Model Audit Rule that reflect provisions in the Sarbanes-Oxley Act of 2002. The focus of the argument is on cost and what constitutes cost. Is it measured in dollars and employee hours, as insurers state? Or, are costs also measured in saving companies from insolvency, as regulators propose?

Regardless of the outcome on this one, the take away may be the heightened awareness of the need for stronger internal accounting controls, a kind of wellness program for the corporate body.

Limited term licensing is another issue in which highlighting a problem in the industry may be more important than whether or not a resolution opposing the idea advances. The fundamental changes here are cause for concern: a drop in the number of producers who sell insurance and the failure to adequately serve the middle and lower income markets. But the good news may be that now that the issue is on everyone’s radar, some action plan can be developed.

The one NAIC agenda item that could be the equivalent of a fiery alien space pod landing in insurers’ back yards is the growing acceptance of insurance as an investment rather than as protection. While the concept is not new and there has been a gradual acceptance that it often is both protection and investment, the issue of investor-owned life insurance would even make Orson Welles nervous.

The fundamental shift here is expansion of insurable interest laws so that a party that would not traditionally have an insurable interest in an insured can initiate purchase of a life insurance contract.

Regardless of which camp one falls into, the possibility, as testimony during a hearing warned, of the tax status of the life insurance product being jeopardized because of a new way of looking at life insurance, is a fundamental shift, and a dangerous one for insurers.

For the insurance industry, this would be one case of art imitating life.


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