War Of The Worlds?

While the big summer movie release “War of the Worlds” is packing crowds into theaters, insurance regulators may well be wondering if they are being besieged.

Is SMART, that flaming object catapulted from Washington and aimed at Kansas City, threatening to destroy the insurance regulatory world as they know it?

SMART, the State Modernization and Regulatory Transparency Act, generated “a lively discussion” among commissioners during the recent summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo. This took place before a full-dress congressional hearing on June 16 on SMART and the effectiveness of state insurance regulation.

But before regulators, insurers and the consumers who buy insurance take flight in panic, they might want to consider what they are witnessing. Are they really seeing a Martian invasion? Or is it instead a series of fundamental shifts in the industry that presage change rather than doom?

Some high priority issues aired at the summer NAIC meeting suggest a fundamental change in the way the business is viewed–from the inside and out.

This is not always bad. For example, rather than portending calamity, an issue such as using a principle-based approach for reserving and risk-based capital may offer tremendous opportunity if executed properly.

It was suggested, for instance, that a more flexible approach to reserving could make for better use of capital and make it possible to offer new products.

Another hot-button issue for insurers 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 it. Is cost to be measured in dollars and employee hours, as insurers contend? Or, should it also be measured by its effectiveness in saving companies from insolvency, as regulators propose?

Regardless of the outcome on this one, the takeaway 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 industry changes here are cause for concern: a drop in the number of producers who sell insurance and the failure to serve adequately the middle and lower income markets. But the good news may be that now that the issue is on everyone’s radar, some plan of action can be developed.

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

The push here is the expansion of insurable interest laws in some states so that a party who would not traditionally have an insurable interest in an insured can initiate purchase of a life insurance contract.

The possibility 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 one fraught with danger for insurers.

For the industry, this could be worse than being invaded by Martians.

Some high priority issues aired at the summer NAIC meeting suggest a fundamental change in the way the business is viewed–from the inside and out.”