On the Agenda: Insurance and Ratings

The hot topics that Congress will continue to debate this year and into 2008 are whether to create an optional federal regulator for the insurance industry and how to fix the subprime mortgage mess.

Granted, while the subprime debacle just unfolded within the last year, reforming the insurance industry’s regulatory structure has been debated for some time–Congress held 15 hearings on the issue last year alone. Paul Kanjorski (D-Pennsylvania), chairman of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, held this year’s first hearing on insurance regulatory reform in early October, and vowed that more hearings would follow in the 110th Congress. These hearings, he said, will help educate the new members of the Capital Markets Subcommittee on the need to modernize the insurance industry’s regulatory structure, as about one-third of the subcommittee’s members were new in 2007.

Of course, there are those in the insurance industry who believe that creating an optional federal regulator for an insurance industry that has been regulated by the states is a bad idea. But there are plenty in the industry–and in Congress–who support some type of reform. In May, Sens. John Sununu (R-New Hampshire) and Tim Johnson (D-South Dakota), introduced the National Insurance Act of 2007 (S. 40), which would establish an optional federal insurance charter and a federal insurance regulator. Both senators introduced a similar bill last year, but the Senate Banking Committee did not act on it. The Senate bill affects life insurance and property/casualty insurance but not health insurance. It would create a National Insurance Commissioner, appointed by the President for a five-year term, and establish a Division of Consumer Affairs, Fraud, and Ombudsman. In July, Melissa Bean (D-Illinois) introduced in the House companion legislation (H.R. 3200) that would have the same effect as the Senate bill.

Opposing Voices on Reform

In his opening comments at Rep. Kanjorski’s House subcommittee hearing, Richard Baker (D-Louisiana) agreed that a federal regulatory option is a good idea, and stated that the insurance industry’s current state-based regulatory structure is “a mess.” Kanjorski stated plainly at the hearing that it’s “no longer a question of whether or not to pursue reform. The question we must answer is how best to achieve this reform.” But Kanjorski conceded that the issue is a complicated one. “The imposition of the federal government in some form into an area traditionally regulated by the states has enormous implications for insurers, businesses, and consumers,” he said. “Therefore, we should not rush ourselves into considering reform legislation.” Rather, he continued, “After establishing a need for reform, we will begin to explore policy options for reform.”

Kanjorski said his subcommittee will hold separate hearings at some point on solvency protections, enforcement systems, product approval, and best practices for reform implementation.

What, specifically, is so bad about the states continuing to regulate insurance? In his testimony before the subcommittee, Christopher “Kip” Condron, CEO of AXA Equitable, noted that besides the fact that each state has its own laws and regulations that lack uniformity, there are disparate and complex state-specific rules relating to agent licensing, “which impose different qualification, registration, and continuing education requirements for each state in which an agent seeks to do business.”

Those in the property/casualty insurance business argue, however, that a state-based regulatory system works best for them. John Bykowski, president and CEO of Secura Insurance Companies in Appleton, Wisconsin, told Congress that “state insurance regulation has the capacity to adapt to local market conditions, to the benefit of consumers and companies.” He said a state insurance commissioner “can develop expertise on issues particularly relevant to his or her state,” and that unlike banking and life insurance, “property-casualty insurance is highly sensitive to local risk factors, such as weather conditions, tort law, medical costs, and building codes.”

Playing the retirement card

On the other hand, a downside of state regulation is that it’s difficult to get products to market quickly, Condron and others testified, which “hampers the ability to address the retirement security crisis our nation is facing.” Today, Condron noted, most industries are looking at global regulatory structures, so from a competitive standpoint, the current state-based regulatory structure–which hasn’t been changed in 60 years–puts the U.S. at a competitive disadvantage, he argued. But questions arose during the hearing about whether a federal regulator would indeed help the U.S. insurance industry be a stronger global player.