Let us all be careful of what we wish for. I for one, will argue reform is not neccessary. I need to see more specifics on why the current system of state regulation isn’t working. I realize the American Association of Reinsurers would like only one form to file so they can write in 50 states. Ok, could we standardize that form? Why would Federal oversite be neccessary? All in all I think ISO and NCCI, do a pretty good job of standardizing the forms we now use. Couldn’t NAIC come up with something?
Federal regulation seems to be a Pandora’s Box I would like to avoid.
You are absolutely correct with your comment. There may be problems with the present system but it would be easier to correct on a state by state basis than to let the Feds take over. There has never been a federal oversight or law that was better than individual state laws. There is no ‘one shoe fits all’. The federal government is a bloated beauracrasy that is slow, inefficient, corrupt, and lacking in the basic knowledge of individual states. The federal government has showed over and over why we should never trust them with our business. As you said, ‘beware what you ask for’. You do not want the feds telling you how to run your business.
I strongly disagree with you both. The cost and complexity associated with the compliance with 50 different regulatory masters results in huge inefficiencies and overhead costs that are ultimately passed on to insurance consumers.
Companies and rating bureau’s have to develop rating plans and policy forms that accomodate 50 different masters. This means that actuaries, lawyers, accountants, and programmers spend endless hours developing, maintaining, and programming 50 products that in theory should be fairly standard, but instead vary in miniscule ways that don’t provide meaninful protection to consumers but impose significant costs on the system.
Just look at the corporate structure of a typical property casualty company to see an example of this. A large insurance carrier will often have 20 to 30 legal entities under the corporate umbrella, mainly to work around and comply with the patchwork of inconsistent and often-times downright contradictory regulatory stances of the different states. These compliciated corporate structures, although necessary in today’s regulatory environment, impose significant additional burdens on companies (and ultimately consumers) and restrict the flexibility and mobility of capital to areas of need, which again, ultimately harms consumers.
Also, the quality and education/training level of the average state department of insurance employee is far inferior to those found in equivalent federal agencies such as the Federal Reserve, SEC, or Federal Trade Commission. Due to the political nature of many state insurance departments and commisioners, many departments have fundamental mis-understandings of the economics of insurance that further restrict insurance companies, reducing choice and availability to consumers.
Furthermore, the state regulatory system doesn’t fit today’s more mobile population or larger multi-state commercial risks. It is ridiculous that a person who moves from one state to another must find another insurance agent because their agent isn’t licensed in their new state. A relationship with an insurance agent is best if it is stable and long-term, not transient and ever changing. Can you imagine if you had to change stock brokers everytime you moved from one state to another? Also, for large corporate insured’s with business locations in multiple states, it is hard to get coverage for a given line of business (such as Workers’ Comp) with a single policy. Often times, multiple policies must be written on multiple legal entities (with the intrusion of the occasional monopolistic state fund) to provide coverage for all their employees/locations across severl states. These multiple policies increase administration costs, errors & ommisions risk, and in general are just a PITA for everyone involved.
Lastly, the state regulatory system is ill-equiped to handle the national issues that effect large multi-state insurance carriers such as Terrorism, Credit for Alien Re-insurance, and Risk Based Capital. The insolvency process is a joke, with many claimants of insolvent insurers having to wait almost two decades before receiving any payment for their claims because few state insurance departments have the resources or expertise to administer such complicated matters.
IMO, most opponents of Federal Regulation oppose it because it means increased competition to many single state and regional carriers and agents. This is a poor reason. The best way to weigh the merits of Federal Regulation is through the impact on the consumer. Through that lens, I think the argument is clear. Today’s state based regulatory system is bloated, overly bureaucratic, inefficient, and most damning of all, doesn’t provide adequate protection to consumers, all at an extrodinary cost. Countrwide in 2006, insurance customers paid over $12 billion in premium tax (just P&C, not including life/health) and IMO are getting a pretty raw deal for their dollar in terms of regulatory service.
The existing state system is so incredibly bad, that pretty much any federal alternative, no matter how poorly conceived, would be better.
1) 50 masters? What about a regional company that is in one state, or two or ten. Aren’t the needs of a California different than the needs of an Indiana? Who best to determine? I would choose the governmental body closest to its constituents.
2) Large Carrier burden? A national carrier can choose which ever state they want to compete in. If they find the state (i.e. a Florida) difficult to compete in, then they can pull out. They can also shield themselves by setting up several entities. Are you saying an AIG is going to conslidate all their companies into one, just because they can have one filing?
3) Work Comp issue. I agree it can be difficult to insure a multi-state risk, especially WC, however, there are a number of companies that can and do provide the coverage. If you want to throw out the baby with the bath water, then which state’s rate structure and benefit structure do we use?
4) Insolvency and National Issues. Do you really think the Federal government will handle inslovencies better than the State? My answer is absolutely not. You think the red tape is bad at the state level, haven’t you heard about the problems with passports? As far as terrorism, slowly it is being addressed. The hold up is not the industry or regulations, but rather congress. I don’t know about the other issues to comment.
5) 12 Billion in premium tax. That sounds like alot, however, how much do you think it would cost to run another Federal Bureacracy? I think 12 billion would be cheap.
6) Your characterization of those of us that oppose federal regulation is way off base. I am in Indiana and Illinois and can not imagine our market to be any more competitive than it is today.
One last question, who do you work for and in what capacity?
Vlad, I’m with you. while there may be different rules on a per state basis, each state is unique and tailors its regulation to the state’s specific market. I doubt if Federal chartering would improve anything, knowing that another burgeoning bureaucracy would be the result, not something streamlined and simple. And let’s be clear what is driving this, unsatisfied claimants, like Trent Lott, who could not collect for coveage he didn’t purchase nor deserve. Politics should not be driving a free market; just look at Florida and you’ll see how well that works…
so..” Today’s state based regulatory system is bloated, overly bureaucratic, inefficient, and most damning of all, doesn’t provide adequate protection to consumers,” and you propose to replace it with, what? another BLOATED, OVERLY BUREAUCRATIC, INEFFICIENT but FEDERAL system? Comparing insurance with stock and agents with brokers doesn’t make sense to me, given the difference in purpose and need. one more point, like Vlad, I say better the devil I know than the one I don’t.
I work in product development for a regional P&C insurance carrier. I have pretty close interactions with the various Sate departments of insurance. What capacity do you work in?
At any rate, I looked up the budget numbers of other Federal Regulatory Agencies:
Office of Comptroller and Current (Regulator of Federally Chartered Banks) has a projected 2008 budget of roughly $700 million.
The Federal Trade Commision, charged with consumer protection and maintaining competition in various industries, has a projected 2008 budget of $240 Million (p. 39 of link). http://www.ftc.gov/ftc/oed/fmo/budgetsummary08.pdf
These numbers look pretty reasonable to me given the broad responsibilities of each department. When compared to the aggregate cost of 50 state departments of insurance, it looks pretty clear that the state based system imposes pretty high costs on consumers through duplication of services/activities. BTW, the $12 billion figure I cited for industry premium taxes can be found in the 2006 AM Best aggregate and averages.
Federal regulators of other industries have proven themselves more efficient, less political, and more responsive to consumers. Most importantly, they have done a better job of toeing the line between ensuring fair treatment of customers while still recognizing the need of industry to earn profits to create a viable and competitive marketplace.
I suspected company person, however I would have guessed national not regional. With the expertise you have demonstrated in your responses I figured you had a pretty sizable dog in this fight.
To your point about the agencies you mentioned. I do not think you can compare the FTC or the office of comptroller and regulations with regard to regulating insurance. To develop and regulate the cost of loans or trades is far easier to accomplish than to regulate insurance. I think a closer comparison of bureaucracies would be the department of education. We all have districts with differences, yet we want to accomplish the same goal i.e. educting our children. This year’s Education Department Budget is 55 Billion. Or how about the IRS annual Budget 10 Billion?
If there were a “Federal Regualtion” of insurance, are you saying that all State Department of Insurance offices would be eliminated or closed? If you are saying the Federal Regualtion will eliminate the State offices and save 11.7 Billion, then I am all for that part of the equation. However, just like the toll roads we pay for today, I have seen the governments “temporary” solutions or fixes almost always become permanent.
I actually favor Optional Federal Chartering similar to the dual regulatory system for banks. Companies opt for one or the other, but are only subject to regulation by either the States or the Federal Regulator, but never both. State Departments of Insurance could continue to regulate state licensed insurers and agents. The State DOI’s would only go away if state licensed insurers and agents did (which would ultimately be a consumer decision).
I will respectfully disagree with your estimate of the cost of a Federal Regulator. With the ability to centralize and eliminate duplication on issues such as licensing, insolvency funds, and other common items, I think a Federal regulator can be much more cost effective, but more importantly, move more quickly than 50 state regulators who are beholden to 50 state legislatures.
Lastly, regarding regulation of rates, I would hope a Federal Regulator would have the sense to avoid any regulation of rates in markets/coverages where competition is adequate to prevent anti-competitive behavior. Such actions only restrict availability and deter entry by new competitors.
Your banking comparison is a little off for two reasons.
1) Federal regulation came about because there were virtually no banks that crossed state lines. Not true with insurance companies. Even with the current dual system, banks are currently bogged down with state regulations.
2) It is not either or with banks, but Federal Laws and regulations supercede state laws. Just as they would in any other type regulation or law i.e. commerce or even criminal law.
You can read http://www.chicagofed.org/publications/fedletter/cflseptember2006_230a.pdf
to see just how well your dual system is working for the banking industry.
My whole start to this was a very simple suggestion. Why couldn’t NAIC develop a standard from for all states and all companies to adhere to and the problem of filings and duplications is solved, and I won’t have that federal bureacracy?
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Let us all be careful of what we wish for. I for one, will argue reform is not neccessary. I need to see more specifics on why the current system of state regulation isn’t working. I realize the American Association of Reinsurers would like only one form to file so they can write in 50 states. Ok, could we standardize that form? Why would Federal oversite be neccessary? All in all I think ISO and NCCI, do a pretty good job of standardizing the forms we now use. Couldn’t NAIC come up with something?
Federal regulation seems to be a Pandora’s Box I would like to avoid.
You are absolutely correct with your comment. There may be problems with the present system but it would be easier to correct on a state by state basis than to let the Feds take over. There has never been a federal oversight or law that was better than individual state laws. There is no ‘one shoe fits all’. The federal government is a bloated beauracrasy that is slow, inefficient, corrupt, and lacking in the basic knowledge of individual states. The federal government has showed over and over why we should never trust them with our business. As you said, ‘beware what you ask for’. You do not want the feds telling you how to run your business.
I strongly disagree with you both. The cost and complexity associated with the compliance with 50 different regulatory masters results in huge inefficiencies and overhead costs that are ultimately passed on to insurance consumers.
Companies and rating bureau’s have to develop rating plans and policy forms that accomodate 50 different masters. This means that actuaries, lawyers, accountants, and programmers spend endless hours developing, maintaining, and programming 50 products that in theory should be fairly standard, but instead vary in miniscule ways that don’t provide meaninful protection to consumers but impose significant costs on the system.
Just look at the corporate structure of a typical property casualty company to see an example of this. A large insurance carrier will often have 20 to 30 legal entities under the corporate umbrella, mainly to work around and comply with the patchwork of inconsistent and often-times downright contradictory regulatory stances of the different states. These compliciated corporate structures, although necessary in today’s regulatory environment, impose significant additional burdens on companies (and ultimately consumers) and restrict the flexibility and mobility of capital to areas of need, which again, ultimately harms consumers.
Also, the quality and education/training level of the average state department of insurance employee is far inferior to those found in equivalent federal agencies such as the Federal Reserve, SEC, or Federal Trade Commission. Due to the political nature of many state insurance departments and commisioners, many departments have fundamental mis-understandings of the economics of insurance that further restrict insurance companies, reducing choice and availability to consumers.
Furthermore, the state regulatory system doesn’t fit today’s more mobile population or larger multi-state commercial risks. It is ridiculous that a person who moves from one state to another must find another insurance agent because their agent isn’t licensed in their new state. A relationship with an insurance agent is best if it is stable and long-term, not transient and ever changing. Can you imagine if you had to change stock brokers everytime you moved from one state to another? Also, for large corporate insured’s with business locations in multiple states, it is hard to get coverage for a given line of business (such as Workers’ Comp) with a single policy. Often times, multiple policies must be written on multiple legal entities (with the intrusion of the occasional monopolistic state fund) to provide coverage for all their employees/locations across severl states. These multiple policies increase administration costs, errors & ommisions risk, and in general are just a PITA for everyone involved.
Lastly, the state regulatory system is ill-equiped to handle the national issues that effect large multi-state insurance carriers such as Terrorism, Credit for Alien Re-insurance, and Risk Based Capital. The insolvency process is a joke, with many claimants of insolvent insurers having to wait almost two decades before receiving any payment for their claims because few state insurance departments have the resources or expertise to administer such complicated matters.
IMO, most opponents of Federal Regulation oppose it because it means increased competition to many single state and regional carriers and agents. This is a poor reason. The best way to weigh the merits of Federal Regulation is through the impact on the consumer. Through that lens, I think the argument is clear. Today’s state based regulatory system is bloated, overly bureaucratic, inefficient, and most damning of all, doesn’t provide adequate protection to consumers, all at an extrodinary cost. Countrwide in 2006, insurance customers paid over $12 billion in premium tax (just P&C, not including life/health) and IMO are getting a pretty raw deal for their dollar in terms of regulatory service.
The existing state system is so incredibly bad, that pretty much any federal alternative, no matter how poorly conceived, would be better.
I too disagree with your points.
1) 50 masters? What about a regional company that is in one state, or two or ten. Aren’t the needs of a California different than the needs of an Indiana? Who best to determine? I would choose the governmental body closest to its constituents.
2) Large Carrier burden? A national carrier can choose which ever state they want to compete in. If they find the state (i.e. a Florida) difficult to compete in, then they can pull out. They can also shield themselves by setting up several entities. Are you saying an AIG is going to conslidate all their companies into one, just because they can have one filing?
3) Work Comp issue. I agree it can be difficult to insure a multi-state risk, especially WC, however, there are a number of companies that can and do provide the coverage. If you want to throw out the baby with the bath water, then which state’s rate structure and benefit structure do we use?
4) Insolvency and National Issues. Do you really think the Federal government will handle inslovencies better than the State? My answer is absolutely not. You think the red tape is bad at the state level, haven’t you heard about the problems with passports? As far as terrorism, slowly it is being addressed. The hold up is not the industry or regulations, but rather congress. I don’t know about the other issues to comment.
5) 12 Billion in premium tax. That sounds like alot, however, how much do you think it would cost to run another Federal Bureacracy? I think 12 billion would be cheap.
6) Your characterization of those of us that oppose federal regulation is way off base. I am in Indiana and Illinois and can not imagine our market to be any more competitive than it is today.
One last question, who do you work for and in what capacity?
Look forward to your response, Vlad
Vlad, I’m with you. while there may be different rules on a per state basis, each state is unique and tailors its regulation to the state’s specific market. I doubt if Federal chartering would improve anything, knowing that another burgeoning bureaucracy would be the result, not something streamlined and simple. And let’s be clear what is driving this, unsatisfied claimants, like Trent Lott, who could not collect for coveage he didn’t purchase nor deserve. Politics should not be driving a free market; just look at Florida and you’ll see how well that works…
so..” Today’s state based regulatory system is bloated, overly bureaucratic, inefficient, and most damning of all, doesn’t provide adequate protection to consumers,” and you propose to replace it with, what? another BLOATED, OVERLY BUREAUCRATIC, INEFFICIENT but FEDERAL system? Comparing insurance with stock and agents with brokers doesn’t make sense to me, given the difference in purpose and need. one more point, like Vlad, I say better the devil I know than the one I don’t.
I work in product development for a regional P&C insurance carrier. I have pretty close interactions with the various Sate departments of insurance. What capacity do you work in?
At any rate, I looked up the budget numbers of other Federal Regulatory Agencies:
Office of Comptroller and Current (Regulator of Federally Chartered Banks) has a projected 2008 budget of roughly $700 million.
link: http://www.treas.gov/offices/management/budget/budgetinbrief/fy2008/FY_2008_BIB_OCC.pdf
The Federal Trade Commision, charged with consumer protection and maintaining competition in various industries, has a projected 2008 budget of $240 Million (p. 39 of link).
http://www.ftc.gov/ftc/oed/fmo/budgetsummary08.pdf
These numbers look pretty reasonable to me given the broad responsibilities of each department. When compared to the aggregate cost of 50 state departments of insurance, it looks pretty clear that the state based system imposes pretty high costs on consumers through duplication of services/activities. BTW, the $12 billion figure I cited for industry premium taxes can be found in the 2006 AM Best aggregate and averages.
Federal regulators of other industries have proven themselves more efficient, less political, and more responsive to consumers. Most importantly, they have done a better job of toeing the line between ensuring fair treatment of customers while still recognizing the need of industry to earn profits to create a viable and competitive marketplace.
I am agent for a small (25 employee) agency.
I suspected company person, however I would have guessed national not regional. With the expertise you have demonstrated in your responses I figured you had a pretty sizable dog in this fight.
To your point about the agencies you mentioned. I do not think you can compare the FTC or the office of comptroller and regulations with regard to regulating insurance. To develop and regulate the cost of loans or trades is far easier to accomplish than to regulate insurance. I think a closer comparison of bureaucracies would be the department of education. We all have districts with differences, yet we want to accomplish the same goal i.e. educting our children. This year’s Education Department Budget is 55 Billion. Or how about the IRS annual Budget 10 Billion?
If there were a “Federal Regualtion” of insurance, are you saying that all State Department of Insurance offices would be eliminated or closed? If you are saying the Federal Regualtion will eliminate the State offices and save 11.7 Billion, then I am all for that part of the equation. However, just like the toll roads we pay for today, I have seen the governments “temporary” solutions or fixes almost always become permanent.
I actually favor Optional Federal Chartering similar to the dual regulatory system for banks. Companies opt for one or the other, but are only subject to regulation by either the States or the Federal Regulator, but never both. State Departments of Insurance could continue to regulate state licensed insurers and agents. The State DOI’s would only go away if state licensed insurers and agents did (which would ultimately be a consumer decision).
I will respectfully disagree with your estimate of the cost of a Federal Regulator. With the ability to centralize and eliminate duplication on issues such as licensing, insolvency funds, and other common items, I think a Federal regulator can be much more cost effective, but more importantly, move more quickly than 50 state regulators who are beholden to 50 state legislatures.
Lastly, regarding regulation of rates, I would hope a Federal Regulator would have the sense to avoid any regulation of rates in markets/coverages where competition is adequate to prevent anti-competitive behavior. Such actions only restrict availability and deter entry by new competitors.
Your banking comparison is a little off for two reasons.
1) Federal regulation came about because there were virtually no banks that crossed state lines. Not true with insurance companies. Even with the current dual system, banks are currently bogged down with state regulations.
2) It is not either or with banks, but Federal Laws and regulations supercede state laws. Just as they would in any other type regulation or law i.e. commerce or even criminal law.
You can read http://www.chicagofed.org/publications/fedletter/cflseptember2006_230a.pdf
to see just how well your dual system is working for the banking industry.
My whole start to this was a very simple suggestion. Why couldn’t NAIC develop a standard from for all states and all companies to adhere to and the problem of filings and duplications is solved, and I won’t have that federal bureacracy?