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No one argues the need to revamp the regulatory structure of the insurance industry, but just how to reform regulation remains the big question for legislators considering the issue. Some in the insurance industry support further reform to the current state-based regulatory system, while others say an optional federal charter system would work best.
The U.S. House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, again heard testimony from both sides of the insurance regulatory reform debate in its effort to continue to review and understand how best to improve insurance regulation. The committee held the second in a series of hearings on insurance regulatory reform on Oct. 30 to hear from additional concerned parties. The first hearing was held by the same subcommittee on Oct. 3, 2007.
“Our initial hearing reiterated my belief that insurance regulation remains a complex issue in need of reform,” said Rep. Paul E. Kanjorski, D-Pa., who serves as chairman of the subcommittee. “Taking into consideration the views of all parties involved in and affected by insurance constitutes an important step before taking any action. These hearings will help the Subcommittee to devise the most beneficial and practical policy decisions for consumers of insurance products.”
In this second hearing, the subcommittee heard testimony from Joining Rep. Craig Eiland, Texas, past president of the National Conference of Insurance Legislators (NCOIL); former National Association of Insurance Commissioners President Alessandro Iuppa, who testified on behalf of the Financial Services Roundtable; Bob Hunter of the Consumer Federation of America; Frank Nutter of the Reinsurance Association of America; Scott Gilliam of The Cincinnati Insurance Cos; and John W. Felton, who testified on behalf of the National Association of Independent Life Brokerage Agencies.
“This Subcommittee remains committed to dedicating our full energies to move the U.S. insurance market forward. We cannot allow our regulatory structure to continue to disadvantage consumers and hinder innovation,” stated Congresswoman Pryce, R-Ohio, Ranking Member of the Subcommittee.
Eiland has long supported state-based regulation, saying to the committee that insurance consumers and marketplaces are well-served by state regulation, which states will continue to tailor to respond to market needs.
Eiland, current State-Federal Relations Committee chair of NCOIL, acknowledging that while certain aspects of the market were in need of regulatory reform — including speed-to-market, rate and form approval, market conduct, and agent and company licensing — he remains confident in states’ ability to evolve with the market.
“NCOIL believes that states have a winning track record in their role as what former Supreme Court Justice Louis Brandeis aptly called ‘laboratories of democracy,'” he said. He cautioned members that critics of state regulation have trivialized state progress.
Eiland, the only government witness to testify during the Oct. 30 hearing, said that state efforts have fostered a “dynamic and competitive insurance marketplace.” He said, “Our states are major players in the global insurance economy. Twenty-six of the top 50 insurance markets in the world are located in the U.S.”
Eiland argued that the “tried and true system” of state regulation created an environment where “consumers receive the highest possible degree of protection, products are accessible and affordable, competition thrives, and companies can bring innovative products to the market quickly to meet consumer demands.”
He also emphasized the many benefits of state regulation for insurance consumers. He said, “State legislatures, regulators, and attorneys general have responded to their constituents’ needs and have developed oversight to states’ unique market demands… state regulation also — through safety nets like guaranty funds and residual market mechanisms — protects the rights of claimants whose insurance companies have failed and ensures that consumers who otherwise could not secure coverage may do so.”
The Reinsurance Association of America (RAA) is less enthusiastic about state-based regulation and instead advocates a modified optional federal charter for reinsurance to allow a U.S. licensed reinsurer to choose between a single federal regulator, a single regulator in the current 50-state system, or alternatively, to seek federal legislation that streamlines the current state-based system.
Federal legislation should also address “mutual recognition” so that non-U.S. based reinsurers may conduct business based on their home country regulation, said Franklin W. Nutter, president of the RAA.
Nutter testified that in order for the U.S. insurance market to remain competitive on a global basis changes to the current 50-state regulatory structure were fundamental. He said the goal is to ensure that reinsurers have the ability to move seamlessly among various regulatory structures.
Nutter said that U.S. market share underwritten directly by foreign-based reinsurers increased to 53 percent in 2006 from 38 percent in 1997, despite U.S.-based and non-U.S. based reinsurer differences in regulatory requirements to transact business in the U.S.
“Significant differences have emerged among states in recent years with respect to reinsurance regulatory requirements, and to require large international companies conducting highly sophisticated commercial transactions to submit to a 50- state regulatory system is inefficient,” Nutter said.
Nutter then highlighted three regulatory options that he claims would eliminate the inefficiencies and inconsistencies in the current system:
• A single-state passport system that allows a reinsurer to be licensed in, and regulated by, one state, but with the ability to “passport” and assume business in all other states; or,
• An optional federal charter which allows a reinsurer to remain in the 50-state system or obtain a federal charter and be regulated at the federal level pursuant to federal standards; or,
• A modified optional federal charter that allows a reinsurer to choose between a single federal regulator, a single state regulator, or remain in the current 50-state system.