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4th Annual Insurance Reform Summit
Optional Federal Charters, Consumer Protection and Terrorism Insurance Dominate Discussion
(March 8, 2007) — Leaders representing legislative, academic and corporate interests converged in Washington D.C. for the 4th Annual Insurance Reform Summit on March 7, 2007, to address the industry’s most pressing regulatory issues. An optional federal charter for insurers, the Terrorism Risk Insurance Act and flood insurance were among the topics debated by experts on both sides of the issues. Speakers included Chairman of the House Financial Services Committee Barney Frank, U.S. Senator John Sununu, U.S. Representative Ed Royce, National Association of Insurance Commissioners Walter Bell, and Assistant to the President for Economic Policy and Director of the National Economic Council, Allan Hubbard.
Is There a Role for Optional Federal Charters?
U.S. Rep. Barney Frank (D-MA) opened the discussion of a federal charter option for insurers by noting that conservative and more liberal counterparts had largely changed their approach to legislation in the insurance industry. He observed that conservative interests appear more willing to delegate the regulation of insurance to a federal power, whereas more liberal interests are concerned about sacrificing consumer protection if insurance regulation is transferred from the states to a federal party.
Representative Frank noted that as technology has advanced, geography has largely been rendered irrelevant; and that the financial services community is better positioned to function under a federal form of regulation than in previous eras. “More than 20 sets of rules regulating what is a national industry simply are not practical,” he noted. Representative Frank also noted that federal chartering may be more practical for life and health than for property/casualty products and advised that the industry distinguish what product lines would be covered by a federal charter.
His most direct remarks related to how the insurance industry may benefit from the efficiencies and uniformity provided with a federal charter without compromising consumer protection. He urged attendees to carefully weigh the debate within the context of efficiencies versus consumer protection. “Nothing will move forward without significant consumer protection,” Rep. Frank cited. A longtime advocate of affordable, available housing, Rep. Frank brought up the housing debacle created by 2005’s hurricanes and urged the insurance industry to stop subsidizing premiums for affluent vacation homes in high-risk areas.
Allan Hubbard shared the Administration’s thoughts with regards to a federal charter. Citing a number of examples, he presented an argument that federal regulation results in undercharging throughout a market and over-compensation for losses. Mr. Hubbard discussed the Pension Benefit Guaranty Corporation’s efforts to persuade Congress not to fully fund corporate pensions, resulting in an unfunded liability of $20B to $25B. From a natural disaster perspective, he referenced the $20.5B U.S. taxpayers invested to fund Hurricane Katrina losses that should have been covered by a $22B trust fund which was found to contain only $1.5B when disaster struck. “Be careful about federal government’s involvement in regulation,” he advised attendees.
How Would an Optional Federal Charter be Structured?
U.S. Senator John Sununu (R-NH) discussed his perspectives on how an optional federal charter should be structured; advocating that regulatory legislation take a comprehensive approach that would include property and casualty lines. He cited the success the banking community has achieved with a dual-chartering structure noting the banking sector’s ability to regulate and provide consumer protection. “States would still have all of their consumer protection laws enforced,” he noted. Senator Sununu said an ombudsman position would be created to provide consumer protection at the federal level. Premium taxes have been an ongoing concern in the debate about federal charters. Senator Sununu advised that premium taxes would continue to be levied and collected at the state level under a federal charter.
Professor Hal Scott of Harvard University also spoke regarding the structure of federal legislation. Professor Scott stated that the design of an effective optional federal charter would consider a convergence of product line types along with the role of state guaranty funds. He argued that greater consolidation within the industry would enhance efficiencies and provide the federal government with responsibility for fully regulating the solvency, safety and soundness of all insurers under the optional federal charter. State regulatory agencies would continue to provide consumer protection services. He indicated that the National Insurance Act (NIA) introduced by Senators Tim Johnson and Sununu establishes a structural framework for both life and property casualty insurers. The NIA would establish an Office of National Insurance within the Treasury Department, headed by a Commissioner of National Insurance. The Commissioner would possess exclusive authority to act, similar to the Controller of Currency. The office would be partially funded via examination fees. Professor Scott also discussed that the NIA would contain a division of consumer affairs to protect consumers and would be modeled on the dual banking system. He advocated that the NIA would insulate regulation from political pressures, better serving the industry and the consumers it serves. With regards to enforcement, Professor Scott argued that the cooperative approach assumed by banks would be more effective than the external, more confrontational approach used to enforce SEC regulations. Finally, Professor Scott indicated that the NIA would have no bearing on states’ residual risk mechanisms but would keep the risk pool function at the state level.
U.S. Representative Ed Royce (R-CA) argued against an overly intrusive regulatory regime and toward replacing politically-motivated state regulators with a world class federal chartering system. “Congress has the authority to create one national insurance marketplace that can be an effective advocate for an industry with a unified voice,” he stated. Rep. Royce stated that the legislation set forth by Senators Sununu and Johnson would foster competition and provide consumers with safety via independent regulation financed through assessments, and would still include the participation of state guaranty firms. While some within the industry advocate a federal charter applicable only to life and health products, Rep. Royce urged that the regulation be inclusive of all lines of insurance. He pointed to failure of the SMART Bill as an example of why the industry needs a broader legislative agenda. “Narrow measures do not succeed. Comprehensive legislation will benefit consumers and create a stronger, more powerful voice for the industry,” Rep. Royce stated.
The Case for State Regulation
William A. Bell, Alabama Insurance Commissioner and President, National Association of Insurance Commissioners cited proximity and responsiveness as two key factors that make state charters most effective for the insurance industry. Pointing to the March 1 tornado in Enterprise, Alabama, Commissioner Bell indicated that the state agencies were on the grounds within hours of the disaster, an example of responsiveness that a federal agency would be unable to provide. Commissioner Bell also advised that insurance products should not be confused with banking products, citing that they tend to be products consumers consider primarily in times of disaster and loss as opposed to the more commercial product nature of banking products. With regards to modernization, Commissioner Bell cited efforts already underway to meet states’ evolving needs including Streamlined Rates and Forms and an intrastate compact that provides unified standards and a single point filing system now used by 29 states.
Efficiencies and Consequences of Rate Regulation
Professor Sharon Tennyson of Cornell University discussed the efficiencies and consequences of rate regulation. She expressed the lack of uniformity across states for both regulatory and enforcement functions with regards to rates. Professor Tennyson explained that states regulate rates in response to changes in interest rates, variances across different consumer risk groups and rate categories with active regulators focusing on insuring that rates are not excessive. “Within the industry, rate changes typically follow cost movements, indicative of inflationary pressures; and further indicative of a competitive versus monopolistic market model,” she stated. She noted that competitive markets typically make redistribution through a price mechanism more difficult. From a supply side, rate regulation restricts the competitive supply of insurance, reducing firms’ interest in writing policies and reducing competition in the market. On the demand side, rate subsidies distort consumer decisions, prompting low risk consumers to exit the market or buy less. She cited that stringent rate regulation would result in reduced competition, customer inflation, lower insurance availability and greater volatility in the insurance market. “The empirical market data suggests that stringent rate regulation impairs the market and raises the cost of insurance. Deregulation evidence in contrast, shows benefits including more competition, more availability and better pricing.” Professor Tennyson concluded by urging insurance companies to promote risk-based pricing, enforce compulsory insurance laws, focus policies on the cause of inflation and develop better regulatory prediction systems.
TRIA and Flood Insurance
Both natural disasters and terrorism were considered within the context of the Summit.
The Terrorism Risk Insurance Act as well as the industry’s approach to flood insurance were top concerns of attendees. Rep. Frank referenced an April 2007 House Bill that will more clearly define terrorism risk insurance and flood insurance. He indicated that under the yet-to-be-introduced House Bill, terrorism insurance would no longer distinguish between domestic and international acts of terror and would be expanded to include workman’s compensation and group insurance. He also alluded to a new concept “disaster back-up insurance” that he expects to see introduced soon. Senator Sununu shared concerns with TRIA, advocating a need to more effectively share the burden, establish sunset dates and institute incentives for policyholders to assume appropriate levels of risk. He urged the insurance industry to consider incentives for homeowners to build in safer places and to focus efforts on helping the poor displaced versus subsidizing multi-million dollar homes. “Removing unneeded subsidies will result in better buildings, better environment and better land use,” he noted.
Mr. Hubbard cited TRIA as a federal insurance program that sounded good but lacked the funding resources necessary to deliver upon its intent. He explained that TRIA was developed as a free insurance product requiring no premium. Other proposed catastrophic funds provide the potential for individuals to build in high-risk areas, resulting in unreasonable price increases shared with all policyholders. Quoting from an opinion piece in the Monday, March 5 Washington Post Hubbard stated, “Betting against Mother Nature is never a winning proposition.”
Industry Perspectives on the Issue of a Federal Charter
A panel of those opposing and favoring an optional charter provided an industry-level perspective on the regulation issue. William H. McCartney, senior vice president of insurance regulatory policy, United States Automobile Association; and John Brown, vice president of government relations, Jackson National Life Insurance Company were joined by Greg Wren, executive director of the Coalition Opposed to a Federal Insurance Regulator and members of the Optional Federal Charter Coalition including J. Stephen Zielezienski, senior vice president and general counsel, American Insurance Association; and Wendy Cooper, senior vice president and associate general counsel, AXA Equitable Life Insurance Company.
Mr. McCartney made the case for a federal charter option by citing that consumers’ needs are different; on average USAA members move every two years, requiring policies and underwriting to be renewed due to a state-based regulatory environment.
Mr. Brown of Jackson National Life Insurance Company explained that new products have necessitated the nimble, responsiveness only available via a state-regulated structure. He cited 81 percent of Jackson National Life’s insurance products sold after January 1, 2005 were new products. “Innovation is driving the marketplace and requiring very competitive personalized service; particularly in the area of annuities.” Mr. Brown concluded by stating that a federal charter would “not be cheaper or faster,” indicating that evidence at his own company shows the SEC has not brought products to market faster than state-introduced products.
Concluding the presentation, Liz Coit, executive director of Networks Financial Institute at Indiana State University noted that the disparity of opinions, passionate arguments for both sides and upcoming legislative agenda mean that the chartering issue may take its time in being enforced. Concluding, Ms. Coit stated, “The dialogue today has generated plenty of material for the development of the 2008 Insurance Reform Summit.”
First held in 2004, the Annual Insurance Summit is presented by Networks Financial Institute at Indiana State University. The Summit has gained a reputation as a leading forum for advancing dialogue related to the changing regulatory environment of the insurance industry. B&D Consulting LLC serves as a contributing sponsor and key facilitator of the Insurance Reform Summit.
Networks Financial Institute at Indiana State University was founded in 2003 with a grant from Lilly Endowment. NFI strives to facilitate broad, collaborative thinking, dialogue and progress in the evolving financial services marketplace, concentrating on the areas of education, outreach and research. Headquartered in Indianapolis with offices in Washington, D.C., and on the campus of Indiana State University, and with outreach internationally, NFI’s goal is to serve as a catalyst for change in the financial services industry.
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