NAMIC Paper Blasts Fed Chartering

By E.E. Mazier

NU Online News Service, April 12, 4:05 p.m.EST?A reform of insurance regulations by the states ispreferable to an "unproven" system of optional federal or dualchartering "crafted in a problematic political environment," aninsurers trade group is advising.

The finding was contained in a white paper from the NationalAssociation of Mutual Insurance Companies.

In other words, "the road to reform runs through state capitals,not Washington, D.C.," said David Anderson, chairman of theIndianapolis-based group and secretary-treasurer of Farm MutualInsurance Co. of Lincoln County, Canton, S.D.

NAMIC said it released its 43-pages of findings titled"Regulation Of Property/Casualty Insurance: The Road To Reform" tokick off a new push for reform at the state level.

The white paper examines the reasons for regulating insuranceand evaluates federal and dual regulation alternatives. It alsosets out specific proposals for achieving reform through thestates.

While the group recognizes that others in the insuranceindustry, notably fellow trade organization American InsuranceAssociation, do not oppose optional federal chartering plans, NAMICbelieves its proposal for reforming state regulation willultimately prove to be the best policy for all parties affected byinsurance regulation.

The basic premise behind the NAMIC report, according to itspreface, is that public policy should not be created and does notoperate in a vacuum.

Therefore, the operative social, political and economicenvironments must be taken into account when formulating a reformpolicy, NAMIC said.

The major points raised by the white paper include:

? Protecting against market failure and the public interest--such as the gathering of consumer information --are the twoprimary and legitimate reasons to regulate insurance.

? Social regulation, meaning the use of business to solvesocietal problems, is not a legitimate reason to regulateinsurance, and in fact often creates unintended negativeconsequences. However, this purpose frequently is imposed onbusiness, increasingly at the federal level.

? Although state regulation of insurance is flexible, innovativeand closer to the people, it still requires reform. Among otherfailings, state regulation can be slow to act and it isinconsistent from state to state.

Additionally, NAMIC believes most states continue to have"unnecessary rate regulation regimes" that result in fewer choicesand higher rates for consumers.

The advantages of state regulation include the ability of stategovernments to recognize and adapt to unique local issues, such asrisks related to weather and consumer product preferences.

Additionally, consumers and insurers have easier access toregulators and lawmakers at the state level than they would at thefederal level.

? Proposals for the federal or dual regulation of insuranceentail a number of problems.

These problems include likely additional social regulation forthe industry, the creation of inefficient layered regulation, newconflicts with existing state tort laws, and the likelihood ofincreased regulatory cost and a bloated bureaucracy.

The white paper states that while federal regulation would bringa measure of uniformity, it is no better than state regulation foraddressing market failures or consumer interests. In fact, the useof federal action for enacting social regulation provides "one ofthe most compelling arguments for opposing it," NAMIC wrote.

Moreover, federal and dual charter proposals do not offer manyadvantages to consumers, the report notes.

Among the proposals for reforms at the state level, the NAMICreport recommends:

? States should get rid of the approval process for pricinginsurance products as well as "burdensome and unproductive"form-approval processes.

? States must adopt a new market surveillance program that isbased on the premise that insurers "are in the business to treattheir policyholders fairly," and that only companies that violatethat trust should be singled out and punished.

According to the white paper, market conduct examinations todayare frequently initiated with no tangible proof that the targetedcompany has treated its policyholders unfairly.

As a result, the targeted companies end up paying regulators"thousands of dollars in examination costs" without the detectionof any substantive problems.

? The costs of the current financial examination function nowconducted by most states must be reduced and additional trainingfor examination staff must be provided so that regulatory oversightcan focus on financial analysis and risk assessment.

? The insurance company licensing process must eliminatestate-specific requirements and develop an electronic process thatallows insurers to seek licensure or change information aboutcorporate governance "with a few keystrokes."

The NAMIC report concludes that state regulation can be "theoptimal insurance regulatory structure: but only if statelegislatures become the focus of an all-out effort" to enactreforms that protect consumers, create uniformity, ensurecompetition and provide more choices for buyers of insurance.