Regulators Say Defunct System Slowly Changing; Not Quick Enough for Feds

Uniformity, modernization and the never-ending battle of state versus federal insurance regulation was the topic of debate on a regulator panel at the annual meeting of King of Prussia, Pa.-based American Association of Managing General Agents (AAMGA) in May. And according to panelists, some form of federal regulation will be inevitable.

“The debate is unique … what other area of regulation is constantly absorbed with the fundamentals of what kind of system we should have?” asked Charles Cohen, former Arizona commissioner, now in private law practice. “I would suggest to you that the reason this goes on is because we don’t have the kind of system we should have.”

No one argued that the current insurance regulatory “system” works well, yet none of the panelists believed doing away with the existing state-based regulation environment was the answer either.

“More importantly is the threat of a system that doesn’t make sense,” said Kevin McCarty, Florida’s insurance director. “We still need to break down the barriers that we have with the filing process.” But time is running short, he said. Federal intervention is not far off. And while the opportunity is great to modernize the current regulatory environment, the chance for failure is also great, added McCarty. “I think we have a long way to go.”

According to J. Robert Wooley, Louisiana insurance commissioner, more commissioners are beginning to understand the need for change. “It just doesn’t make a lot of sense, especially in today’s marketplace where you have highly competitive areas in the insurance industry,” argued Wooley. “I truly believe what we have done is hung on to a system that punishes the entire industry in hopes of catching a few bad guys. It’s not working, it doesn’t work and it needs to be improved.”

In recent months, Louisiana has made news headlines for its 2003 legislation that passed a flex band rating system, which allows companies to modify their rates up or down by 10 percent without the approval of the Louisiana Insurance Rating Commission (LIRC) as long as those rates can be actuarially justified. The flex band system went into effect in January 2004 and according to panelist Paula Davis, Louisiana deputy commissioner, there have been 167 filings under the system so far. Prior to the flex band system, rates had to be filed and approved by the LIRC before products hit the market. “We are doing away with the prior approval system,” said Davis.

Wooley added that Louisiana will continue to move towards deregulation of industry rates, but will do so in a responsible manner, slowly moving to a file and use system.

“The basic premise, and I think more commissioners believe this now, is that you can have a competitive marketplace and you can still protect consumers,” said Wooley. “In fact, competition is one of the best ways to find out who the bad guys are because the insurance industry is so competitive … they will eat each others’ young … they will turn each other in.”

As for Cohen, he claimed to be more of a pragmatist when it comes to the debate over state versus federal regulation. “I was never a solider in anybody’s ideological army of state versus federal intervention,” said Cohen, calling the current system “anachronistic” and “slow to change.” According to Cohen, the most ideal regulatory environment should be three-fold, including levels for local, national and international regulation.

“We must have a regulatory system that has local, national and international elements with the ability to interact and mesh between those three levels in an efficient and effective way,” said Cohen. “I am a big supporter of states doing a part in insurance regulation. But the way the world is now, you need some kind of an effective national regulation system to deal with national markets.” Cohen advised that for a good national system to work it must have two basic elements: national standards that are uniform and reciprocal; and an essential and effective mechanism to facilitate insurance regulation at the national level.

“I think everybody is moving in the right direction in terms of standards,” he said. “But the difficult issue seems to me, and it doesn’t get enough attention, is the national regulatory mechanism. How are you going to make this work? I personally favor some sort of hybrid, multi-layered system—a working system with local, national and international levels.”

For now, regulators remain dedicated to modernizing the regulatory process even without consensus on what the “system” should look like.

“I do believe that the executive committee of the NAIC (National Association of Insurance Commissioners) as well as the leadership understands the importance of reinventing ourselves and changing the way we do business,” said McCarty. “But when you are working on a modernization or action plan that takes three years to get consensus, the term ‘action plan’ can become oxy-moronic.”