Competitive Rating, Uniform Regulation Are Key Elements of Oxley-Baker Bill

Sweeping legislation being drafted by federal lawmakers would end state approval of insurance rates and require all states to adopt competitive rating for most types of insurance.

States would have to stop requiring approval or prior review of rates and comply with a new system of nationwide competitive pricing within two years of enactment of the legislation. While the legislation would require states to modify insurance laws, it stops short of creating a federal insurance regulator or a federal charter option as sought by some insurers.

The draft bill, the product of House Financial Services Committee Chairman Mike Oxley (R-Ohio), and Capital Markets Subcommittee Chair-man Richard Baker (R-La.), is being circulated among state insurance commissioners and trade groups for comment.

The nationwide competitive rating system would be phased in using a flex band approach. The flex band would allow up to a 7 percent increase or decrease in rates for the first 12-month period and a 12 percent increase or decrease during the second 12-month period.

Credit, title, mortgage, gap and medical malpractice insurance would be exempt.

Under the State Moderni-zation and Regulatory Trans-parency Act (SMART), states may continue to regulate the use of all underwriting or rating factors or classifications including prohibiting the use of race, religion or other criteria.

The measure aims to make states more uniform in their regulatory requirements and procedures in market exams, financial surveillance, licensing, product approvals and other areas.

Among its major initiatives is the creation of a new regulatory oversight panel. This state-national partnership would “promote uniformity and efficiency in government policies that affect the insurance marketplace,” and would be balanced between state and national entities. It would be responsible for identifying whether uniformity requirements have been met by the states, resolve conflicts, and facilitate financial and international trade issues that affect insurance.

This board will have seven members, including an insurance commissioner from each of a small, medium and large state, as well as designees from the Securities and Exchange Commission, the Department of the Treasury, and the Board of Governors of the Federal Reserve System, plus a seventh member nominated by state insurance commissioners and appointed by the president to act as chair and break any tie votes. This partnership will have no office and minimal staff.

The proposal gives states three years to implement coordinated insurer market conduct exams and adopt standardized agent licensing and eligibility standards, and two years to implement reciprocal licensing for agents and brokers. For insurer licensing, states would be required to develop a single point-of-entry based on adequate standards and using uniform electronic filing systems.

States would also have to come up with uniform electronic product filing systems for personal and commercial lines products within three years and eliminate so-called unpublished “desk drawer” rules that often contain exceptions and deviations.

Trade associations respond
The National Association of Mutual Insurance Companies, one of the first trade groups to weigh in on the draft bill, described SMART as a “basis for legislative activity” for the Congress that convenes next January.

“NAMIC has long contended that state regulation should be reformed and that these reforms can best be accomplished in the state capitols,” said David A. Winston, NAMIC federal affairs senior vice president.

“The long-awaited discussion draft is designed to move toward greater uniformity in state regulation, enhanced speed-to-market for insurance products, streamlined producer and company licensing and market-based rates for both personal and commercial lines. Notably, the draft eliminates price regulation within a two-year period,” Winston said.

“Most importantly, the bill would accomplish this without creating an optional federal charter, a federal regulator or any type of permanent federal insurance office.”

In separate letters to Reps. Baker and Oxley, the American Insurance Association commended the legislators for their willingness to tackle the issue of reforming the state-based insurance regulatory system.

“While a comprehensive review of the bill is not yet complete, we applaud the path toward free-market principles taken by the legislation,” the AIA said in its letter to Rep. Baker. “In particular, we commend your effort to end decades of government price controls and usher in a free-market system that will benefit consumers by giving them more marketplace control and more choices.”

In a letter to Rep. Oxley, the AIA noted its intention to remain involved in the process of fine-tuning the legislation. “Specifically, we will focus on substantive improvements to the bill’s enforcement mechanism and forms regulation as well as several other sections of the bill,” the letter stated.

According to the Property Casualty Insurers Association of America (PCI), the proposal would “dramatically reform the way insurance is regulated in the United States.”

Carl Parks, PCI’s senior vice president of federal government affairs, noted in the association’s announcement, “We have identified several areas of concern to our members in the draft. Chief among these are provisions calling for market conduct examinations to be completed based on a fixed arbitrary schedule rather than allowing regulators the freedom to conduct these reviews of companies that show evidence of compliance problems on a targeted basis.”

Topics Legislation