The Pressure’s On

Washington State’s Kreidler believes now’s the time for the industry to face climate change

Washington State Insurance Commissioner Mike Kreidler has proven adept at balancing the many demands placed upon state regulators, perhaps due in part to his background in public service. Kreidler, an optometrist, served in the Washington State Legislature for 16 years, distinguishing himself in health care and environmental matters. He went on to serve in the U.S. Congress.

As insurance commissioner, Kreidler has taken a leading role at the national level in examining how climate change may affect the insurance industry. He is co-chair of the National Association of Insurance Commissioners’ Climate Change and Global Warming Task Force. Kreidler also is at the forefront of the move to create more uniformity among states in market conduct, producer licensing and other areas.

At the recent NAIC meeting in Washington, D.C., Kreidler sat down with Insurance Journal Vice President of Editorial Content Andrew Simpson to share his views on issues facing the insurance industry and his state.

The following is excerpted from a conversation Simpson had with Kreidler:

Insurance Journal: You’ve done research into how climate change may affect the insurance industry and have some concerns about that. How is climate change a threat, and how involved should the insurance industry be in protecting us?
Mike Kreidler: I think the real threat to the insurance industry is one that they think is a perception perhaps more associated with the American insurance market than let’s say the European. The companies look at the American market and visualize something, a risk that they can walk away from, effectively leaving certain markets.

I don’t think that is going to be possible. If we saw anything coming out of some of the insurance fiasco around Hurricane Katrina and the aftermath, it’s pretty clear that insurance companies are not going to be able to just go ahead and walk away.

I think it really does behoove the insurance industry to be much more engaged in mitigating risk, both from the standpoint of lessening what kind of risks they would be exposed to in particular markets — meaning becoming very engaged in the building code standards and setbacks and other factors that would make it possible to better judge risk in certain markets — and finding it less appetizing to effectively walk away from coastal communities.

I think if they do that, you are only inviting the kind of repercussions that we have seen … on the part of members of Congress to press the insurance industry to cover certain risks, and stay in certain markets.

This is one (area) where American insurance companies are going to have to pay attention and start to become much more engaged, both from a mitigation standpoint of lessening the risk, but also what they can do … the investment portfolio and other factors to help lessen what is driving the climate change issue.

IJ: Are investors putting more pressure on insurers in regard to how this changing market is affecting their exposure to financial risk?
Kreidler: I think you are seeing it more from the institutional investors right now. You are certainly seeing it from a number of the pension funds — the publicly held pension funds where you are getting some real pressure on institutional investors. A very safe and sound investment historically has been in the insurance market area and then certainly in some of their publicly held funds and bonds. This is one (area) that they are going to increasingly see pressure, and I think part of that pressure will evidence itself in making sure that insurers are disclosing what potential risks they face, both to the people who invest in them and also to their stockholders.

IJ: There seems to be a resurgence of interest among state regulators in uniformity and streamlining of market conduct, producer licensing and other areas. How is your state playing a role in that trend?
Kreidler: We were one of the first states to join the Interstate Compact on life and annuity and long-term care products. Over 30 states now are participating. It’s up, and they have already begun by approving the first products through the Interstate Compact. Insurance companies would be able to enter multiple markets simultaneously with one single filing. This is a big time streamlining of a process.

On the issue of producer licensing, much more needs to be done. We passed the model producer licensing legislation earlier this year in the state of Washington. We are pushing hard to be a part of the solution in making it easier for companies to get producer licensing approved, and address some of the ancillary issues around such things as continuing education credits and how they apply, recognizing reciprocally other states’ licensing procedures.

We are working hard to make that an easier process and the same is true now for market analysis. We just passed, I think, by far the most comprehensive and closest to any Interstate Compact model of any state right now. Only three states to the best of my knowledge have done so far. And a part of that is to move further along so that we see an accreditation process built around market analysis and market conduct, so that you don’t have companies being exposed to multiple states coming in, effectively doing the same kind of analytical background research on how they’re performing in the market.

Effectively having the domestic state be the one that’s recognized, accredited, and they’re the only one that comes in. This will be both cheaper and faster for the companies. Again, it’s part of what we’re doing for producer licensing, particularly for the large companies. What we’re doing for the life companies here is having a compact tier to allow them to enter multiple markets simultaneously.

IJ: Would that be one of the values of insurance department accreditation — that those other states can have more faith in a market analysis of a company and wouldn’t have to repeat the steps in a lot of cases?
Kreidler: Clearly that’s where we’re headed. Right now the only place that exists right now is for financial solvency of companies. That is the one that we’re modeling right now for market analysis and trying to move in that direction as quickly as we can. It’ll take a while.

Some states have better resources than others, so we’re probably going to have to talk about making some resources available to those states that struggle. I think we’ll be able to do that, and it’ll make it easier for developing that kind of uniformity, but it doesn’t exist today for market analysis. I would say that clearly we’re further along on the Interstate Compact and getting products approved in multiple states.

Second, we’re closer on producer licensing.

Last, clearly would be the market analysis; more work needs to be done there. It’s going to be challenging but it’s incredibly important. I believe in keeping insurance regulation at the state level, and in proving to the insurance industry that they’re relieved from certain regulation by having uniformity and speed to market and standardization that should be there. It doesn’t exist today, and could be there tomorrow. We can do it with the system we have without inventing a new one.

IJ: A number of coastal states face unrest regarding property insurance availability and affordability. Has this been an issue in Washington state?
Kreidler: At this point in time we are not particularly impacted. I look at that problem as being a national one. Quite frankly, if companies are abandoning the Gulf Coast, Atlantic Coast, regions there along the coast, that’s going to be problematic; not just for them, but for the entire industry. I’d like to think we’re going be part of helping to see that they find the solution to that problem without abandoning markets. That means they have to become engaged on the climate change issue.

IJ: Does that also argue for some kind of national catastrophe plan?
Kreidler: I think so. One of the things that we’re somewhat unique on in this country is that we haven’t put in the requirement of a multi-perils type of approach to insurance products. We’ve taken a tier where we’ve pulled out flood, for example. I think that’s a mistake, because you’re inevitably going to wind up with the controversy and finger pointing of saying, “When is it wind, when is it flood?” and we’ve certainly seen the outgrowth of that problem.

I think we’d be much better if we could develop a system that incorporates it into the primary liability insurance, property/casualty insurance, so it’s part of that product as opposed to a separate government-run program. Phase out the government-run program. That’s what we’re talking about doing now with TRIA (Terrorism Risk Insurance Act) and terrorism insurance. It’s there to make sure the market develops, but it’s not to be there in perpetuity.

We should take the same approach, in my opinion, on flood. It’s not going to be easy, there’s obviously going to be some resistance. But in the end, I think it allows market forces to be much more cohesive and concentrated and deliver a much better outcome.

IJ: The House of Representatives passed reforms to the federal flood program, including adding the option of windstorm coverage to the federal flood policy in 2007. Is that a good idea?
Kreidler: Again, I think that should be part of a multi-perils product as opposed to something that the government is taking over. I think it’s often too easy to come in and say “Let’s do a simple fix over here.”

It’s going to take time to wean us off the National Flood Insurance Program, even including wind. We should begin doing it and recognize we need to do it so that we consolidate the assessment of risk.

IJ: Do you find some of your fellow state regulators questioning whether that’s the way to go?
Kreidler: I’ve heard less criticism from my fellow regulators from this particular score. More of it comes from members of Congress who, I think, are very, very sensitive to the fact that they have benefited rather considerably under the existing federal flood insurance program. Continuing it, expanding it, is something that their constituents are warm and fuzzy about.

I find insurance regulators tend to look at it a little bit more pragmatically, and recognize that this is a system that cannot be sustained indefinitely. There are huge benefits in getting insurance companies into the position where they’re looking at their total risk, as opposed to limited risk because of federal programs.

IJ: What is the budget today for the Washington insurance department?
Kreidler: Around $22 million, every two years. We have about 200 people.

IJ: Does that give you what you need to do the job?
Kreidler: I’m very comfortable with it right now. We’re very fortunate in the state of Washington. When we take a win with our budget, we have the insurance industries, the companies that are paying an assessment fee for our operation standing right there next to us nodding their head and testifying that it’s money well spent. So we have a good working relationship and the resources we need to do the job.

IJ: Rep. Brian Kennedy of Rhode Island, representing the National Conference of Insurance Legislators, says that the NAIC should hold fewer of what he describes as “executive sessions” and create more dialogue with state legislators who deal with insurance issues. What is your take on this?
Kreidler: I am more comfortable talking about what we should do, relative to the openness, than I am on whether we should allow certain legislators more access than they currently have. Quite frankly, I have more trouble with the thinking that they’re necessarily more representative of the general public in having that access.

I look at it as … the NAIC, whether they like it or not, really has become or is becoming even more so, a quasi-government entity. They play a very integral role here with insurance regulation, which is something that’s done for the public, for consumer protection. It’s a public entity in the states, because we rely on a national association.

They inherit some of the same constraints we have at the state level, and they can’t more or less walk away from it. It’s a learning process.

I sense there’s still a little bit of resistance, particularly from people who are commissioners, who perhaps haven’t had to be as exposed to the public process the way some others of us have.

I’ve been in government long enough to be keenly sensitive to a particularly elected part of it. You’ve got to be accessible to the public. I think the NAIC needs to be more transparent and open. There are plenty of areas where we don’t need to appear secretive. It’s only going to help us in the long run by being more open and transparent.

Topics Legislation Flood Washington Climate Change Market