Federal Oversight

Everyone agrees on the need for some sort of insurance regulation reform that would standardize insurance approvals and sales, thereby saving insurance agents time and employers money in lower premiums. The problem is, nobody agrees on how to do it.

At least three major proposals are making the rounds of trade groups and federal and state insurance officials. Each has its own method of unknotting the tangle of laws that makes it difficult for insurers to know how exactly to sell in a given state. However, the central issue comes down to a classic conflict: federal versus state control.

Federal oversight

The current system, with which no one is satisfied, is entirely state-run, with each jurisdiction imposing its own rules on the insurance approval and sales process. While nobody is willing to exorcise entirely the states’ power from the regulatory mix, there are calls for federal oversight, including: a dual charter system that would allow insurance companies to choose between federal and state charters, depending on their circumstances; the creation of a federal insurance advocate; and an optional national producer’s license.

“A federal regulator deals with you in all jurisdictions, and there is a single set of rules and interpretations,” says Gary Hughes, senior vice president and general counsel of the American Council of Life Insurers (ACLI). “There are several kinds of costs you’re dealing with [under the current system].

“There are the hard dollars paid to the regulator for the privilege of being regulated. The insurance company will charge the employer a certain price based on its profit margins. Some of that would be passed on to customers. There is the huge cost to the issuer of the product by having to provide 35 variations instead of just one, and those costs will be passed on to consumers.”

ACLI is not the only group that believes federal insurance regulation is necessary. The National Association of Insurance and Financial Advisors (NAIFA), historically a supporter of a state-regulated insurance system, modified its position, noting “the changing dynamics of the financial services industry in the 21st century compels us to be open-minded to all promising options to improve the regulation of the industry.”

States’ rights

At the other end of the spectrum is the National Association of Insurance Commissioners (NAIC), whose members think the insurance system should be fixed, but believe oversight should stay with the states.

Currently, group officials are working out the particulars of an interstate compact that will set standards for life, disability, annuity and long-term care products. The standards should be ready by December, and 26 states will need to adopt them for the compact to take effect and enable brokers to sell uniform products in a majority of the country. Some states are not waiting until December to decide what to do; so far, 10 to 12 have moved forward with approval.

Earlier this year, Kansas Insurance Commissioner Sandy Praeger told a gathering of insurance brokers, vendors and worksite marketers about the compact, pointing out that NAIC does not support any sort of federal insurance legislation because it would conflict with state regulations.

But some consider that to be the point. Every commissioner has a different idea of how to interpret and enforce insurance regulations. Even if acceptable standards are formulated, NAIC still needs 26 states to adopt them, a tall order when the regulations have to make their way through the legislature and the governor’s office.

Thus far, only Colorado has formally signed into law acceptance of the NAIC standards. Utah and West Virginia’s lawmaking bodies have passed the standards. All told, there is a long way to go before the requisite number of states goes so far as to make insurance regulations a priority and then adopt them.

“We have been spending a huge amount of resources to work with NAIC to come up with standards,” Hughes says. “It’s a long, slow process. We have four states that have passed the compact bill, three that want to do something else, and the attorneys general are lukewarm about this.”

And what if the attorneys general and insurance commissioners all were hot to get this done? In an ACLI-commissioned report, researchers at the University of Massachusetts Isenberg School of Management wrote that “[b]ecause of the NAIC’s lack of legal authority over individual commissions, it lacks leverage to force agreement on uniform standards. Even if agreement could be reached, it would be up to individual state legislatures to adopt model legislation, which they seem unlikely to do, at least without also adopting their own modifications.”

Oxley-Baker road map

In the meantime, congressional legislators appear determined to find some sort of happy medium that would use federal resources to bolster the state-run system. Although they have not detailed specific proposals, Reps. Michael G. Oxley (R-Ohio) and Richard H. Baker (R-La.) plan to introduce a bill that would expand availability of different types of insurance products, improve the efficiency of the state-based regulatory system and working with state officials to create a uniform arrangement.

Keep in mind, however, that while there would be federal input, Oxley told NAIC officials, there would be no optional federal charter, no federal regulator and no dual federal-state regulatory system. Instead, he continued, the legislation would create an advisory panel, consisting of both federal and state regulators that would make his “road map” work and coordinate future insurance discussions.

Meanwhile, Oxley and Baker plan to build on NAIC’s company and agent licensing programs, as well as help put together uniform standards of review and create a streamlined review process based on those standards. Moreover, they want to move away from state price controls and toward stricter regulations on market conduct.

Already, Oxley and Baker have received support from officials at the Independent Insurance Agents & Brokers of America (IIABA), who consider the proposal “the best hope for insurance regulation,” and MassMutual, which endorses an optional federal charter. MassMutual executives believe the Oxley-Baker proposal will “create more affordable and competitive choices for consumers with uniform standards that will help state insurance regulators better target resources towards more meaningful consumer protections.” – K.L.