Assessing possible changes from the many deregulation proposals under consideration remains a big area of interest for the commercial lines industry, writes Paul W. Springman.
One of the dominant issues in insurance circles today is the proposal to deregulate commercial lines insurance. With a number of proposals under consideration, it can be difficult to answer the question, "do you support deregulating commercial lines insurance?"
Despite not being the subject of panel discussions at NAPSLO's recent convention in September in San Francisco, it still was a popular topic among attendees.
Close to 2,300 people registered for the convention, a new record for the Association, and while the Year 2000 technological problem and a closer look at market conduct exams were the focus of programs, and completing business arrangements was the focus of many members, deregulation was discussed widely among attendees.
Anticipating market changes and changes in the regulatory or legislative field under which the industry operates is important and as a result assessing possible changes from the many deregulation proposals under consideration remains a big area of interest for the industry.
The National Association of Insurance Commissioners' has adopted a white paper on deregulation which includes a number of ideas for regulators and legislators to contemplate in order to deregulate portions of the admitted commercial market.
For the non-admitted market, the white paper includes recommendations that push for the expanded use of the export list concept and efforts to find effective and efficient ways for brokers to pay surplus lines premium taxes on multi-state risks.
While the NAIC white paper offers some advantages to the non-admitted market, it doesn't answer the question "is deregulation necessary?"
Last fall Georgia State released a study on commercial lines deregulation. The draft report generally concluded that if competition exists in commercial insurance markets, there is no need for rate and form regulation. In fact, such regulation is not only unnecessary, but also costly.
The report also argued for reduction of some of the current regulation of the surplus lines market and suggests that the market be opened further through the expansion of the use of export lists and the creation of ways to simplify the payment of premium taxes on multi-state surplus lines risks. This suggests that changes in current regulation, no deregulation is necessary.
Opposition to further deregulation of commercial lines or markets is not due to business concerns, but to the public policy impact of this action. Deregulation of commercial insurance is the wrong public policy road to follow. What is needed is not more deregulation, but more efficient implementation of the existing regulation. What is needed is not more exceptions to current regulation, but actions that assure the fairness, integrity and uniformity of the current regulatory process, with any exceptions being fully justified as promoting the public interest.
Commercial lines deregulation, for the most part, is premised upon the concept that large commercial insurance buyers possess the knowledge, assets and expertise to effectively deal in the commercial marketplace without having to bear the cost and burdens or receiving the benefits of current regulatory protections. The elimination or circumvention of these existing safeguards would reduce the cost of the insurance transaction and enable these "sophisticated" buyers to secure their insurance coverage at a cheaper price. This approach is, at least on the surface, appealing. However, there are some difficulties with it.
Although the world may be full of "sophisticated" insurance buyers, the "sophisticated" claimant, particularly the "sophisticated third party claimant," is a nonexistent species.
It was primarily the sophisticated risk managers and "expert" brokers who utilized the Mission Insurance Company in the 1980s. It was these same sophisticated professionals who used Transit Casualty Company, and then the London-based Weavers Group in the 1980s. All three companies or syndicates wrote commercial risks for large "sophisticated" buyers and their brokers. At least they wrote these risks until each company became insolvent, leaving many claimants holding the bag. One can imagine what might have happened if these "sophisticates" had had unfettered access to standard markets through deregulation?
Also, you can imagine the "black eye" state insurance regulation would have gotten if these disasters were facilitated by earlier state regulatory/legislative action that deregulated the commercial marketplace. If that had occurred, the insurance industry might be regulated by a federal agency today.
Another example of the danger of deregulation can be found in the recent problems suffered at Lloyd's. One reason Lloyd's of London found itself in the bind it did was the continuous drive toward deregulation of the Lloyd's market by self regulators. The self regulators made things too easy for the market participants and forgot their responsibility to protect the buyers of insurance. Regulation can promote a market, but its primary objective is to protect insurance buyers and the claimants. Unfortunately, many of the current proposals for commercial lines deregulation facilitate the use of commercial insurance markets at the expense of the buyers and claimants.
Commercial lines deregulation does not have to take the form of elimination of regulation. What the larger industrial risk demands is regulatory relief in obtaining insurance coverage tailored to meet its needs. Whether or not this relief comes in the form of the creation of a more efficient regulatory process or the elimination of regulation altogether is not the issue. It is efficiency that the buyer demands from the regulatory process, not a specific form of regulation.
For example, large industrial buyers and their brokers often find that an admitted company does not have available precisely what the insured requires through filed and approved forms. As it stands now, the insurer would need a minimum of 35 days to file and obtain approval of a program which is tailored specifically to meet the insured's needs, but this may not accommodate the insured's time table - which is immediate. Changes in current rules, in some states, could lessen this regulatory burden through the implementation of a file and use regulation rather than using a prior approval approach.
According to the proponents of deregulation, one of its goals is to create efficiencies for both regulators and companies by standardizing the laws among the states, while maintaining a level playing field among the insurers. If this is what is meant by deregulation, then we support the concept; for our industry endorses efforts to re-engineer the current regulatory process to make it consistent among the states. Of course, this is a much different approach to "deregulation" than the elimination of regulatory oversight of various markets or market participants.
However, in re-engineering insurance regulation to create these efficiencies and uniformities, the landscape of the marketplace should not be altered. This type of deregulation should not create a situation where a certain group of insurance companies obtains an advantage over another group of insurers. Rather, any re-engineering of the regulatory structure should simplify the manner in which business is conducted for all insurers, while maintaining a financially sound competitive market, which serves the consumers needs, in a fair and equitable manner.
Thus, a major benefit of deregulation or re-engineering, for both the admitted and non-admitted markets, should be streamlining the existing regulatory procedures so regulation works in the interest of all concerned - not a restructuring of the market in favor of one segment over another. Consequently, changes made, in the name of deregulation, for the admitted market, should result in an equivalent reduction in regulatory cost or burden for surplus lines market participants.
The NAIC white paper on commercial lines deregulation suggests that certain laws and regulations currently governing policy forms and their contents should not apply to large commercial buyers. The laws and regulations that would be affected include requirements for renewal notices, cancellation notices and procedures, and mandatory policy wording.
In some states, these laws apply to surplus lines insurance as well as to the admitted market. Therefore, to the extent deregulation proposals exonerate the policies of admitted carrier from compliance with these rules, surplus lines policies should also be exempted.
Currently, some of the risks written by the surplus lines market are declined by the admitted market because the admitted companies do not have the necessary rate, rule and form filing approvals in place. Many times these insureds are unique in nature and possess a degree of risk which is generally better insured when underwritten by experienced surplus lines companies. If states completely deregulate the market for large buyers, these types of risks should be placed on the export list in all states. This would maintain a level playing field between surplus lines and admitted markets. Such a level playing field benefits the consumer by expanding their access to available markets.
Currently, in the two states, New Jersey and Pennsylvania, surplus lines companies must file their policy forms and endorsements. Ironically, these states generally do not require admitted companies to file their commercial forms. This creates an inequity for surplus lines insurers. In the name of a level playing field, these inequities should be eliminated.
At a time when the Congress is debating, in Washington, the future regulatory structure of the financial services industry, the NAIC and state insurance regulators are contemplating the abandonment of the regulation of major segments of the insurance industry. This is the wrong message for state insurance regulation to send Congress.
The federal government cannot be given any more ammunition to justify usurpation of state regulation. The very heart of McCarran states that the federal government will not interfere with state regulation to the extent that insurance is, in fact, regulated by the state. If the business of insurance is substantially deregulated and insolvencies occur or a market crisis transpires state sponsored deregulation will be blamed. This will dramatically enhance the possibility of a federal takeover of insurance regulation. In fact, it might compel it.
Paul W. Springman is the immediate past president of NAPSLO.