A roadmap for regulatory modernisation, a step towards a free market, a fantasy wish for insurers or just 'dumb', are some of the descriptions of the US draft State Modernization and Regulatory Transparency Act as insurers, intermediaries and consumers prepare for battle Phil Zinkewicz writes.
Once again, US insurance industry regulators, federal legislators and insurance industry interests are pursuing their seemingly never-ending quest to discover the best road to travel in streamlining what almost all agree is a complex regulatory system that is inefficient, time-consuming for insurance companies and agents alike, and places the US insurance market at a competitive disadvantage in the global insurance arena.
The latest proposal is for a different kind of 'roadmap' for insurance regulatory reform called the State Modernization and Regulatory Transparency Act (SMART). The draft is the brainchild of Representative Mike Oxley (Ohio), chairman of the House Financial Services Committee, and Representative Richard Baker (Louisiana), chairman of the Capital Markets Subcommittee.
Among those areas addressed in the 17 sections of the draft law are: market conduct and uniform standards; insurer licensing; producer licensing; life insurance; commercial property and casualty insurance; personal lines property and casualty insurance; surplus lines and independently procured insurance; reinsurance; anti-fraud network; viatical products; miscellaneous insurance; receivership; financial surveillance; a new state-national insurance coordination partnership, and creating competitive insurance markets.
State or federal?
On the face of it, SMART still leaves the regulation of insurance in the hands of the states. For example, in the area of market-conduct oversight, states would be required to have, within three years of the bill's passage, a coordinated system for implementing market-conduct examinations of multistate insurers on a regular basis. States would also have to create uniform standards for handling complaints. In addition, the draft addresses uniform licensing standards for agents that states must establish within a certain time frame.
However, there are some elements of the draft that stand out from the more technical ones - elements that have caused concern in some segments of the insurance industry and that have led some consumer advocates to believe that SMART, rather than promoting state regulation of insurance, may be more of a federal wolf hiding in sheep's clothing.
For example, how will the mandates under SMART be enforced if not through some federal intervention? The draft proposes the creation of a federal insurance arbiter, "without any regulatory authority," to oversee conflicts over compliance. This "arbiter" would be made up of a seven-member board, including: three state insurance commissioners; delegates from the Securities and Exchange Commission (SEC), the US Treasury Department and the Board of Governors of the Federal Reserve System (FRB), and a chair nominated by the state insurance commissioners and appointed by the US president.
There is obviously a good deal of federal input there - the SEC, Treasury, the FRB and even the president of the United States.
The board would have equal numbers of Republicans and Democrats. The bill says that the "body" would have no regulatory authority and that it would not have a permanent office. It could only offer non-binding arbitration and interpretations of SMART Act issues. It would, however, be able to seek expedited hearings in federal court to resolve conflicts.
There's that word 'federal' again!
Another element of SMART that stands out from the rest is that the Act mandates open competition in the property and casualty marketplace (no-prior-approval) to replace prior approval laws in states where they exist.
Right now, some states have no-prior-approval laws, which say that an insurer can apply to the insurance department for a rate increase, then implement the rate increase immediately without the state's official sanction.
If the insurance department later determines the rate increase is improper, then it can take action against the insurer. Under this approach, insurers do not have to wait long periods of time, as they do in prior-approval states, to implement what they believe are necessary rate increases.
However, SMART would do away with prior-approval eventually in every state. With respect to personal lines, the discussion draft calls for a two-year flex-rating provision to apply upon enactment of the legislation.
The measure allows for a 7% flex-band in the first year and a 12% band in the second year. After the second year, no state would be permitted to "require the approval, establishment, or prior review of any rate charged for an insurance policy by an insurer".
This provision, of course, has drawn praise from insurance companies, often frustrated by prior-approval laws in certain states. But to consumer activists, it smells once more of federal intervention - the federal government telling states what kind of rating law they must eventually have.
Julie Rochman, a senior vice president with the American Insurance Association (AIA), gives the insurers' view: "We are very encouraged by the fact that the chairmen (of the committees) are trying to take a step away from state price controls and toward a free market." The AIA represents the larger national insurance companies in the US marketplace.
The Property Casualty Insurers Association of America (PCI), whose membership comprises some of the smaller US insurers, also looks favourably on the open competition portion of the Act. "Earlier this year, Rep. Baker told us that rate regulatory relief is the most critical part of the legislative package and that the bill will not move without it," said Carl Parks, senior vice president of federal government affairs. "The discussion draft delivers on that promise."
The National Association of Mutual Insurance Companies (NAMIC) has jumped onto the SMART bandwagon as well. "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," said Mr Winston.
"Most importantly, the bill would accomplish this without creating an optional federal charter, a federal regulator or any type of permanent federal insurance office."
So much for insurers' views. But what about insurance agents and brokers?
In September, in testimony before the Senate Banking Committee, the Independent Insurance Agents and Brokers Association (IIABA) said it "strongly supports" SMART, saying it would provide targeted federal reforms without undermining the state-based system. The IIABA sees SMART as a sort of "partnership" approach on the part of the federal government and state regulation, noting that it has always opposed out-and-out federal regulation and the dual regulatory approach.
In his testimony, Thomas B Ahart, an IIABA past president, said that two overarching principles should guide congressional action to reform the existing system. "First, Congress should only change components of the existing system that need to be fixed - not overhaul the entire system on a one-size-fits-all basis. Second, no actions should be taken that would jeopardise the protection of insurance consumers. By using target and limited federal legislation to overcome the structural impediment to reform at the state level, we can improve rather than replace the current state-based system and, in the process, promote a more efficient regulatory framework," Mr Ahart commented.
However, Mr Ahart's testimony did not address the open competition mandate of SMART and, when asked about it, another IIABA spokesman said "this is not federal regulation. It merely preempts certain state laws."
Those in the middle
While the National Association of Professional Insurance Agents (PIA) says it is encouraged by the first draft of SMART, it has stopped short of outright endorsement of the Act at this time. "The draft addresses many of the goals PIA supports to ensure regulatory modernisation, in a manner that preserves the principle of state regulation of insurance," said PIA national executive vice president and CEO Len Brevik. "We are particularly pleased that the bill seeks to accomplish these goals without creating an optional federal charter or establishing a federal insurance 'czar' to oversee the insurance industry."
However, Mr Brevik added that, despite being pleased with many of the provisions included in the draft, PIA "will not issue a blanket endorsement at this time."
The PIA stated that: "A provision for the creation of an advisory council comprised of state and federal regulators that would have no regulatory power, but would mediate disputes and report back to Congress on compliance, appears to be well thought out." However, the PIA went on to add that New York Superintendent of Insurance Greg Serio, chairman of government affairs for the National Association of Insurance Commissioners (NAIC), was quoted in an interview with the Bureau of National Affairs (BNA) as saying that one concern state regulators have with the draft is with the notion of a federal entity that lacks a concrete format and structure, not being needed because of changes in state regulation.
Mr Serio has indeed expressed concerns over Congressional attempts to bring about insurance industry regulatory reform. Speaking on behalf of the NAIC before the Committee on Banking, Housing and Urban Affairs last September, he said: "The NAIC and its members believe Congress must be very careful in considering potential federal legislation to achieve modernisation of insurance regulation. Even well-intended and seemingly benign federal legislation can have a substantial adverse impact on existing state laws and regulations designed to protect insurance consumers. Because federal law preempts conflicting state laws under the United States Constitution, hastily drafted or vague federal laws can easily undermine or negate important state legal protection for American consumers."
Mr Serio said that, when Congress passed the Gramm-Leach-Bliley Act (GLB) in 1999, it acknowledged that states should regulate the business of insurance, as the SMART Act does. "There was a careful statutory balancing of regulatory responsibilities among federal banking and securities agencies and state insurance departments, with the result that federal agencies would not be involved in making regulatory determinations about insurance matters," he explained. "Even though Congress tried very hard in GLB to craft language that would not unnecessarily preempt state laws, there have already been disagreements about the extent to which federally-chartered banks may conduct insurance-related activities without complying with state laws."
Mr Serio concluded that the NAIC and the states are "well underway in our efforts to modernise state regulation where improvements are needed, while preserving the benefits of local consumer protection that is the real strength of state insurance regulation."
Meanwhile, the Conference of Insurance Legislators (NCOIL) has taken a strong position against the SMART Act. In a letter sent by Senator Steven Geller of Florida to both Oxley and Baker, Senator Geller said NCOIL cannot support SMART because it could:
- undermine the role of state legislatures in the development of insurance public policy;
- undermine the authority of state insurance commissioners, who are elected in no less than 12 states, two of those states being the most populous in the nation, as well as the authority of state insurance commissioners who are duly appointed by their elected governors;
- nullify and preempt many state insurance statutes that were enacted after input from consumers and businesses and after thoughtful consideration by state legislatures; and
- impose on taxpayers and consumers the costs of a new quasi-federal entity that will very likely evolve into a federal regulatory body.
It is that last point that is of most concern for those who are the strongest proponents of state regulation. NCOIL, the NAIC and the PIA all expressed concern that what is now the amorphous federal entity described in the SMART Act could become a federal body of more substance.
"NCOIL cannot support any federal legislation that would encroach upon the states' authority to develop insurance public policy," said Senator Geller. "Federal intervention in the regulation of insurance would cast aside the insurance public policy expertise of state legislatures and state insurance regulators in favor of an untested and inflexible system."
Probably the most vociferous opponents of the SMART Act are the consumer advocates. Speaking recently before the NAIC, Birny Birnbaum, leader of the Center for Economic Justice, said that the Act is mis-named. "The Act is not SMART, but incredibly DUMB", adding that it should be sub-titled "Insurers' Deregulation and Unfunded Mandates Bonanza Act".
Mr Birnbaum told the NAIC that SMART is a "fantasy wish for insurers," providing roadblocks for regulation, for market analysis and enforcement.
He said that, under SMART, there would be no oversight of risk classification or overall rate levels, no requirements for reasonable or non-discriminatory rates and excessive rates in residual markets.
At the same time, Mr Birnbaum said, there is nothing offered to consumers under SMART. "There are no loss prevention measures, no insurance availability or affordability measures, no consumer representation or advocacy, no new tools for market regulation, no limits on risk classification, no consumer information or education measures and no initiatives to improve consumers' position in insurance market transactions." He also said that SMART would virtually eliminate state anti-discriminatory laws. Asked to characterise SMART's mandate for no-prior-approval laws, Mr Birnbaum said it amounts to "de facto federal regulation".
Right now, of course, the architects and proponents of SMART are being extremely careful in referring to the Act as "a draft for discussion", or a "roadmap for regulatory modernisation", indicating that SMART is not written in stone. And, since there is very little likelihood that Congress will address SMART before the end of this year, it is virtually certain that it will be introduced again next year and will bring about significant debate. At issue will certainly be whether SMART is indeed a move to assist states in regulating insurance or whether it is yet another attempt to sneak that camel's nose - federal regulation - under the tent.