With all the changes taking place in the insurance industry, the last thing players want to do is toss out a state-regulated system which is sensitive to local needs and replace it with a highly bureaucratic, centralized system, writes Jack Ramirez.
Competition, consolidation, and technology: These complex issues have all had an impact on the way we conduct the insurance business, and in many ways have benefited consumers. But recently proposed legislation could hurt both insurers and buyers - by changing state regulation.While it is true that our current state regulatory system could stand some fine tuning, it is a system that works. State regulation stimulates competition by making it easier for small to mid-size insurance companies to enter and exit local markets, keeping availability broad and prices competitive. State regulators know their local markets better than any federal overseer could. And state regulation spreads the risk of exposure in the event that a single federal regulatory system goes bad.
Proposed changes to federal financial services laws could change all that. The financial modernization bill in Congress could ultimately change the way insurance is regulated.
The current versions of the bill do not clearly define “functional insurance regulation.” Its wording limits state regulation by saying it cannot “prevent or restrict” bank insurance activities. However, under an earlier US Supreme Court decision, state regulation could be limited only if it “prevents or significantly interferes” with the business of banking. Under the current versions of the bill, the Office of the Comptroller of the Currency (OCC) could pre-empt existing state laws and regulations if they have a substantially more adverse impact on banks.
The National Association of Independent Insurers (NAII) represents more than 620 insurance companies of all sizes, writing all lines of insurance in every state, and 29% of the nation's property/casualty business. This diversity means that our members may not agree on everything. However, they do concur on one point - the importance of a strong state regulatory system that works well for them and their customers.
If the current insurance market is driven by competition, convergence and technology, state regulation is helping to fuel the engine. Although the US insurance marketplace is still the biggest in the world (with about 1,100 property/casualty insurers, nearly 600 life/health insurers, and 31% of the global market for all lines), it also is extremely competitive. High catastrophe losses, slow premium growth, and weakening investment income left us with lacklustre financial results for 1998 - our rate of return fell to 9.3%, from 11.9% in 1997. These returns mean insurers are more driven than ever before to keep expenses low, which in turn spurs even more competition.
State regulation also helps keep the industry competitive. Many small to mid-size insurance companies do not write insurance on a national basis. Their underwriting criteria are based in large part on an individual state's regulatory environment. Under the current state regulatory system, these companies can leave a market if restrictive regulations or legislation prevent them from making a profit in that state.
Because the state system relies on 50 different regulators in 50 different jurisdictions, it avoids the lack of choice that could develop if a single “unsympathetic” regulator is running a single centralized system. Such an arrangement would not be conducive to a healthy, open, competitive insurance market.
Convergence is another side effect of today's competitive environment, which is why mergers and acquisitions are at an all-time high. Insurance companies that merge or acquire are taking a two-pronged approach to competition. They're seeking bigger size, more geographic reach, and a wider product line. At the same time, they're attempting to eliminate redundancies and make their operations more efficient - again, to the benefit of insurance buyers.
During 1998, there were $165.4 billion of insurance company mergers and acquisitions, almost 200% more than the $56.1 billion in 1997, according to Conning & Co. These mergers are worth more, too - the top five of the 1998 deals accounted for almost two thirds of the dollar volume. We're talking jumbo deals, involving players like Commercial Union, General Accident, General Re, Nationwide, St. Paul, and USF&G.
This trend is resulting in some interesting permutations. Banks are buying agencies and insurance companies - insurance companies are launching thrifts. Travelers and Citicorp merged in a $70 billion deal that spawned Citigroup, a broad-based financial services company that will sell everything from insurance to securities.
If adopted, the financial services modernization bill will probably create even more of these arrangements, with more banks buying up insurance companies. However, banks and insurance companies are coming at the merger trend from two very different perspectives. If the bill passes, banks may buy insurance companies - not necessarily to try and turn a profit on underwriting, but to cross-sell their products to insurers' voluminous customer lists. Insurers, on the other hand, do not want to get into the banking business. They have established thrifts to better serve customers who want “one-stop shopping,”Finally, technology is playing a major role in today's changing insurance market. Our customers want their products better, cheaper and faster - and a mind-boggling array of technological wonders is making this not only possible, but mandatory.
According to a recent study, internet insurance sales will increase to $1.4 billion by 2001 or 7.5% of total premiums written and to 10.5% by 2005. Companies like Progressive and Travelers are using the web to sell auto insurance, and the Reliance Group plans to significantly increase its sale of commercial coverage over the internet. This technology has the potential to change our industry, affecting pricing, coverage, and distribution.
Soothsayers who predict that convergence between banks and insurers is inevitable, and that only a central overseer can regulate them, are mistaken. There will always be a place for pure insurance company models in the mix. Successful companies like GEICO, for example, have gone the opposite of the “one-stop shopping” approach and are focused on being the best at personal lines coverage like auto. Such insurers are highly reliant and supportive of the state regulatory system.
State regulation works for insurers and consumers because it brings the insurance industry close to the local level. State commissioners are knowledgeable about the markets in their states, and are able to spot both trends and problems while they are still in the developmental stage. The system works because its administrators are intimately involved in the market, and know what's involved with doing business in the state. They develop a relationship with the insurers and consumers, and are in the best position to serve both fairly. No far-away federal bureaucrat can have that kind of rapport, especially if he or she has little knowledge of the inner workings of insurance.
With all the changes taking place in our industry, the last thing we should do is toss out a state-regulated system which is sensitive to local needs and replace it with a highly bureaucratic, centralized system. Instead, we should promote a system that can evolve with the marketplace changes, without starting from scratch.
In addition to all this, there's the simple fact that the state regulatory system isn't really likely to go away. No federal regulatory “silver bullet” can simplify the regulatory process. State regulators are far too entrenched in the system to let it go, so it's safe to assume that some sort of state regulatory system will survive whatever modernization efforts become law. And the resultant dual regulatory system would be even more expensive and unwieldy.For the most part, the state regulatory system does a good job for the insurance industry and its consumers. That's why the NAII and its members, while recognizing the need for regulatory streamlining, want to safeguard the system for today and the future.
Jack Ramirez is president and ceo of the National Association of Independent Insurers.