One of the dominant issues in US insurance circles today is deregulation of 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?" says Paul W. Springman.
The National Association of Insurance Commissioners (NAIC) is considering 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.
However, while the NAIC paper offers some advantages to the non-admitted market, it does not answer the question: "Is deregulation necessary?"
Last fall the Georgia State University 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 with changes in current regulation, no deregulation would be 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 based on the premise that large commercial insurance buyers possess the knowledge, assets and expertise to deal effectively 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 non-existent species. It was primarily the sophisticated risk managers and "expert" brokers who utilised the Mission Insurance Company in the 1980s, and these same sophisticated professionals who used Transit Casualty Company and then the London based Weavers Group. All three companies or syndicates wrote commercial risks for large "sophisticated" buyers and their brokers. At least they did until each 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, imagine the "black eye" state insurance regulation would have had 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.
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 programme which is tailored specifically to meet the insured's needs, but this may not accommodate the insured's timetable - 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.
Re-engineering for efficiency
According to the proponents of deregulation, one of its goals is to create efficiencies for both regulators and companies by standardising 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 a streamlining of the existing regulatory procedures so regulation works in the interest of all concerned - not a restructuring of the market in favour 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 affected would 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.
A level playing field
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.
In the two states, New Jersey and Pennsylvania, surplus lines companies currently 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 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 the McCarran-Ferguson Act 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, then state sponsored deregulation will be blamed. This would dramatically enhance the possibility of a federal takeover of insurance regulation. In fact, it might compel it.
Paul W. Springman became president of the National Association of Professional Surplus Lines Offices (NAPSLO) in September 1997. He is president of the Evanston Insurance Company and president and ceo of the Evanston, Illinois, based underwriting manager, Shand Morahan & Co, Inc. NAPSLO Tel: (1) 816 741 3916. Fax: (1) 816 741 5409. E-mail: email@example.com.