Constant Change

After a year in which insurance companies felt the burdens of compliance continue to multiply, witnessed top industry executives held accountable and felt the pummeling of the worst hurricane-related claims ever, carriers are hoping for less turmoil in 2006. But the coming year's regulatory and political agenda could result in requirements for reform and increasing technology investments, which could alter the business environment for property and casualty, life, and health insurers alike.

Among the issues swirling around insurers are the pending deadlines for Sarbanes-Oxley (SOX) compliance and the continuing controversy over state-based regulation of the industry. In addition, the debate about insurers' cooperation with the federal government to establish a catastrophe and terrorism response likely will be heard in the halls of Congress this year as P&C insurers continue their efforts to help rebuild the Gulf and prepare for the next hurricane season. Further, carriers will await a consensus on the state of long-term care and retirement funds. And the collaboration among insurers and the government to promote the adoption of electronic medical records (EMRs) could shape the health insurance industry's technology strategy for decades to come.

Still, the regulatory and political action could present an opportunity for insurance companies. In 2006, insurers that have been struggling to comply with disparate state regulations could achieve some standardization with the passage of the SMART Act. The regulatory modernization proposal would build a framework for a national system of state-based regulation that would create uniform standards in such areas as market conduct, licensing, the filing of new products and reinsurance. "Regulatory modernization would keep states in charge of regulating insurance, but create a set of federal standards that would eliminate price controls and controls over policy forms," explains Joseph Annotti, senior vice president of public affairs for the Property Casualty Insurers Association of America (PCI; Chicago).

But reaching a consensus on regulatory modernization will not be easy. By creating a set of federal standards, private insurance companies or mutual insurers that currently are exempt from SOX would be subject to that regulation. So the debate continues. "The cost of complying with regulations is significant," points out Brian Casey, a partner with Lord, Bissell, & Brook, an Atlanta-based corporate insurance law practice. "And layering compliance regulations on a small company could smother them with costs."

P&C: Federally Funded?

Cost is an all too familiar issue for P&C carriers, which still are recovering from the $70 million in estimated losses resulting from 2005's hurricane season. Consequently, many executives want to take steps to ensure that the industry can afford to cover future catastrophes. Over the next year, P&C insurers will debate whether the federal government should have a role alongside private insurers to initiate a national catastrophe insurance fund. "The industry has seen repeats of the significant impacts of risk," says Casey. As a result, "There will be a consideration from Congress this year for some kind of economic partnership to deal with federal-related risks."

But opponents of a national catastrophe fund argue that involving the government would make it more difficult to charge appropriate rates in high-risk states. Creating the program from scratch also will be a challenge, explains the PCI's Annotti. "We want a system that relies on free market principles as much as possible while also allowing insurance companies to charge the right price to insure as much of that catastrophic exposure in the private market" as possible, he says.

In addition to weather-related catastrophe insurance coverage, another widely debated topic in Washington has been the possible two-year extension of the Terrorism Risk Insurance Act (TRIA) of 2002, which guarantees that the federal government will share up to $100 billion in insurance coverage for catastrophic losses resulting from terrorist attacks. Both the House and the Senate have passed versions of the extension that raise the amount the federal government will share with private insurers for losses resulting from terrorism, and the bill is headed to the president for approval. But the industry is looking for a long-term solution. "A long-term solution is creating a more market-driven terrorism insurance market in the sale of catastrophe risk bonds with some presence of the government backing up insurers," says Annotti.

Life: One Regulator to Rule Them All

Another regulatory proposal that is gaining momentum is the Washington, D.C.-based American Council of Life Insurers' (ACLI) push for a federal and state chartering system that would allow insurers the option to comply with either federal or state regulations. (The proposal differs from the SMART Act, which proposes all insurers comply with a national framework of state-based regulation.) "In 2006, we would like to see a bill in which life insurance would be regulated on the federal level," explains Kimberly Olson Dorgan, ACLI's senior vice president.

Currently, insurers must comply with 51 different sets of state regulations. An optional charter would create consistent regulations and examinations across all states. "One of the biggest problems that life insurers have is getting their products to market promptly," says Jack Dolan, managing director for ACLI. "A federal regulator would help address this issue so there would be only one place to file new products."

The life insurance industry also will begin dealing with the issue of anti-money laundering (AML) and suspicious activity reporting regulations under the USA PATRIOT Act, which requires certain insurers to establish AML programs to train employees to recognize suspicious activity. "Raising the awareness with these regulations is a good precaution," says Lord, Bissell, & Brook's Casey. But, insurers will have to dole out money to establish training programs.

In 2006, raising awareness about qualified plans for retirement saving also will be top of mind. Life insurers are pushing the federal government to allow tax breaks to consumers who invest in annuities, explains the ACLI's Dorgan. "Retirement security and taxes will be a crucial issue because Americans need to take personal financial responsibility, and annuities are going to become more important with ballooning [federal] deficits," she says.

The proposed Retirement Security for Life Act would provide incentives for people who purchase annuities by exempting them from paying federal taxes on $20,000 of the income generated by nonqualified annuities, according to the ACLI's Dolan. "This encourages people to save for the future, making sure people don't outlive their incomes," he asserts. For life insurers, the initiative would provide incentives to market annuities to the tidal wave of baby boomers nearing retirement.

Health: An Apple a Day

While those nearing retirement present an opportunity for life insurers, servicing current retirees is proving to be a challenge for health insurers. As of Jan. 1, 2006, the Medicare prescription drug card is available to all 40 million Medicare beneficiaries. In most states, beneficiaries can select from 40 different plans, and there has been much confusion among participants. "The greatest challenge will be to implement education for the program so people can choose the drug coverage that is right for them," explains Mohit Ghose, vice president of public affairs for America's Health Insurance Plans (AHIP; Washington, D.C.).

Currently, the government and insurers provide several Web sites to help customers examine the premium and deductible structures to determine which plan is appropriate. In 2006, insurers will explore more options to educate plan participants.

Educating customers about the benefits of consumer-directed healthcare also will be a major challenge in 2006. Many consumer-directed health plans (CDHPs) include Health Reimbursement Arrangements (HRAs) layered on top of high-deductible PPOs, coupled with interactive Web-based decision-making tools. Other insurers have built a large range of choices into a single product so consumers can select a mix of premium, deductible, co-payment and co-insurance levels. As a result, consumers often are confused about how consumer-directed healthcare works. "It will be a telltale year on whether the consumer-directed health care movement will flop or not," says Lord, Bissell, & Brook's Casey.

2006 also could be a telltale year for electronic medical records (EMRs). The effort to introduce EMRs requires effort and technology investment on the parts of providers, insurers and patients. This year, many states will form Regional Health Information Organizations (RHIOs) to support healthcare data exchange and work toward developing a common set of standards with which they can communicate with each other.

"The absence of federal standards could result in isolated islands, and connecting those islands is key," explains AHIP's Ghose. It is expected that the government will take a role in forming an infrastructure for RHIOs, referred to as the National Health Information Network (NHIN). But, for now, many insurance carriers are taking the lead - and likely will foot most of the bill.