Acknowledging that legacy technologies are not the only antiquated systems in insurance, carriers, trade associations and commissioners are aggressively approaching the regulatory reform of the insurance industry. The U.S. House Financial Services Committee is leaning towards federal standards legislation that would support the establishment of an Office of National Insurers within the Treasury Department. Such an office would enforce uniform requirements, faster decision-making and a centralized voice for the industry. But not all interest groups are convinced that a federal charter is the best solution.
Many industry representatives argue that through a greater reliance on technology, a modernized state-based system could reap similar results. And since the states have the advantage of being closer to consumers, modernization of the current system should first be given a try, they say.
Currently the Property Casualty Insurers Association of America (PCI, Des Plaines, Ill.)-formed as a result of the January 2004 merger of the National Association of Independent Insurers and the Alliance of American Insurers-is advocating a state modernization effort in the P&C market.
"Over time, regulation within many of the states has grown to the point where it has become excessive," contends Bob Zeman, senior vice president, PCI. He fears that U.S. carriers will be unable to compete with global insurers that are not nearly as regulated as their U.S. counterparts.
PCI is pushing for a competition-based rating system free of price controls. The organization-which represents 40 percent of the P&C industry-reasons that in a competitive market insurers will develop more innovative policies and pricing structures to capture a greater share of business. Many insurers agree.
"The optimal regulatory system is really one that is dependent on the educated consumer and competition," says JoAnne Kron, counsel, Allstate Insurance Company (Northbrook, Ill). "If the states can reform and rely on a competitive marketplace then they have an advantage over a federal charter."
Allstate envisions a reformed state-based system that would place a greater emphasis on technology. "Today's regulatory system doesn't acknowledge today's technology," contends Kron. "It's based on a marketplace that doesn't exist anymore." The carrier would like to see state insurance departments freed from administrative tasks such as those associated with rate filings so that they can take on a bigger informational role.
"As a consumer I could rely on my [state insurance department] to distribute information regarding a carrier's solvency and rates," she says. "Additionally, [departments] could hold information that insurers have about consumers." But that wouldn't be the only benefit for carriers.
If such modernization is adopted in the states, reduced administrative burdens could also equate to an increase in much-needed dollars for technology, suggests Ernst Csiszar, director of the South Carolina Department of Insurance and president of the National Association of Insurance Commissioners (NAIC, Kansas City, Mo.).
"As the former CEO of a P&C carrier, I know firsthand that insurers spend millions of dollars on creating efficiencies," stresses Csiszar. "However, insurance expense ratios are extremely high compared to other industries." In order to free up administrative dollars, the NAIC is lobbying for uniform product standards so that life underwriters can compete on a more even playing field.
Product Approval Costs
The association reports that products sold by life insurers have evolved to be investment-like. And since these carriers are regulated on a state-by-state basis, they have to compete with securities firms that are free to sell their products without prior review.
"It can be costly when a carrier is going through product approval and doing it in 50 state territories," explains Csiszar. "There are also costs involved in waiting while these products are reviewed. The NAIC wants to make the process as efficient as possible with a single point of entry and a quick review process."
Although the NAIC supports standardization, the group is strongly opposed to a federal charter, stresses Csiszar. "The advantage of the state system is the closeness to the customer, and you won't get that at a federal level."
In individual states as well as collectively, the NAIC has been enforcing improved insurance marketplace efficiencies Its goals have been outlined in the organization's Regulatory Modernization Action Plan, which recognizes that advances in technology facilitate the opportunity to offer new products.
The association has gotten the legislative ball rolling through the creation of the Interstate Insurance Product Regulation Compact. "The compact is a model law," explains Csiszar. It will establish a mechanism for developing national product standards for life insurance, annuities, disability income and long-term care products.
State regulators will work with state policymakers with the intent of having the Compact operational in at least 30 states or states representing 60 percent of the premium volume for life insurance, annuities, disability income insurance and long-term care insurance products entered into the compact by the end of 2008, according to the NAIC.
Progress has also been made within some of the more excessively regulated states, reports PCI. In July 2003, New Jersey governor James McGreevey signed a bill that is intended to reform the state's auto insurance system and boost competition. Additionally, in Texas lawmakers have approved a file-and-use system. And Louisiana lawmakers have sent the governor a bill that could establish a limited flex-rating system that would alter rates by up to 10 percent within a year without needing rating approval.