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12:19 PM
Michael J. Bernaski
Michael J. Bernaski
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OFC: Bring in the Feds

TRIA provides a model for how consumers, corporations and municipalities would benefit from federal regulation of the insurance industry under an Optional Federal Charter model.

In November 2002, when President Bush signed the Terrorism Risk Insurance Act (TRIA), few questioned the trade-offs inherent in the federal government playing an increased role to ensure the solvency of the insurance industry. The act was even extended in influence and duration in December 2006 after moderate industry lobbying.

However, state-by-state legislation could have been passed with a separate solution put in place at the discretion of each jurisdiction. The NAIC could have negotiated a model law and each state would have assessed its unique exposure and determined the degree of subsidy it was willing to provide if a terrorist act occurred within its borders.

An argument could be made that the relatively few states with large potential targets have very different needs than the majority of states. Coincidentally, these few already have the largest bureaucracies regulating the insurance industry. Terrorism anywhere in the United States is terrorism against all of us -- without question. However, if we followed the template of the past, a jurisdiction-centric solution would have been pursued aided by a less-comprehensive facility.

This did not happen for a very simple reason -- it did not make sense for consumers, municipalities, corporations or industry participants. The benefits of a federal role included the speed and ease of implementation, the simplicity of uniformity, lower administrative cost and a pooling of risk that better leverages the assets set aside for the purpose.

A similar line of logic can be used to justify the passage of an Optional Federal Charter (OFC). Consumers, corporations and municipalities would benefit for similar reasons.

For starters, across markets the ability to apply actuarial analysis at a regional or national level would enable pricing that more closely mirrors risk. Accessibility for unique risks in the admitted market might also increase as a result of larger data sets. Distribution could also be simplified and streamlined, increasing the value it provides to the buyer. The entry point for reinsurance might also become more efficient across markets.

Consumers would be able to buy insurance at lower cost and state budgets could decrease as they would only regulate the insurers that opt out. Our increasingly mobile society would benefit from convenience when moving between states -- the rates might change, but the coverage would be more apt to stay the same.

Corporations doing business in multiple states would be able to make risk management decisions without concern for anything but the exposure of their operation. The cost of their insurance as well as their internal administrative costs would decrease. Even municipalities could benefit from lower cost and the potential to pool risk on a more cost-effective basis.

The passage of an OFC would likely become a catalyst for much needed industry restructuring. Significant cost outtake, an increase in the speed of product/price changes and the lowering of overhead expense would fuel an increased level of competition. And as with any change, there will be winners and losers. Industry consolidation is not only likely, it is imminent if such legislation is passed. New entrants, particularly specialists, would come into the simpler marketplace and provide options with better coverage and lower cost. After a shakeout, the benefits to the insurance buyer would be substantial.

State regulators have the knowledge today on how to increase access, affordability and solvency in the industry and they are critical to the formulation of any national policy. However, it is important to keep in mind that the politicians to whom the regulators report are going to be deprived of a hot issue if the OFC passes, particularly in the largest populations states. Leveraging (or inflaming) consumerism and taming industry abuses are political weapons for local battles they are not likely to concede easily -- no matter who benefits.

Michael J. Bernaski is an independent consultant to the insurance industry, specializing in IT strategy, operational improvement and transformational change management.

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