Renaissance Regulators.

A small group of insurance regulators are shaking things up in their home states and leading a regulatory revolution at the national level.

When Kansas Insurance Commissioner Kathleen Sebelius took office five years ago, she forced longtime department employees to scour every regulation and requirement, holding each one up against two standards: Did it do anything to help guarantee an insurer's solvency or did it do something to protect consumers?

Everything was on the table, and at the end of process, Sebelius wiped half the state's regulations off the books. Over the next five years, she created rules and fought for legislation to help get agents licensed within 24 hours and companies licensed within 90 days. She was also among the earliest regulators to fight for-- and win--looser rules on commercial lines insurance.

This is not what insurers expected when Sebelius refused industry contributions during her campaign to become Kansas' fourth insurance commissioner in 50 years and the only one who didn't spend nearly 20 years as assistant commissioner.

"There was half a century of one way of thinking and doing business," Sebelius said. "When people in this department said they've always done it this way, they were talking always. There was no short-term memory in the Kansas Insurance Department."

Sebelius is one of a core group of insurance regulators who, after shaking things up at home, are leading a regulatory revolution at the national level. "It's precisely the same exercise, and it's helpful to have done it already in a microcosm," Sebelius said.

State regulators are trying to reinvent themselves, in part so they can keep their jobs in a changing financial-services marketplace that threatens to make them irrelevant. Like Sebelius, the other commissioners in this group of renaissance regulators believe they can fulfill their duty to protect consumers without necessarily inhibiting insurers' ability to churn out new products and compete against other financial-services providers.

Ask industry and consumer groups which commissioners are leading the charge, and the same names crop up.

Sebelius is the veteran of the pack, a bridge to an earlier generation of regulators, including North Dakota's Glenn Pomeroy, who cracked the wall of inertia at the National Association of Insurance Commissioners. Now NAIC vice president, Sebelius carved a reputation as a national leader on health insurance issues and is leading the NAIC effort to develop uniform regulations that balance privacy against insurers' business needs for consumer information.

Mike Pickens, the Arkansas insurance commissioner, revamped his office by setting new financial solvency standards and streamlined rules for insurers. He flew to Cairo earlier this year to help Egyptian officials draw up regulations as they seek to create a free market for insurance. He's also working to ensure that the market will be open to U.S. companies.

Lee Covington, the Ohio commissioner, was an insurance defense lawyer who worked with Pickens to develop the Arkansas solvency program. In less than a year, he emerged as a chief "speed-to-market" advocate, lobbying nationally for a system to allow insurers to quickly develop products and get them to consumers.

Texas Commissioner Jose Montemayor is prying loose the restrictions on products and rates. He's begun by exempting many products from the need for his review. Montemayor envisions a state system to license companies nationally so they can compete against national banks.

Illinois Insurance Director Nat Shapo has been in office less than two years, but he's already traveled to Tokyo with a U.S. trade delegation to help Japanese officials form insurance regulations. He preaches the benefits of the Illinois "experiment," which freed insurers from prior approval for rates and new products, producing lower rates and more competition. Though it's been in place for a few decades, regulators still regard the Illinois system as an experiment.

This month, as the NAIC meets in Orlando, Fla., these regulators will be in the vanguard of an unprecedented attempt to cast aside the old ways of doing business and to reshape how states govern insurance. Their efforts could ensure that state regulation has a future in a fast-changing financial-services market defined by the federal Gramm-Leach-Bliley Act. The law, enacted late last year, lifts regulations that separate banks and insurance companies and restructures Depression-era financial-services laws.

"State regulation has to change, or it's going to go the way of the dinosaur," Pickens said.

Following a Vision

Several years ago, Pomeroy had a vision to create uniform standards that would make the NAIC a more efficient organization. He and other commissioners approached NAIC Executive Director Cathy Weatherford with their ideas, and she helped the commissioners transform the NAIC from an advisory organization to a group that could help state regulators set policy Connecticut Commissioner George Reider carried that vision through as NAIC president, paving the way for the current president, George Nichols III of Kentucky, to secure a signed pledge from each NAIC member to streamline insurance laws this year.

Some say the NAIC is progressing with the speed of a glacier. But states now are forced to quicken their pace as financial services change, Nichols said. "There are dynamics occurring within the states as large companies feel the pressure of new competition coming from outside of their business," he said. "You're getting all of us to begin to see that, but there are some people who get it more than others."

Renewed efforts to accelerate change in the states have turned the spotlight on this "new breed of commissioner," said Paul Mattera, a vice president and assistant general counsel at Liberty Mutual Group.

These leaders don't share a common thread of experience. Sebelius is elected, but the rest are appointed. Pickens and Shapo don't have insurance backgrounds, but Montemayor, a retired Air Force major, worked his way up through the Texas department for more than five years before replacing Elton Bomer. Sebelius, the daughter of former Kansas Gov. John Gilligan, served as a state legislator and has a government background.

Covington, a lawyer who worked for a private practice, represented insurers before being picked from a national pool of candidates for the Ohio job. Pickens, also an insurance defense lawyer, won his job after helping Arkansas Gov. Mike Huckabee with his campaign. Shapo worked for Illinois Gov. George Ryan for almost nine years before being appointed to his post.

What they share is a similar state of mind.

"I think it's a common philosophy about how they approach their office," said John Marlow, public affairs director for the American Insurance Association's southwest region. "What you're seeing is a solid, free-enterprise, market-based philosophy. It allows them to be creative."

Faith and Democracy

Covington's approach to regulation evolves from a combination of his work in private practice and his faith. Using business principles in government helps to ensure that government works for people, he said.

"Certainly my faith influences how I approach government and making government work for people," said Covington, a member of Fellowship Bible Church in Little Rock, Ark. "I try to adopt a servant's attitude and not a top-down approach, but that I'm working for the people of Ohio."

Covington meets with companies and consumers after hours, and he posts his personal e-mail address on the state's Web site. Often, he sits at home answering e-mail messages until midnight.

In his first year, Covington set performance standards for his staff and streamlined agent licensing. Ohio also is beginning a pilot program that allows would-be agents to schedule tests online. His department also developed a system that allows insurers to file rates and policy forms electronically. And Ohio is among the states that passed a law allowing electronic signatures.

Open Door

Shapo, who is new to the industry and, at 32,is among the youngest commissioners, has gained a reputation as willing to learn. That openness doesn't conflict with serving consumers, he said. "I can do a better job of protecting consumers by having a good and open relationship with the industry than I can by being hostile and nonresponsive to them," he said.

Shapo's guidelines are simple: Always be willing to listen to any side of an argument, and always try to be upfront about where he stands.

"He has already come in to make a major impact on what we do," Nichols said as he introduced Shapo at an NAIC meeting early this year.

In Illinois, Shapo has spent much of this year handling an insolvency case. "It's totally what I signed up for, but in some ways, it's totally not," he said.

When Shapo became commissioner, he figured the NAIC was an important umbrella organization, but he soon learned that the group was wrestling with issues critical to the industry. So he jumped into the thick of things, working with Nichols on financial-modernization issues and helping to develop a state regulatory system that would work within a national and global framework.

Shapo also lobbied for provisions in the federal law that protected state regulation. "The issue was flagged for me early on. The NAIC officers--in particular, George Reider and George Nichols--were very good at framing the issue as a significant and sweeping one. That piqued my interest."

The issue of access is a critical one for regulators who must be concerned that they don't give special treatment to particular insurers and that they don't sacrifice consumer protections as they make it easier for insurers to compete against banks and brokerages. The issue is a hot topic as California Insurance Commissioner Chuck Quackenbush faces investigations into whether insurers' campaign contributions influenced the treatment they received by his office.

Twelve states elect their insurance commissioners, and Kansas is one of those states. Sebelius' refusal to accept campaign contributions from insurers won her a fair amount of suspicion in a tough 1994 campaign.

"We would no longer shake down the industry in order for them to have access to this office," said Sebelius, who is now considered the Democrats' best hope for Kansas governor in 2002. "Even though I said that over the course of the campaign, not until it happened did people really believe it. What they learned is that they didn't have to have a special lawyer with them to come into this office and they didn't have to learn the secret handshake."

Open Mind

In nearly 20 years of attending NAIC meetings, Mattera has seen many commissioners come and go. The successful ones have several things in common. "They know the management of the companies that are domiciled in their state," he said. "Companies are people, and companies' actions are really an outcome of management decisions."

Pickens agreed. "You have to talk to the people that you regulate. You don't just listen to the lobbyists," he said. He also pointed to another key to successful commissioners: the ability to leave their egos at the door. "You can get a lot done if you don't care who gets credit for it."

Mattera said good commissioners also know the difference between regulating companies and legislating them so that companies are allowed to freely do business. Most leading commissioners have reduced the time it takes for agents and companies to get licenses. Some states, such as Kansas, have approved premium tax credits for companies that have offices in their states.

When Pickens took office three years ago, for example, he found a backlog of 200 companies waiting to get licenses to operate in Arkansas. Covington, then a part of the Arkansas staff, revamped the licensing system so companies could get licenses within three months. Pickens also repealed about 100 rules insurers had to follow. Now he's rethinking the state's entire 40-year-old insurance code, because it may be obsolete and ineffective.

Pickens launched a task force in the Arkansas department that is reviewing all rules and regulations that govern insurers, with an eye toward updating and streamling the state's insurance laws. At the same time, he's begun looking for ways to attract new insurers to the state. Pickens also is trying to find a way for health insurers and doctors to resolve arguments over how long it takes to pay claims.

Pickens has led efforts in Arkansas to set risk-based capital requirements to ensure that health maintenance organizations have the financial strength to pay their claims. He's also advocated loosening restrictions on commercial insurance. Good regulation requires a balance between consumer protection and allowing companies to do business, he said.

"It's kind of like holding a baby bird in your hand," Pickens said. "You can hold it if you don't squeeze too tightly, because if you squeeze too tightly, you'll kill it."

Delicate Balance

People in the insurance industry are "interested in doing business on an honorable basis and getting a decent return on their money," Montemayor said. "Our first job is to balance that against consumers' needs. I think where we fall apart is in believing that consumers don't know what they want and that somebody died and made us king and somehow we know better what they need than they do."

That attitude slows the time it takes for products to find their way to the market. More than three years ago, Covington, then an attorney in private practice, helped develop an insurance product that still awaits approval in some states. More recently, an Ohio company developed a long-term-care policy that is coupled with an annuity. Under the current system, it could take more than two years to get the product approved nationwide.

"That's two years consumers don't have that product available to them and two years that our good company here in Ohio doesn't have the right to sell that product," Covington said. "That's not good for anybody."

This new breed of commissioners does not consider themselves pro-industry. All five say they are consumer advocates. But all five want their consumers to be able to buy the products they want, when they want them. "I'm a big believer that being pro-consumer doesn't mean you're anti-industry," Sebelius said. "Consumers benefit by having more companies doing more business and having competitive rates in all the markets." Otherwise, constant regulator intervention could drive companies out of a state.

"We've got a far more sophisticated consumer than we ever had, but because of the way we do business, we're not allowing them to get access to the products they want," Montemayor said.

Like the other commissioners, Montemayor, who became Texas commissioner in January 1999, has begun exempting many products from the need for his review, except for medical supplemental insurance and long-term-care insurance. The commissioner has the right to review a product after it's gone to market, however.

Financial-Services Revolution

When historians look back to the late 1990s and early 21st century, the evolving financial-services market could be described as a financial version of the industrial revolution. Just as industrial giants learned how to efficiently turn iron ore into mass-produced steel, financial-services giants are learning how to use the same information to generate a consumer's bank loan and insurance policy. But instead of leading the world, this time the United States is following a world that already has combined its financial services.

The U.S. system has resulted in 5,000 insurance companies, 10,000 banks and about 500 major brokerages. "All of them sort of do things inefficiently," Montemayor said. The Texas commissioner doesn't envision a European-like environment with a few huge companies, but he believes customers should be allowed to tap into their checking accounts, work on their 401(k) plans and buy insurance from the same source.

Montemayor envisions someone sitting in his den at 2 a.m., trying to figure out how to invest a $10,000 bonus. "They may want to turn it into an insurance product, and they can't, at least not readily," Montemayor said. "But they can easily click on Schwab or click on a bank and make an investment decision on the spot--and they do."

For the time being, the competition seems most intense for life insurers that already sell bank-like products, such as equity-indexed annuities or products tied to interest rates. Some companies tell regulators that they face a desperate competitive disadvantage.

"Bankers can roll out a big fancy product--the super-duper, turbo-charged, dual chrome-exhaust investment vehicle--while these other guys are here in the dirt trying to figure out how to get their forms approved in 50 states and get their advertising approved again in 50 states," Montemayor said." It's a little bit like trying to take a freight train to a dirt road. They can't do it."

Shifting Focus

For insurers to be able to compete while remaining regulated by 50 states, regulators will have to shift their focus from setting rules on product design and delivery to monitoring solvency, ensuring standard rules across the United States whenever possible and protecting consumers.

That takes the kind of leadership that can build a consensus among commissioners with competing interests as regulators seek to form a national structure that meets individual states' needs. "It's kind of like herding crickets into a bucket," Montemayor said.

Montemayor relishes his role as a player in the changing financial landscape. "In the morning, I literally can't wait to get going on it, and at night I have a real hard time tearing away from it."

Texas aside, many of the regulators leading the revolution at the NAIC come from small states, rather than dominant markets, like New York, Florida and California, A good understanding of the market shows that it makes sense for leadership to come from states like Kansas, Kentucky, North Dakota or Arkansas.

Kansas, for example, is a small market and prone to erratic weather conditions--not exactly an open invitation for property/casualty insurers. While larger states have signed up to help with new NAIC initiatives, they don't need to lean on other states for help. "They can survive just fine and companies are going to flock to California and New York, whatever their policies are. They're not necessarily beating down the doors in Kansas," Sebelius said.

As a result, it's become more important for small states to be as attractive to business as possible. "As markets become more national, and now international, moving toward as much uniformity as possible was really necessary, without losing the important features of consumer protection and solvency monitoring, which I think all of us feel very strongly is best done within the borders of a state," Sebelius said.

Sebelius was in office when Pomeroy began to shake up the NAIC with talk of uniform standards. Then, conversations were divisive and the atmosphere acrimonious. Now, most commissioners are following the lead of people like Sebelius. "Some of the newer commissioners are taking a leading role, but the seasoned commissioners are also very much there, which is very helpful," she said. "We're not going to split this group."

Kathleen Sebelius

Elected; took office January 1995

Kansas insurance Commissioner

Age: 52

Political affiliation: Democrat

Career: Four-term legislator, representing Topeka, Kan. Member of the Kansas Health Care Commission and the boards of Friends of Cedar Crest, the 501 Public School Foundation and Kansas Kids Count. Former executive director of the Kansas Trial Lawyers Association.

Family: Husband, Gary; two sons: Ned, 17, and John, 14.

Jose Montemayor

Appointed; took office January 1999

Texas Insurance Commissioner

Age: 49

Political affiliation: Republican

Career: Retired Air Force major. Joined the Texas Department of Insurance in 1993 and directed insurer services, then oversaw licensing, solvency and market conduct before being appointed commissioner by Gov. George W. Bush.

Family: Wife, Dolores; three children: Oscar Montemayor, Kelly Thompson and Wanda Montemayor; three grandchildren.

Nat Shapo

Illinois Insurance Director

Appointed; took office January 1999

Age: 32

Political affiliation: Republican

Career: After graduating from law school in 1998, served as research director for Illinois Gov. George Ryan's gubernatorial campaign before being appointed commissioner.

Family: Wife, Elizabeth

Mike Pickens

Appointed; took office January 1997.

Arkansas Insurance Commissioner

Age: 38

Political affiliation: Republican

Career: Lawyer in private practice in Arkansas before being appointed commissioner by Gov. Mike Huckabee.

Family: Wife, Melissa; two children: Mary Katherine, and Rob, 4.

Lee Covington,

Ohio Insurance Director

Appointed; took office March 1999

Age: 32

Political affiliation: Republican

Career: Former deputy insurance commissioner in Arkansas and former lobbyist. Also worked for the insurance industry as a private attorney for a Little Rock, Ark., law firm.

Family: Wife, Heather; twin daughters, Katherine Joy and Kendell Faith, 11 months old.