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Congress readies to act on regulation reform.

Conventional wisdom in Washington is that Congress is more likely to intervene in insurance regulation during the current session than at any time in the last 50 years. Indeed, economic and political indicators point to just such an eventuality. However, it is ultimately up to the industry as to whether Congress intervenes or steers clear of the regulation controversy

This is not the first time Congress has attempted to wrest from the states their exclusive jurisdiction over insurance regulation. Since the McCarran-Ferguson Act was passed in 1945, opponents have sought its repeal. In the 1960s senators Warren Magnuson, D-WA, and Thomas Dodd, D-CT, proposed establishing a federal guaranty fund. In the 1970s Sen. Edward Brooke, R-MA, proposed establishing "dual regulation," the opportunity to obtain a federal charter and federal regulation as an alternative to state regulation. That proposal looks strikingly similar to the much-maligned structure of banking regulation today.

There was also a move for federally imimposed no-fault insurance, and in the early 1980s "unisex" rating, which many thought had an excellent chance of passing, was heavily pushed. In 1981 the Product Liability Risk Retention Act was passed to help captives respond to a perceived shortage of product liability insurance. In 1986 Congress expanded that act to include all liability coverages.

Despite ongoing discussions, little progress has been made in providing a role for the federal government. However, two major issues -amending or repealing the McCarranFerguson Act and solvency regulation-have come to the fore, giving proponents of change cause for optimism.

In the 101st Congress, the House Judiciary Committee for the first time reported out favorably a bill to amend McCarran-Ferguson. The bill's sponsor, Rep. Jack Brooks, D-TX, chairman of the judiciary Committee, introduced similar legislation in the 102nd Congress. The bill would prohibit specific activities, including price fixing, market allocation, tying arrangements and monopolization.

However, the bill is being criticized on the basis that it would limit the industry more than the complete repeal of the act. In addition, due to its vagueness, the bill's passage would produce endless litigation and deter joint industry activities that benefit consumers and the industry. As far as repealing the act, the Senate judiciary Committee in the 101st Congress was unable to act on the proposal of the principal sponsor of repeal, Sen. Howard Metzenbaum, DOH. This year the senator introduced legislation that mirrors Rep. Brooks', a move that should facilitate its progress.

Regarding solvency regulation, Rep. John Dingell, D-MI, chairman of the House Energy and Commerce Committee, intends to introduce legislation designed to improve solvency regulation through the development of a national regulatory body. He recently circulated a discussion outline defining a possible federal role in insurance regulation. The outline includes the following proposals: preempting the states' regulations regarding surplus lines and reinsurance companies; federal minimum solvency standards, including federal accreditation of state insurance departments; a federal insurance fraud statute; federal liquidation of insolvent insurers; and possible authorization of a federal agency to supervise state regulation or a self-regulatory group.

Factors Favoring Change

Since Congress responds to economic and political pressures, which are both intertwined in insurance regulation, a good case can be made that such pressures will push Congress to act on McCarran-Ferguson or solvency reform, or both. A prime economic factor is the pressure that can be brought to bear on Congress due to market cycle swings in the insurance industry. Although the life/health segments of the market may not operate economically in conjunction with the property/casualty side, voters may not heed the difference. If one kind of insurance is scarce or expensive, voters often blame the entire industry. Although the soft market has not yet ended, Congress anticipates its demise soon, and memories of the political agitation surrounding the last hard market may motivate Congress to take action.

Economic concentration among financial institutions is also a major factor driving the move toward increased government involvement. The trend toward deregulating financial services provided by banks, savings and loans and securities firms has resulted in financial service institutions encroaching on each others' territories. Previously, the line between what banks, insurers and securities firms could and could not do was well drawn. The recent blurring of this line has increased competition to the point where big, well-capitalized companies are more likely to succeed.

The economic integration of Europe in 1992 is another factor forcing Congress to act on insurance regulation. EC92 should open the U.S. market to more competition from abroad and the European market to U.S. competition. Again, only large, well-capitalized companies will be able to compete in this environment. They will also benefit from the Insurance Services Office's determination to stop issuing final advisory rates and to produce only loss costs. Not all small companies will have the economic resources to develop final rates.

Finally, the joint effect of the economic slowdown and the recent market cycle may impact insurer solvency reform. Guaranty fund assessments are increasing annually, although the percentage of industry companies that become insolvent is essentially constant. The possibility of increasing guaranty fund assessments, estimated to reach $20 billion for the property/casualty and life/health sectors, may stimulate action.

In addition to economic factors, various political factors favor a change in the status quo. As in all political matters, the perception of the problem may be more significant than its reality. For instance, the idea that the insurance industry may be as financially weak as the savings and loan industry is demonstrably untrue. However, the perception that a comparable disaster may be imminent is a major factor motivating Congress to act.

A related consideration is the perception that financial service deregulation has failed. The failure of deregulation, as exemplified by the savings and loan crisis, has prompted the U.S. Treasury Department to propose not to reimpose segregating financial services, but instead to expand banking powers to engage in the securities and insurance businesses. This, in turn, has promoted the belief that the federal government will need to be involved in insurance regulation.

Another factor enhancing the prospect for federal involvement is the increase in the availability of information regarding the insurance industry. The General Accounting Office and the Congressional Research Service have both performed their own studies on the insurance industry. In addition, the well-known "Failed Promises" report and the insurance industry's participation in tax legislation over the past several years have further enhanced the level of insurance knowledge on Capitol Hill. Moreover, the Senate Banking Committee has instructed the Treasury Department to study the insurance business. All this information may provide congress with the factual background it needs to formulate new legislation.

In addition, the unprecedented number of issues today that relate to the insurance industry are having an enormous political impact. McCarran-Ferguson used to be the only issue that required insurance industry lobbyists' attention. Now industry representatives must deal with solvency and financial service reforms. The result is a dilution of the industry's ability to resist change. The foot soldiers of the industry, the agents, consider banking reform their first priority; large life/health and property/ casualty companies are focusing on solvency and banking reforms; and small companies must focus on all proposed legislative efforts.

It is ironic that these issues have become politically linked because in some ways they are inconsistent. Specifically, proponents of antitrust reform are motivated by the desire for more competition, which would include less rate regulation. Conversely, proponents of solvency enhancement would promote stiffer rate regulation and capital requirements, which would be perceived as restricting competition.

However, because of Congress' structure, these two issues are likely to move ahead in tandem. In both the House and the Senate, antitrust is the province of the Judiciary Committee, whereas solvency is an issue for the Commerce Committee. Banking reform is under the jurisdiction of the House and Senate banking committees. Naturally, no committee would consider ceding the issue to the other, even though the legislative process would benefit.

The political attractiveness of these issues cannot be underestimated. The tremendous surge in interest in financial service reform is certainly not unrelated to the potential bonanza in the political action committee contributions that will flow to congressional coffers and to potential publicity opportunities.

A further stimulus for congressional action is, paradoxically, the response of state regulatory officials. The National Association of Insurance Commissioners has responded to increased federal government attention by attempting to enhance state regulation, a move that apparently has met with some success. Even the harshest critics of state regulation have noticed the progress the NAIC has made in certifying state regulatory bodies and enhancing solvency regulation by improving the Insurance Regulatory Information Service. However, the NAIC's quick response has nurtured the concept that greater centralization of insurance regulation and uniformity may still be required.

Contradictory Perceptions

There are several somewhat contradictory political perceptions that have eroded support for the status quo and destabilized the political environment. The relative success of Proposition 103, for example, has shaped the perception that consumer discontent can be used politically.

Another perception is that initiatives on Capitol Hill supported by the insurance industry, such as tort and product liability reform, have been thwarted by the industry's support of McCarran-Ferguson. Support for tort and product liability reform has placed the insurance industry in opposition to the trial bar, which is using the industry's support of the act against it. If the act is considered to be a bargaining chip, some segments of the industry would prefer to let it go in exchange for progress on tort and product liability reform.

It is also assumed that the protection afforded by McCarran-Ferguson has been narrowed by the courts so much that it has become useless, and therefore protection of the act should not be a priority. Another perception is that state regulation cannot maintain solvency. This has been fostered by an increasing understanding of the influence of alien insurers, particularly reinsurers, in the U.S. market.

Ironically, some believe that state regulation has reacted to federal pressure by harshly increasing regulation. In other words, state solvency oversight is now so strict in some states, especially in terms of company investments, that companies have no flexibility and may be forced to divest assets at an inopportune time. In addition, some pundits think only federal regulation can act as a political counterweight to state rate rollback initiatives.

The perception also exists that only federal regulation or oversight can end regulatory inconsistency among states. Specifically, it will take federal clout to cut the Gordian knot of overlapping, burdensome state regulation. Similarly, it is believed that only a federally backed guaranty fund can override 50 inconsistent state guaranty fund laws, which have produced separate funds that could not handle the insolvency of even one large carrier.

Does a Crisis Exist?

Due to the number and variety of interests with which it deals, Congress usually only responds during a crisis. An exception to this is when there is overwhelming industry support, as illustrated by the 1986 Risk Retention Act amendments. By 1986 the liability crisis had reached the point where public agitation for action by the federal government had peaked. Congress responded by expanding the Product Liability Risk Retention Act to include all liability coverages. While this action was generally opposed by the industry, opposition was not as vigorous as with other issues, such as McCarran-Ferguson reform. Congress reacted to public pressure by passing legislation without industry support, but it might not have been able to pass it against virulent industry opposition.

The question now is whether a crisis situation exists that is severe enough to make Congress act. In the case of insurer solvency, the answer is no. The recently publicized financial difficulties of First Executive Corp., however, will undoubtedly skew this perception. It will also provide a focus for further investigations by Rep. Dingell's committee and ammunition for industry critics. Nonetheless, absent the emergence of industry support for a federal role in solvency regulation, the enactment of legislation appears unlikely, at least in this Congress.

While there is no evidence that a McCarranFerguson crisis exists, there may be enough industry support for Congress to move. The assault on the act over the years has been supported by an odd combination of antitrust academic purists, state regulation critics and consumer advocates. Today, however, insurers themselves, reacting to pressures regarding solvency and banking, have split on the issue of defending the act. Small insurers tend to remain true to McCarran-Ferguson, while some large insurers give the impression that it is negotiable.

In addition to McCarran-Ferguson and solvency regulation, a third issue has emerged that clears the way for increased federal regulation. In recent months some insurance commissioners individually, and collectively through the NAIC, have assumed a more receptive posture to federal intervention. For example, the NAIC has indicated that it will support a bill based on an NAIC model introduced by Rep. Cardiss Collins, D-IL, which would provide a federal solution to consumer abuse problems created by collision damage waivers in the rental car industry.

More significant, perhaps, is the NAIC's support of a federal insurance fraud bill. For years the NAIC has tried to coordinate the interstate and international insurance fraud activities of the states. However, the complexity of the crime and the cleverness of the perpetrators have frustrated its efforts. Coincidentally, the Dingell proposal includes a federal fraud statute, and the Justice Department recently created a unit to investigate insurance fraud.

Most important is the NAIC's recently expressed interest in federal legislation which would authorize it to establish standards and then to require that alien insurers and reinsurers adhere to them. The NAIC already performs this function in part through its Non-Admitted Insurers Information Office. While it is unclear how, or even whether, such authorization could occur, it is significant that the NAIC has indicated its willingness to look to the federal government as a new source of empowerment rather than looking to the states, its power base since its inception.

The NAIC's new receptivity to federal regulation may provide the avenue for federal legislation that may not involve either McCarranFerguson or solvency reform. The absence of state regulatory opposition will encourage industry support, which, in turn, could provide the critical mass necessary for legislation without the presence of a crisis. It certainly represents a substantial departure from past NAIC policy,, which was to vigorously and without exception oppose any federal regulatory role.

However, if federal fraud legislation is not enacted, Congress may seize the opportunity to amend McCarran-Ferguson in the hope of satisfying the voting public that it is doing something about insurance. Whether or not it is the right thing to do may be irrelevant.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Myers, Robert H.
Publication:Risk Management
Date:Jun 1, 1991
Words:2441
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