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Preserve and improve: opinion: the insurance industry must battle the push for federal oversight while streamlining state regulations. (Industry Strategies).

Much is being said about how the insurance industry will benefit from federal regulation. Some shortsighted leaders within the insurance industry are even buying into the argument that Washington could regulate insurance better than the states have done for the past 150 years.

It would be a mistake for the industry to be taken in by the Shangri-La-like promises that are being made by those would-be regulatory suitors who are based in Washington. Insurers do have legitimate concerns, however, about how theft industry is regulated by the states. For example, state regulators must quickly begin to Streamline their insurance industry regulations. Streamlining will help to reduce the administrative costs borne by both regulators and the regulated, while increasing the number of insurance products that can be sold to consumers.

It seems to me that some in Washington are using this opportunity to seize more federal power. However, having washington in charge of insurance regulation is detrimental to both the insurance industry and this country's taxpayers. To retain the right to regulate the insurance industry, the states must accomplish two tasks. First, state regulators must eliminate redundancies. Second, the states must use their collective political power to ward off those in Congress who wish to give themselves the authority to regulate insurance matters.

Making a Federal Case

Deregulation of policy form and rate approvals and the establishment of one set of standards for market examination activities and solvency requirements are the issues driving the argument for federal oversight.

When the federal government regulates complex industries, it tends to slay away from placing large numbers of federal employees in each state to effectively regulate the industry in question. Instead, Washington tends to "regulate" industries by letting the marketplace dictate the products offered and the prices charged for such products. The federal oversight of the airline industry illustrates Washington's tendency to let the marketplace regulate an industry.

By allowing the marketplace to regulate complex industries, such as the airlines, the federal government has benefited consumers. There are disadvantages to consumers, however, when Washington gets involved. For example, some would argue that when Washington deregulated aft travel, the system set up by the marketplace was not completely in line with the public interest. True, on average, the cost of air travel has decreased. Consumer satisfaction has nose-dived, however, because of unpredictable flight schedules, layovers, canceled flights, bad or nonexistent food, and the overall stress and unpredictability now associated with air travel. In addition, the solvency of the airline industry is now being called into question. This threat of insolvency is present even after numerous federally directed taxpayer financed bailouts.

Washington's efforts to regulate the U.S. stock exchanges and the financial services industry also have been called into question. Again, Washington tends to rely on the marketplace to dictate the kinds of securities that can be issued by publicly held corporations and traded on our national stock exchanges.

The primary safeguard instituted by Congress to protect investors from fraudulent activities is requiring publicly traded corporations to the corporate financial disclosure statements with the Securities and Exchange Commission. These statements must be made available to the public so that investors can make informed decisions about the stocks that they purchase. Unfortunately, Congress has not allocated adequate resources that the SEC needs to ensure that accurate corporate financial disclosure statements were filed in certain cases.

Further, the unsavory relationships that were established among accountants, investment bankers, securities traders, attorneys and corporate officers to defraud the investing public went unnoticed or were ignored by Congress and federal regulators. Many theories and excuses exist as to why Washington was asleep at the wheel, it is clear, however, that Washington seems to consistently have lapses of regulatory foresight that precipitate financial crises that need to be remedied by massive federal taxpayer bailouts, such as the savings-and-loan bailout during the mid-1980s.

Contrast this pattern of mistakes with how state insurance departments have vigorously regulated the industry and conducted market conduct exams to protect consumer interests. The recent financial and corporate governance scandals probably would not have occurred at all or to such a wide extent if state regulators had been involved. In fact, when Washington hesitated to implement damage control to stabilize the nation's financial markets and curb the abuses that occurred on their watch, it was the states' attorneys general and the North American Securities Administrators Association that acted to curtail the fraudulent corporate acts that were being perpetrated.

As these examples demonstrate, Washington relies on deregulation and market forces to regulate and organize core complex, capital-intensive industries. Further, when severe abuses or criminal activity are uncovered by the media, Washington is slow to act. It is clear that washington seems to address concerns only after the damage has occurred. In addition, Washington seems to mitigate the damage done to a regulated industry by simply ordering yet another taxpayer-funded bailout.

We have clearly seen the history with the savings-and-loan crisis, the deregulation of the airlines and the recent financial scandals. If Washington secures the ability to regulate the insurance industry, it is more than probable that taxpayers will have to fund a bailout if the federal government continues its history of mismanaging complex businesses. The public and the industry would suffer dire ramifications if Washington is allowed to mismanage the regulation of insurance. Because the consumer is "purchasing a promise" when buying an insurance product, if Washington's mismanagement precipitates the insolvency of a large carrier or causes the industry to fall into disarray, the money will be gone, but not the uncovered losses that will need to be reimbursed so that the economy can function and remain strong.

Streamline Regulations

The fact that Washington is not the level of government most suitable to regulate the insurance industry does not negate the fact that the insurance industry does have some legitimate needs that the states must strive harder to satisfy. The states must reduce administrative costs for both the regulator and the regulated, as well as facilitate the availability of more insurance products to satisfy public demand.

Insurers articulate two main regulatory objectives that would reduce their administrative costs and increase their ability to offer more products on a nationwide basis. First is the need for speed-to-market initiatives so that large national insurers can launch national products quickly and inexpensively. Second, regulators need to offer market-conduct and financial exams uniformly across the country.

Both state regulators and insurers should address these objectives because it is in their best interests to reduce administrative costs. Further, increasing the number of insurance products will help promote the public interest and increase the competitive edge insurers have against noninsurance-based financial-service companies.

Many industry concerns are now being addressed at an accelerated pace by the work being performed by the National Association of Insurance Commissioners, National Conference of Insurance Legislators, and the recent activities of the National Conference of State Legislatures' task force to streamline and simplify insurance regulation. Projects such as the Coordinated Advertising Rate and Form Review Authority, the Accelerated Licensure Evaluation and Review Techniques Working Group, the National Treatment Proposal for more coordinated review of various company transactions, the System for Electronic Rate and Form Filing, the Uniform Certificate of Authority Application, NCOIL's model bill for Uniform Company Licensing, and the NAIC, NCSL, and NCOIL's joint effort to draft and enact an Interstate Insurance Compact for Annuities, Life Insurance and Disability Income Products all demonstrate the high level of commitment that the states are taking to address industry concerns.

It is critical to preserve the best characteristics of the current state-based system--its ability to foster innovation, its experienced regulators, and its responsiveness to the needs of the local electorate. We must draw on this system's inherent strengths, not destroy the current system and replace it with some new, unidentified, and untested Washington-based regulator. We should celebrate and not condemn diversity in the regulation of insurance as long as it protects and satisfies the insuring public's vital need for health, property/casualty, life and commercial lines products. It is also important to realize, however, that a new state-based mechanism to regulate insurance needs to be implemented so that it minimizes needless administrative costs to both the insurer and the regulator.

One of the best avenues for reform that is now being considered is the Compact for Annuities, Life Insurance and Disability Income Products. Interstate compacts blend the strengths of state regulation, including its flexibility, ability to quickly foster and implement innovative solutions, and geographic proximity to the public and regulated insurers, with the ability to bring some national uniformity to regulation.

As state leaders, we need to demonstrate that the states have the political will, capability, and vision to forge and enact into law new state-based regulatory systems, such as interstate compacts, as soon as possible to establish a system that call properly regulate the business of insurance well into the 21st century. It is encouraging that the Alliance for Sound State Uniform Regulatory Efficiency has been established. This nonprofit alliance is made up of insurance regulators, consumers, state legislators and industry and business leaders who believe that state governments are best equipped to regulate the business of insurance and protect America's insurance consumers. The alliance will be building a political base of support to enact state laws across the country that can promote more efficiency and uniformity in state regulatory practices.

I must emphasize again how critical it is that all states quickly adopt such measures.

State Sen. William J. Larkin Jr., R-N Y, is a 24-year veteran of the state Legislature and is the immediate past president of the National Conference of Insurance Legislators.
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Comment:Preserve and improve: opinion: the insurance industry must battle the push for federal oversight while streamlining state regulations. (Industry Strategies).
Author:Larkin, William J., Jr.
Publication:Best's Review
Article Type:Editorial
Geographic Code:1USA
Date:Aug 1, 2003
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