Congress takes closer look at overhauling insurance regs

Business Insurance, August 30, 2004 v38 i35

by Meg Flecther

COPYRIGHT 2004 Crain Communications, Inc.

WASHINGTON-The most comprehensive proposal to modernize insurance regulation in nearly 60 years is garnering kudos as well as questions from policyholders, regulators and many segments of the insurance industry.

In preliminary comments, observers are generally enthusiastic that proposals to make the state-based system of insurance regulation more uniform and efficient are gaining wider discussion in Congress.

A discussion draft of the State Modernization and Regulatory Transparency (SMART) Act was released earlier this month by Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. The more than 300-page draft reflects a joint effort with Rep. Mike Oxley, R-Ohio, chairman of the House Financial Services Committee, which oversees that subcommittee's activities. Rep. Oxley unveiled some of the concepts earlier this year (BI, March 22).

At its core, the draft would affirm the 1945 McCarran-Ferguson Act, which gave states the authority to regulate insurance, unless federal law spells out a pre-emption.

The draft recommends two major changes, however:

First, it proposes that, for the first time, federal authorities would explicitly pre-empt state rating laws for commercial and personal lines coverages to create "nationwide competitive insurance pricing.''

Two years after enactment, the draft proposes deregulation of rates for nearly all commercial lines risks, excluding primarily medical malpractice liability coverage. The draft also recommends a "flex band'' approach to deregulate rates for most personal lines coverages over a two-year period. Insurers could increase or decrease rates without regulatory approval by 7% in the first year and by 12% in the second.

The draft also leaves the door open for Congress to pre-empt other industry-related activities if the National Assn. of Insurance Commissioners and its member states fail to adopt essential model laws in the future, said Julie Gackenbach, the Washington-based assistant vp of federal government relations for the Property Casualty Insurers Assn. of America.

Second, the draft proposes the creation of a seven-member group-the "state-national insurance coordination partnership''-that would have narrowly defined powers and resources to assess whether uniformity requirements have been met, to resolve conflicts and to facilitate coordination. The group would lack "any regulatory or supervisory authority,'' the draft says. Members would be required to report their findings to Congress.

New York Insurance Superintendent Gregory V. Serio, who was speaking as a representative of the NAIC, described those two changes as the draft's "most contentious'' elements. Regulators "are very pleased'' that they had "not only a seat but a voice at the table,'' he said. But the NAIC is concerned that the group "will morph into a regulatory body,'' Mr. Serio said.

The draft's 17 sections also address a wide range of other insurance regulation issues, including surplus lines, reinsurance, life insurance and viatical settlements. There also are provisions that would apply to market conduct, insurer and producer licensing, antifraud activities, financial surveillance and receiverships, among other topics.

The New York-based Risk & Insurance Management Society Inc. "strongly believes that (the draft) is an important measure,'' said Janice Ochenkowski, vp-external affairs. Deregulation of rates "will result in a more competitive marketplace for commercial lines of insurance,'' she said.

"This document addresses some of the problems that commercial policyholders experience under the current regulatory system,'' including promoting uniformity among state insurance laws and addressing problems related to multistate risks, said Ms. Ochenkowski, who is a senior vp at Jones Lang LaSalle Inc. in Chicago.

In addition, representatives of RIMS, the NAIC and the National Assn. of Professional Surplus Lines Offices all said they were pleased that drafters attempted to tackle the difficult issue of establishing a uniform system for allocating surplus lines premium taxes.

That is "one of the most vexing problems for brokers,'' said Richard Bouhan, executive director of Kansas City, Mo.-based NAPSLO. Currently, state laws vary about who should pay those taxes and when. For example, some states don't allow an out-of-state broker to pay the taxes, he said. There also is no standard allocation formula that determines an individual state's share of a multistate risk.

The draft essentially proposes that taxes be paid only to the home state of the policyholder, be allocated among states in accordance with a formula and procedure and be processed through a uniform and centralized national electronic system, according to the 20-page section devoted to that topic.

"From an agent/broker standpoint,'' the proposed changes "would be tremendous reforms'' that would encourage nationwide uniformity rather than limited reciprocity, said Joel Wood, senior vp-government affairs for the Council of Insurance Agents & Brokers.

In addition, several groups also have identified areas of concern.

RIMS, NAPSLO and the PCI are among those concerned about confusing or yet-to-be-determined criteria for large or sophisticated commercial policyholders that could be eligible for special exemptions from some state regulation.

In addition, spokespeople for RIMS and the American Council of Life Insurers are concerned about the federal-state partnership's lack of regulatory authority.

"The key to this (act) working is have an enforcement authority that will resolve conflicts among states,'' said Ms. Ochenkowski.

While the partnership document was drafted "to keep the furor down...I don't think it is feasible or reasonable,'' said Gary Hughes, senior vp and general counsel of the ACLI.

While the ACLI and American Insurance Assn. still prefer the concept of an optional federal charter for insurers, representatives of the two trade groups plan to participate in discussions about the draft proposal, which drafters may have in bill form this fall.

To provide comments on the draft, call the House Financial Services Committee at 202-225-7502.

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