Federal Insurance Regulation On Its Way

'Day Of Reckoning Is Coming' For Outdated System, Former NAIC President Warns

National Underwriter News
December 5, 2005
Posted December 19, 2005

The day of reckoning is coming" for an optional federal charter or some other type of federal regulatory arrangement for the insurance industry, warns Ernst Csiszar, president and chief executive officer of the Property Casualty Insurers Association of America.

"There is no news about regulatory modernization-at least no good news," said Mr. Csiszar in his address before the recent 17th Annual Property-Casualty Insurance Conference in New York.

The State Modernization and Regulatory Transparency Act-better known as SMART, which aims to set federal standards for state regulation-might have been in the forefront at the beginning of the year, but catastrophes of the past few months have changed the order of priorities in Congress, noted Mr. Csiszar.

"We lost some of the momentum that we had going into the year" with respect to regulatory change, he added. However, he warned that "we might have postponed the day of reckoning, but the day of reckoning is coming." Supporting his view, he reported that during the PCI annual conference in October, Rep. Michael Oxley, R-Ohio, chair of the House Financial Services Committee, said he would still go ahead with the SMART Act later this year or early next year. Paraphrasing the congressman's remarks, he said Rep. Oxley had said if state regulators don't want to comply, "then there will be an optional federal charter."

Other pressures will move the country toward an optional federal charter, he said, pointing to the globalization of insurance and the movement of more and more commercial coverage into the alternative markets. "Why buy insurance if you can engage in a hedge strategy that is not controlled or overregulated like insurance products?" he asked.

Mr. Csiszar-who resigned as president of the National Association of Insurance Commissioners to assume his post at PCI-also noted that PCI member Allstate "has been very upfront" about looking for a federal backstop to help cover natural catastrophe losses.

"If we go running to the federal government every time there's a hiccup in this industry, then why not be regulated by the federal government?" he said.

Meanwhile, he said, states continue to operate through a fragmented, costly regulatory system. Costs, by PCI's estimates, amount to anywhere from eight cents to 15 cents of each premium dollar.

"It's burdensome to the point where it's difficult to see how one can breathe fresh air," he said. "The intrusiveness is almost beyond my comprehension."

Add to that the fact that the state regulatory system is "much too politicized," and "the reality is that you can't raise rates when an election is coming up," according to Mr. Csiszar.

If an elected insurance commissioner is serving a four-year term, "you had better get your rates up in the first two years," he warned, or else risk seeing politics stymie calls for needed premium increases.

He asserted that while there has been much discussion about interstate compacts to speed product approvals, that's more important on the life side of the business. "The real price for us on the property-casualty side has to become pricing freedom," he added.

To Mr. Csiszar's mind, the state regulatory system has become worse. "All of a sudden, we have attorneys general involved," he said, referring to probes into insurer and broker conduct by New York Attorney General Eliot Spitzer, among other state law enforcement officials. "Who's the regulator here?"

As for his views of federal regulation, he rejects the argument that it creates too much bureaucracy, contending: "We've got enough bureaucracy on the state side if you start adding it up."

However, there is a "real risk" involved with federal regulation, he conceded. "Insurance is going to become an entitlement program. You're going to lose the integrity of the underwriting process," he said, pointing to the federal flood insurance program.

Another real risk is that a federal regulator would be a one-man show. What if the person in charge was Rep. John D. Dingell, D-Mich., or even Mr. Spitzer, he said, mentioning two officials whose investigatory activities have discomfited the insurance industry.

In addition, he said, "the sausage-making process in Washington doesn't always get you the results you would like," pointing to the painful process of extending the Terrorism Risk Insurance Act before its scheduled Dec. 31 expiration. (He noted that it now appears TRIA will be renewed with much higher triggers and retentions before federal aid comes into play, including a brand new exposure-7.5 percent for nuclear, biological and chemical risks.)

"Before we get too caught up in the notion that an [optional federal charter] is the answer, we ought to think about the consequences," he said.

The conference was sponsored by PricewaterhouseCoopers, Standard & Poor's, Black Diamond Group, Morgan Stanley and LeBeouf Lamb.

Copyright 2005 The National Underwriter Company

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