It appears the industry won't have to wait much longer to hear what the federal government has to say on the subject, though. Some type of legislation most likely will be a part of the congressional discussion stemming from the aftermath of the collapse of the financial services industry at the end of 2008.

What those changes will mean continues to be open to discussion, but at least one major insurer–Allstate–supports regulatory reform on the national level.

“It is very encouraging [Congress] is taking a close examination of the financial services landscape,” says Edward Collins, assistant vice president and assistant general counsel for Allstate. “We certainly agree there needs to be comprehensive financial services regulatory reform. And we also think insurance and the regulation of insurance should be included in that.”

One of the problems the insurance industry faces in dealing with the proposals in Washington is the varied views of the industry among the participants. While national carriers such as Allstate would love having a single federal regulator to report to, there are some in the industry that are worried about another layer of regulation. As Robin Harbage, a senior consultant for EMB, says, “It's the devil you know vs. the devil you don't.”

“It's really the gamut,” says Mike Fitzgerald, a senior analyst for Celent, of the varying views from within the industry. The only thing certain is “it is not going to be acceptable to do nothing,” he notes.

Harbage believes the larger question regarding federal involvement addresses what makes sense to regulate on a federal basis and what make sense to continue on a state-by-state basis.

“The argument posed in a discussion I moderated at a conference [in December] was there are certain insurance items that are very specific to local issues–hurricanes in Florida, earthquakes in California, hail and tornados in the Midwest–which really need local focus, and that's what state regulators are good at,” asserts Harbage. “On the other hand, it's very difficult for many states, even with the coordination available now, to do solvency regulation on a carrier that operates in multiple states because the issue is so complex.”

Some argue consumer protection issues in insurance are best handled by the states. Harbage agrees with that argument but adds the industry also needs to study the situations national carriers face. “How much efficiency would they gain if they could file one set of rates that would be nationally effective with regional territories?” he asks.

Being a national carrier creates layers of expense to satisfy state regulations. An insurer with a national call center needs reps who are licensed agents in each state in order to sell insurance. “That means if a person calls in from Missouri, the insurer has to make sure the call is routed to someone who is licensed in Missouri,” says Harbage. “It makes call routing inefficient, which the consumer ends up having to pay for.”

Given other parts of the financial services landscape were responsible for the chaos that arose from the mortgage lending crisis, Collins points out, changes in the regulatory environment are not a matter of applying the same rules to all entities in the same manner. Still, he does believe all entities that are part of the financial services industry ought to be part of the evaluation. “We need to make sure we are modernizing and improving regulations so it works better for consumers,” he says.

STATES AND CONSUMERS

Collins doesn't argue with the fact state insurance regulators do an excellent job for consumers, but the reality is there are so many entities to deal with, which is staggering for a company such as Allstate that operates nationwide.

“You have 51 sets of rules, and that's what makes it nearly impossible,” says Collins. “We certainly consider Allstate to be an innovative company, but it makes it difficult to deliver innovation to consumers because you have to account for all those [regulatory] variations. The point is there is nothing wrong in this context with any individual state, per se; it's just there are 51 different sets of rules.”

Allstate believes in the logic behind the George Miller quote mentioned at the start, but after nearly 140 years, Collins maintains, “we need to pick up the pace.”

He doesn't see the current discussion in Washington as an indictment of the state system and contends the current system will continue to work well for single-state carriers. But Allstate asserts uniformity is needed in the process so national carriers can deliver more innovation and more efficiency to their customers.

“That's why [Allstate] is attracted to a national charter because that seems to be an efficient way to accomplish modernization and uniformity,” says Collins. “We're trying to build a better regulatory system for consumers, and we think that's one way to do it.”

Harbage rates the states' ability to regulate carrier solvency as nothing more than adequate. He doesn't see this as meaning state regulators are incompetent but explains the variety of issues involved in regulatory compliance today are too complex for a single state to do well.

“Many state regulators are among the most competent people I know,” he says. “They will continue to be diligent to make sure consumer protection laws are enforced and a measured pace of innovation is allowed to occur.”

Harbage points to Massachusetts as one state doing the job particularly well. Massachusetts has taken steps to go from a controlled environment, where everyone had to use the same rates for auto insurance, to an open–yet still regulated–market, where the free market system is having a positive effect.

“The result is rates are coming down and competition is thriving,” says Harbage. “I think that's a phenomenal example of a state insurance commission doing a fabulous job for its constituents.”

A positive aspect of this debate, argues Jimi Grande, senior vice president, federal and political affairs, for the National Association of Mutual Insurance Companies (NAMIC), is the federal government is holding a big hammer over the heads of state regulators.

“If [the states] don't find a way to create uniformity and relieve the stranglehold on price controls that are killing some of the marketplaces around the country, the federal government is going to step in and do it for them,” says Grande. “[NAMIC] thinks that is useful.”

In Grande's view, state regulators created much of the demand for federal takeover of insurance regulation. Although some states have begun moving in the right direction, Grande insists not all states are following that lead.

“There are a handful of states you can point to that are doing the right things, but for every one of them you can point to others that are doing the wrong things,” he says. “If there is a good part of this debate that doesn't result in a new, more onerous federal regulator, it's that maybe this will serve to help speed the process of state regulators making the reforms they need to make.”

SATISFACTION RATING

More work needs to be done by technology solution providers to ease the burden around compliance issues, Fitzgerald asserts. In a recent survey of insurers conducted by Celent, respondents were not exactly impressed with the technology solutions available on the market. Forty-five percent of insurers answered “fair” or “poor” when this question was posed: How well does your current technology support your compliance needs?

“I thought insurers would be a little more satisfied [with the solutions],” says Fitzgerald. “This was worse than I thought it would be.”

What did ring true for Fitzgerald was the conclusion too much data is spread throughout the enterprise with no easy way to combine it. This, he feels, is a major hindrance in dealing with compliance issues.

What keeps insurers from spending more money to solve regulatory issues is compliance is not a revenue-generating area, he adds, and the fines levied by the states for violations haven't reached the level to motivate different behavior among carriers.

“Unfortunately, the message is that probably will stay the same even with this increased layer of federal involvement,” says Fitzgerald. “If vendors want to bring value to the area and bring about differentiation, there are some things that can be addressed in the compliance area. It's not a very far reach. The problem is you have data all over the place. If vendors are looking to differentiate themselves and create a client need, there is one here.”

SYSTEMIC RISK

For insurers dealing with compliance issues, nothing has changed in the last few months. Most are focused on keeping up with the day-to-day tasks and watching data security issues that are heating up, points out Fitzgerald. “Right now, it is business as usual,” he says. “People are waiting for the other shoe to drop.”

Celent's position is the federal government is going to try to figure out the issue of systemic risk and what companies are doing about it.

“That leads to the federal government knowing what companies are selling and to whom,” says Fitzgerald. “That means getting into the data to pull out special reports and extracts in a format. This is all part of a general kind of data health for the organization. To whatever extent you already have data programs, either under way or at the margin of being approved, you should look at those programs in light of the federal government coming in and asking you for a lot of data in a custom format in a short time period.”

The other part of the discussion is there are some more precedents for federal involvement in insurance, particularly the TRIA discussion post-9/11.

Insurers should follow the same procedures they used in putting together their terrorist response and coverage, according to Fitzgerald. “Companies set up teams and task forces because once the requirements became known, complying with those regulations was on a short time frame,” he says. “We are reminding people of that approach and suggest those in charge of data and regulatory compliance with insurance companies remind their peers they may need to do something like that again. If this comes down, they need to have the proper approach and set up cross-functional teams to respond effectively and quickly without going through the usual hoops that are set up for other control purposes.”

2010 AND BEYOND

The best news for the insurance industry is things happen slowly in Washington, remarks Grande. The discussion of insurance reform in Congress could have a profound impact on all insurers, but the rush to fix things in the wake of the mortgage security scandal has been sidetracked by the national debate over healthcare reform.

Grande believes the government recognizes the strong case the industry has made in Washington over the last few months that property/casualty insurance is fundamentally different from the other financial industry players that were responsible for the financial crisis.

“As Washington gets ready to fix what went wrong, our message has been one largely of: Stay focused on fixing what the actual problems are,” says Grande. “Don't overreach and mess up a market that's actually working quite well.”

In sharp contrast to Collins' stand, Grande maintains one area of the national discussion that might be onerous for insurance companies is the creation of a Federal Insurance Office.

When the office was first proposed, Grande recalls the initial plan was to give the office broad subpoena powers to gather data from any company for any reason, despite the fact companies already were giving that same information to a number of other regulators. The good news from Grande's point of view is the subpoena provision recently was dropped from the legislation.

Grande expects Congress is going to create some type of oversight in the name of systemic risk regulation. “For most insurance companies, that probably won't impact them, but for those it does [impact], it will be pretty profound,” he says. The danger he foresees is the perception the whole insurance marketplace is engaging in such risky business.

“We've made a compelling case over the last year P&C insurance doesn't impose a systemic risk and can't pose a systemic risk because of its inherent nature,”
Grande says.

Unlike investment banks that had leverage ratios of 20:1 to 30:1, property/casualty insurance companies, he points out, typically have liquid portfolios with low leverage ratios of 1:1. “It's a different business model,” he says. “There is no insurance company that has such a market share that if it disappeared there would be a systemic impact.”

Grande's belief is any time the government discusses new sweeping powers, businesses should begin to worry about the unintended consequences in the marketplace. As a group, he asserts, insurers came through the financial crisis as one of the few areas in financial services that weathered the storm.

“It was a bad year for investments, but the insurance model worked through this storm, so we have to be particularly cautious about any sweeping new regulatory proposals in Washington that could sweep up insurers,” warns Grande.

OPTIONAL OR NOT

Collins is operating from the viewpoint some form of national charter is inevitable, but no one is sure whether there is going to be an optional charter that will allow national carriers to forego state regulation.

“It may be policymakers determine certain companies that operate on a national basis will be subject to a national charter and regulated on a national basis,” says Collins. “I think that's inevitable.”

If the states figured out a way to bring that type of uniformity to the current state-run system, that would preclude the need for a national charter, but Collins doesn't believe this is likely.

A scenario Collins views as more plausible could occur if a first version of the Federal Insurance Office is enacted, and that becomes a precursor to the realization a national charter is the only way for national companies to be regulated more efficiently and experience the benefits of a more modern regulatory approach.

“I think it's very plausible it would not be optional,” says Collins. “The key is it should be optional for consumers. Consumers ultimately should have the choice to decide. If they want to do business with a state-regulated company, they will have that right. If, however, they are attracted to doing business with a national company that may be regulated pursuant to a national charter, they have that right, too. Ultimately, the best regulation is when the consumer can determine with whom they want to do business. They will be voting with their dollars.”

NOTHING TO FEAR

None of the proposals currently before Congress should cause the industry significant concern, states Collins. The only thing he fears is if the federal government places a new layer of requirements on top of existing state requirements and rules. “That would be a mistake because it actually would stifle innovation even more and raise costs,” he says. “We don't see that happening, however.”

Collins trusts there is a strong consensus throughout the industry in support of a Federal Insurance Office. “There is virtually a universal recognition it is appropriate to have some level of expertise within the federal government to deal with insurance issues,” he says.

Less optimistic, Grande contends after slogging through the financial crisis with bailouts to troubled companies, he doesn't expect the government is looking to make things easier for corporate America.

“Anything Washington does in this environment will be additional, duplicative, and on top of any regulation we already have,” he says. “Our message has been to go fix what is broken. Create new regulations or better regulations for those products and markets that were unregulated and had problems. If anything, our insurance marketplace already is overregulated.”

It is important for every insurance company in America to contact its local officials and make sure they understand the insurance business model, Grande suggests. “Most insurance companies in America operate on Main Street,” he says. “Very few of them are up on Wall Street. And none of them were part of the cause of the financial crisis. This is a time to wake up an industry and tell it to contact its state representatives and its congressmen and talk to them about these issues. Policymakers need help understanding our industry, and the best way to do that is to hear from insurance companies.”