Last week I had the privilege of testifying before Congress on the future of insurance regulation (more on that later). Today, I received a copy of a book edited by Bob Klein and me with the same title.
It does not appear to be on Amazon -- which just seems strange to me. It is also missing from the front page of Brookings Press, but you can order a copy here. I am not impressed with their website as there is missing information on the book site.
Last week we had a great conference at the AEI hosted by Peter Wallison. The program and papers are here. Video is here. I sound so much better on fast forward! Bob Klein and I also were interviewed by Ray Lehmann and Sean Carr at AM Best for a podcast (we show up about 5 mins into the podcast). The Brookings Institution will be publishing a book edited by Bob Klein and myself that will be out in about 9 months.
Also see:
Georgia State University, The Brookings Institution and the American Enterprise Institute are putting on a Conference at the AEI on July 9th. There my be some room left if you want to come (click here for details), but in case you are not going to be there or you want to get a head start most of the papers are available at the links below. (Check here to check for future updates.)
Regular posting will resume tomorrow. I just needed a sabbatical!
Just in case you wanted to read something about insurance regulation, Bob Klein and I have a new report that came out this week on the effects of an optional federal charter on the state economies. In sum, we believe there will be relatively small effects.
Here is the report and here is the press release (which is much shorter). The report was commissioned by the ACLI but they did not have content control over what we wrote.
Bob and I also wrote an academic article on the economics of an OFC which came out last fall. It can be found at SSRN.
As I mentioned last week, we finished a study for the ACLI available at ssrn.com, on the economic effects of an OFC. I was interviewed for a podcast by Ray Lehmann for AM Best and the podcast came out Friday.
Here is the abstract for our study...
We examine the likely effects of an Optional Federal Charter (OFC) regulatory system on competition in the life insurance and annuities industry and related markets. Increasingly, many US insurers advocate the creation of an OFC and the associated regulatory framework for several reasons. Primarily, they believe that the adoption of an OFC would reduce the costs and impediments imposed by the current state-based regulatory system. Further, they believe that the adoption of an OFC structure will facilitate interstate operations and enhance the industry's competitiveness relative to other financial service providers and international insurers. The proposal of an OFC system has generated an intensive debate on a number of issues, including its implications for market competition and the associated effects on consumers. Based on our analysis, we conclude that the life insurance industry is structurally competitive based on its inherent characteristics but that many insurers have not fully achieved maximum efficiency due, at least in part, to the barriers and costs caused by state regulation. Our analysis further leads us to the opinion that the creation of an OFC, properly structured and implemented, would likely increase competition in the US life insurance industry, the broader market for financial services, and international insurance markets.
The report itself is quite long (about 150 pages) with tables and charts.
The National Underwriter (reg req) reports today that a Federal Surplus Lines bill is going to the House in September. I haven’t been following this closely, but in essence it is a bill designed to reduce the burden of multiple state regulations and tax policies on surplus lines carriers. These carriers are generally not licensed in every state, but often step in to provide coverage for hard to place risks or in states where insurance is hard to buy for certain types of risk. For example, during the med mal crisis, surplus lines insurers provided med mal cover and in Florida many are writing homeowners insurance for high risk / high value properties.
Surplus lines companies are often taxed at a relatively high rate for coverage in a state and there are issues with actually obtaining the states’ proper tax collection. While this bill is supposed to make it easier for the companies to operate and for the states to get their tax receipts, it does something else too. It mandates professional qualifications for the purchasers of surplus lines coverage.
The main alteration to the bill increased the qualifications for a “qualified risk manager” required to be employed by a commercial insurance buyer if that company wanted to seek coverage on the surplus lines market without first going to the admitted market.
Now, the bill requires a “qualified risk manager” to have an advanced degree in risk management, as well as five years of experience and at least one designation showing competency in risk management from an organization such as the American institute for CPCU or the National Alliance for Insurance Education and Research. [emphasis mine]
Why is Congress imposing restrictions on the qualifications of buyers? Businesses have been buying this coverage for years. Are they doing a bad job of doing this? It is not even a “consumer issue”. In a separate, but related article from the National Underwriter, it appears the Consumer Federation of America is putting its two cents in trying to expand their activities into protecting business.
[The] CFA opposes the bill because it [could leave consumers vulnerable in the event of insurer bankruptcy and] is based on many faulty assumptions, including the fact that it assumes large buyers of insurance don’t need protections normally provided in an insurance transaction, such as protection from deceptive sales practices.
So GM can’t buy insurance unless it has a sophisticated risk manager because it does not get the same protections that ma and pa consumer would get? If deceptive sale practices are involved state law will always provide a remedy and business are in the best position to take advantage of the remedy. The CFA asserts that the protections for business are needed given the NY Attorney General’s bid rigging investigation, but that seemed to work out without resorting to state insurance law protections.
My employer (and myself) would benefit dramatically from such proposed paternalistic protection policies as we have a large (and pardon me while I brag—well known) program in risk management. It doesn’t make sense for Congress to micro manage the professional requirements to keep business safe. In a market economy we don’t want safe, we want to encourage profitable risk taking.
Update: Robert Sargent at Specialty Insurance Blog has more on the bill and the issue of Surplus Lines and placement of coverage.
Now that Mr. Spitzer is no longer distracting the insurance industry (as he is distracted by his own problems — like running for governor and not losing any more cases), we are seeing attention returning to the problem of insurance regulation.
The National Association of Insurance Commissioners (NAIC) is saying we need state regulation and the states are, in fact, doing a pretty good job. Insurance Agents and others want the SMART Act passed (which would essentially take away most state powers to regulate prices and market conduct) while life insurers would like to have a dual charter system like the banking system. According to the NY Times, this Optional Federal Charter has been pushed most recently by a large group of insurers (including AIG) and would allow insurers to choose whether they wanted to be regulated by the states or by a federal regulator.*
Evidently consumer groups also oppose federal regulation (see above linked NY Times article). Having a dual regulatory structure reduces the influence consumer advocates can have as long there is a Republican controlled Congress. Presumably, Congress will look at the SMART Act this summer and that a Optional Federal Charter bill will be introduced soon too. (I recall seeing an American Bankers Association draft of one some time ago.)
I don’t think the consumer advocate bandwagon has been able to get its steam up yet, but it will be interesting to see the comments and themes develop about how bad federal regulation will be.
*Just a snarky note, the NY Times article linked here refers to the NAIC as the National Association of Insurance Regulators.
A former boss*, Bruce Fein, critiques the state of federalism today. He is taken to task by Ramesh Ponnuru at the Corner for, as Walter Olson puts it, a weak op/ed. However, almost everyone seems to forget that while the 50 state laboratories idea sounds great, there are many areas of state law that impose externalities on people and business outside the state. Sometimes its time to bury the lab rats and move on.
For example, poor insurance regulation imposes burdens on both in-state and out-of-state consumers. Out-of-state consumers and firms potentially face higher costs if regulation imposes additional costs without providing any benefit.
Further, by allowing the 50 state laboratory idea to go unchallenged we end up equating med mal reform and product liability tort reform. Both may be good ideas, but one (med mal) may truly be local really subject to state jurisdiction and the other (prod liability) may be truly interstate in nature.
State interference with interstate commerce was something the founders tried to prevent by granting Congress the commerce power. Congress could step in and pre-empt 50 balkanizing experiments if it so wanted. The same is potentially true for insurance regulation--50 states are involved in aspects of regulation--some do a pretty good job, but some do not. The question is whether we ever say the experiment is a failure and pre-empt the puppy.
I haven't given this question a great deal of thought, but I will give it some as I try to order a bottle of California
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*Bruce was my boss when he was the General Counsel at the FCC during the first Regan administration. (Boy, do I feel old). I was a summer clerk and I wrote a memo on whether an administrative agency had the power to declare a law unconstitutional. (The answer was no, as I recall and I am really stretching here, because even independent agencies were creatures of Congress and therefore could not overrule the legislature that created them.) The law in question was the portion of the Communication Act underlying the FCC's Fairness Doctrine which was eventually repealed by Congress and which some worry will be resurrected.
The NAIC has responded to Rep Oxley’s SMART Act proposal to pre-empt a large amount of state regulatory power. Here is a listing of the reviewing panel’s major problems with the proposal. (via Bestwire $)
Exactly. This preemption proposal is designed to reduce the power of the states to regulate. This is, in part, because of the different standards in each state which increase compliance costs. The states have been asked to help standardize these regulations—they say they are trying, but they do not move quick enough to suit some. The threat of federal pre-emption should get them moving faster.The SMART Act would negatively impact state regulatory authority to supervise property/casualty, life, and health insurance, as well as reinsurance, by establishing federally mandated standards and pre-empting state laws that differ from them.
The SMART Act would create unhealthy regulatory confusion in insurance markets by subjecting state regulations and orders to second-guessing and possible interference by a new federal entity called the State-National Insurance Coordination Partnership. In addition to raising serious legal and practical concerns regarding its composition, powers, and administration, this partnership would encourage time-consuming and expensive litigation by those who disagree with state regulatory actions, during which the legitimacy of state actions would hang under a cloud of doubt until a final resolution is reached in federal courts.
Life is tough. However, this seems like something which can be fixed with interim rules.
Get started now. Some of the states’ actions are pro-consumer, but many impose burdens on insurers which have no value to consumers. The purpose of SMART is arguably is uniformity, not “no protection.”In general, the time limits for states to implement the SMART Act's requirements are too short, and many of its provisions seem impractical, unworkable or detrimental to states' consumer-protection efforts.
Federal legislation generally isn't needed to implement the various provisions of the NAIC's regulatory modernization road map. However, federal legislation would be welcome to enable access by all state insurance regulators to the FBI criminal database, to enable sharing of confidential regulatory information among federal and state regulatory agencies, to grant liability protection to the NAIC as the central data exchange for states, and to grant states equal receivership powers with the federal government.Really? "We can regulate without your help thank you very much, but we'd like access to your cool databases," say the states. Further, the states want some lawsuit immunity and more powers over insurance receiverships. I am not sure about that last one--since insurance receiverships are the complete province of state law, I wonder what additional powers they might need.
None of these attack the central problems. Are the states doing a good job? Can the federal government do a better job or at least not a worse job? What is the real cost of Federalism? Why is an industry that is predominantly made up of interstate enterprises subject to parochial regulation? Will insurers and consumers be better or worse off under a new regulatory framework?. The NAIC is an interest group. It has an interest to protect--the power of state regulators. Thus, we are seeing something less than a well though out critique of the SMART Act. To be fair, I haven't seen the NAIC's report and it could be quite detailed.
Catherine England of Marymount University and the Competitive Enterprise Institute has produced a report on Federal Insurance Chartering. The report doesn't take a position on federal chartering, but cautions Congress not to screw it up. The paper is interesting because it carefully looks at the Robert Hunter view (regulation is proper because of the potential actual over-reaching of insurance companies) and the Scott Harrington view ((1) regulate if market failure exists and (2)regulation can actually fix the failure.)
Disclosure: I have received consultant fees from CEI in the past but I had nothing to do with this report even though Dr. England cites one of my papers. I still don't have an opinion as to whether federal regulation dominates state regulation.
