By Robert L. Redding, Jr.
In the closing days of this congressional session, the U.S. Senate Committee on Commerce, Science and Transportation held a hearing on federal involvement in regulation of the insurance industry. Two weeks later, the U.S. House of Representatives continued its own insurance regulation hearing in the Subcommittee on Capital Market, Insurance and Government Sponsored Enterprises Committee on Financial Services. House Subcommittee Chairman Richard Baker, R-La., has been the lead congressional investigator for insurance reform. In a very bold fashion, Baker has pursued the concept of insurance reform despite opposition from many in the insurance industry.
Since the passage of the McCarran-Ferguson Act in 1945, states have established their position as the principal regulator of the insurance industry. Despite McCarran-Ferguson, Congress has grown increasingly interested in regulating insurers.
U.S. Senate Commerce Committee Chairman John McCain, R-Ariz., opened the hearing with the following comments:
"... two major segments of the insurance industry remain almost exclusively within the jurisdiction of the states, namely property and casualty insurance, and life insurance.
"As we continue to consider and debate the merits of whether the states or the federal government - or some combination of the two - should regulate the insurance industry, I would remind everyone that insurance is a unique business structured to protect both individuals and businesses from the risk of financial loss. Because insurance is a business, we need to make sure that insurance companies are not overly burdened by unnecessary regulation. Just as importantly, because insurance is so crucial to the day-to-day lives of Americans, we must also ensure that the interests of insurance companies are protected regardless of whether the states or the federal government regulate insurance."
McCain and his colleague, Sen. Ernest "Fritz" Hollings, D-S.C., both expressed concern over the current process of insurance regulation and the future of insurance regulation.
"The question of how insurance should be regulated is complex and has long been debated," said McCain. "Over the decades, government officials, consumer groups and industry participants have questioned whether the states should be the primary regulators of the insurance industry."
The U.S. General Accounting Office recently released a study reviewing the market conduct of insurance regulation by the states. The report found: "States generally have the systems and tools in place to regulate financial solvency. But market regulation is hindered by limited resources, lack of emphasis on important regulatory tools and the framework of the system itself, which requires individual states to oversee companies that operate in many states or nationwide. As a result, market regulation is currently based on overlapping and often inconsistent state policies and activities. While it provides some oversight, it may also place an undue burden on some insurance companies and at times, fail to adequately protect consumers."
Hollings, the ranking member of the Senate Commerce Committee, has introduced legislation seeking to correct the current problems in the industry. The legislation, S. 1373, the Insurance Consumer Protection Act of 2003, establishes the Federal Insurance Commission, an independent commission established within the U.S. Department of Commerce. It will be comprised of five commissioners serving seven-year terms, regulating property and casualty lines as well as life insurance. Workers compensation and state residual workers compensation pools will be excluded.
Under the bill, the McCarran-Ferguson Act antitrust exemption will be repealed. The Federal Insurance Commission will be the sole regulator for interstate insurers. Insurers that only do business in the state in which they are domiciled will be regulated by the states.
The commission will be responsible for:
- Licensing and Standards for the Insurance Industry, Regulation of Rates and Policies, Annual Examinations and Solvency Review, Investigation of Market Conduct, Establishment of Accounting Standards.
- The commission will be able to investigate the organization, business, conduct, practices and management of any person, partnership or corporation in the insurance industry. The commission will also create a central depository for insurance data for the purpose of studying the insurance industry.
- An independent office will be created within the commission to receive complaints and reports about improper insurance industry practices from the public and to represent consumers before the commission. Consumers will have a right to challenge rate applications before the commission.
- The commission will have the ability to issue cease and desist orders for practices that would place policyholders at risk and to levy civil fines for violations of commission regulations. Actions that require enforcement outside the scope of the commission's mandate will be referred to the proper agency. Criminal prosecutions will be handed to the U.S. Department of Justice.
- A national guaranty corporation will be created to provide payment for life, property and casualty and health claims when the insurer is unable to pay. The corporation will also be responsible for liquidating insolvent insurers.
Not everyone who testified at the Senate hearing was supportive of Hollings' legislation. Tom Ahart, representing the Independent Insurance Agents & Brokers of America (IIABA), is opposed to S. 1373. IIABA believes that by creating this commission, it will take everything that's wrong with the current system and shift it to the federal level.
He added, "We are specifically troubled that this legislation would regulate agents from all states and for all lines of business who do business across a state line in what will inevitably be a new massive Washington bureaucracy."
Ernst Csiszar, insurance director for the state of South Carolina, currently serving as vice president of the National Association of Insurance Commissioners, testified on several points regarding modernizing the state insurance regulation. Csiszar stated, "Effective consumer protection that focuses on local needs is the hallmark of state insurance regulation because we understand local and regional markets and the needs of consumers in those markets."
He continued, "State regulators are on time and on target to accomplish changes needed to modernize the system of insurance regulation in the United States. Our goal is to achieve a more uniform state regulatory system because it makes sense for both consumers and insurers.
"We believe any federal legislation dealing with insurance regulation carries the risk of creating unnecessary bureaucracy and the risk of undermining state consumer protections due to unintended or unnecessary preemption of state laws and regulations," said Csiszar.
McCain and Hollings are well aware of the Automotive Service Association's position on insurance reform. McCain and Baker are illustrating the most interest in broad insurance regulation since Jack Brooks of Texas chaired the House Judiciary Committee a decade ago. Although more hearings are in store, there seems to be mounting interest in major insurance reform.
Bob Redding is the Automotive Service Association's Washington, D.C., representative. He is a member of several federal and state advisory committees involved in the automotive industry.
For more information about the legislative activities of ASA, visit www.TakingTheHill.com.