Will Insurance Consumers Benefit From Modernization?

Since the middle of the 19th century, insurance products in the U.S. have been regulated and approved on a state-by-state basis, with each state making its own rules about the approval and sales process. The Financial Modernization Act of 1999 acknowledged that states should continue to regulate insurance.

But Congress also called for state reform so insurance companies can compete more effectively in an integrated financial services marketplace. Pressure is on the insurance industry to streamline the regulation process.

How will these changes affect consumers?

Streamlining insurance approvals

States have responded to the pressure. Since March 2004, 28 legislatures have adopted the Interstate Insurance Product Regulation Compact (IIPRC). An interstate compact is a contract between member states that allows them to cooperate on multistate issues while retaining state control. To become operational and accept uniform product standards as well as product filings, 26 states must adopt the compact.

The compact is an agreement between member states to create a streamlined, one-stop shopping system of product regulation. It has jurisdiction over four product lines--life insurance, annuities, disability income, and long-term care insurance. They were chosen because they have a long life and travel with people as they move across state lines; they're not as sensitive to local costs and conditions as automobile, homeowners, and health insurance are; and they have a common theme of accumulating or protecting wealth.

The National Conference of State Legislatures (NCSL) and the National Conference of Insurance Legislators (NCIL), Washington, D.C., have endorsed the compact.

A multistate commission with one member from each member state governs the compact. States adopt uniform product standards through a rule-making process. To be adopted, a uniform standard must receive approval by two-thirds of the management committee and two-thirds majority of the states. Among its stipulations are that inconsistent, misleading, or ambiguous product provisions are prohibited.

"I look at it as another stage in the state system's evolution," says Rep. Earl Pomeroy, (D., N.D.), a former state insurance commissioner and past president of the National Association of Insurance Commissioners (NAIC). "It will produce more efficiencies in regulatory structure by bringing new products to consumers in a faster, less expensive way. The lower the cost of regulations, the lower the cost of business. Ultimately it's in the consumer's best interest to have product innovation and company efficiencies in a national and international marketplace. If states can't respond to that, they'll be pre-empted."

To provide consumer input, an eight-member consumer advisory committee is being formed. "I think the compact could be good," says J. Robert Hunter, longtime director of insurance at the Consumer Federation of America, Washington, D.C., and a former insurance regulator for state and federal agencies. "For consumers, the issues are access and accountability. It should be set up in a way that consumer advocates can review new products and so they have enough power to make a difference."

What's best for consumers--state or federal control?

Not everyone is convinced that continued state regulation of the insurance industry is in the best interest of the public. A couple of alternate ways to regulate insurance products are being proposed.

Optional federal charter: The National Insurance Company Act of 2006 (S. 2509 and H.R. 6225), introduced in April 2006 by Sen. John Sununu, (R., N.H.), and Sen. Tim Johnson, (D., S.D.), would establish a parallel, federal system of regulation for insurers and insurance producers. Each would be free to elect federal or state regulation, charters, and licenses. A Division of Consumer Protection would oversee strict regulations and guard against unfair and deceptive practices by insurers and agents. A Division of Insurance Fraud would make such fraud a federal crime.

"Steam for a federal regulator has been building for a long time and reflects the costs, inefficiencies, and inconsistencies in complying with the regulatory policies of 50 state jurisdictions plus the District of Columbia," says Jim Carney, former manager of government and political affairs at CUNA Mutual Group in Madison, Wis.

But advocates of state regulation say switching to federal supervision would damage consumer protection. "Any federal legislation dealing with insurance regulation carries the risk of undermining state consumer protections through unintended or unnecessary preemption of state laws and regulations," testified Greg Serio, former New York state Superintendent of Insurance (2001-2005), in 2004 to a U.S. Senate subcommittee.

"I look at state-based regulation as hands-on consumer protection," says Pomeroy. "It's easy for consumers to find the insurance department and they're close to the 'scene of the crime' in case of insurance violations."

Though the Charter is written to include a consumer protection division, Hunter is skeptical, calling it a placeholder. "The way it looks right now, it would hurt consumers," he says. "Can you imagine a federal agency trying to handle the volume of complaints now handled by the state insurance offices?" According to the NAIC, state insurance regulators handled 3.2 million consumer inquiries and nearly 475,000 consumer complaints in 2004.

Get SMART: A compromise approach is SMART (State Modernization and Regulatory Transparency Act), proposed by Rep. Richard Baker, (R., La.) and former Rep. Michael Oxley, (R., Ohio). The bill was never introduced in Congress but has been floated since 2004. It would create a federal advisory panel and mandate preemptive changes to state regulation of insurance, including free market pricing for insurance products.

But a letter to Oxley endorsed by more than 80 consumer and other organizations opposed SMART, saying it would leave consumers vulnerable to price gouging, as well as abusive and possibly discriminatory insurance rating practices.

"When you compare what's on the table (the current bills) with the states, the federal system would be worse for consumers," says Hunter. "For the consumer, the bottom line is, 'Are we being protected or not?' "

Published February 26, 2007