iThe patchwork, state-by-state regulatory scheme is an anchor on all businesses operating in the United States.
Insurance regulation in the United States is inefficient and redundant. The state-by-state patchwork of laws means there is little uniformity in the requirements for self-insurance, collateral, solvency, state licensing and reinsurance. The product approval process also varies greatly by location. As a result, insurers must file 51 different applications -- one for each state and Washington D.C. -- and the costs associated with these filings are inevitably passed on to consumers.
Further complicating matters, states have the ability to legislate variances to standards and laws, or interpret them however they see fit. For example, state regulations differ regarding how much prior notice is required to "non-renew" or amend policy provisions, ranging from as little as 30 days to as many as 90. In some states, agents and insurers may give rebates. In others, they cannot. The result is an onerous system that creates significant barriers for insurers entering new markets and launching new products. And these differences hurt consumers by adding costs and unnecessary complexity to the insurance products they purchase.
A glaring example of this weakness is the apparent inability of states to coordinate among themselves (and through the National Association of Insurance Commissioners) to implement the part of the Dodd-Frank Act known as the Nonadmitted and Reinsurance Reform Act (NRRA). As mandated by the NRRA, Congress directed the states to adopt uniform, nationwide requirements, forms and procedures that provide for the reporting, payment, collection and allocation of premium taxes for nonadmitted insurance. The result, however, has been a hodgepodge of rules that make compliance even more complex and expensive than it was before the law's enactment.
Ultimately, an optional federal charter (OFC) would bring greater uniformity of regulation, introduce economies of scale and create more open and competitive markets. The creation of a Federal Insurance Office (FIO) was a necessary first step in the process, but more work needs to be done.
A House bill (H.R. 1880), which was introduced most recently in the last Congress by the former Rep. Melissa Bean (D-IL) and Rep. Ed Royce (R-CA), outlined one possible system in which an OFC would allow the state system to remain largely intact but would offer life and property/casualty insurers the option to be regulated at the federal level. National insurers would receive a federal license from a federal regulator such as the FIO and could then write business nationally.
The ability to achieve national recognition would enable a federally chartered insurer to do business in all states and avoid the higher costs that come from the need to comply with 51 different regulators. The eventual creation of a federal regulatory body would result in greater oversight and foster increased competition, which would facilitate a greater supply of insurance at a lower cost to consumers.
Consumers also would be protected against insolvencies, as the current state-based guaranty mechanism would be extended to national insurers and policyholders. In addition, OFC proposals would ensure the financial stability of national insurers by requiring adherence to the stringent investment standards, risk-based capital requirements and quarterly reporting requirements that currently exist under state laws.
Perhaps most importantly, for the first time, consumer issues of national importance would receive direct attention from a federal regulator with the authority to enforce changes. Along with the uniform requirements and increased product availability an OFC would provide, these benefits make it clear that the time has come to modernize our nation's insurance oversight.
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Kathy Doddridge is RIMS' director of government affairs.
