Shadow Insurance Committee Statement on Restructuring Insurance Regulation

Shadow Insurance Committee Statement on Restructuring Insurance Regulation

May 05, 2000

Click here for the Shadow Insurance Regulation Committee Website

At its March Meeting, the National Association of Insurance Commissioners (NAIC) announced that it was considering numerous changes to achieve greater uniformity in state insurance regulation. The NAIC in part hopes to prevent Congress from usurping state power to regulate insurance. It appears particularly likely that within two years enough states will adopt uniform or reciprocal laws for licensing of non-resident agents and brokers to prevent creation of a National Association of Registered Agents and Brokers under the provisions of the Gramm-Leach-Bliley Act. These developments exemplify that we already have a form of dual regulation: the federal government significantly affects state regulation by threatening overt federal regulation or preemption of certain forms of state regulation.

Given that the issue of whether insurance regulation should be restructured is once again on the table, the time is ripe for full discussion of a number of alternatives, including:

  • Allowing an insurer to obtain a national charter that would permit the insurer to operate countrywide while remaining subject to specified types of regulation by individual states
  • Federal preemption of certain forms of state regulation
  • Allowing some or all insurers to choose between federal or state regulation
  • Compulsory federal regulation of one or more activities

The Shadow Committee looks forward to the debate on these issues and will provide detailed discussion of one or more of these proposals in subsequent statements. At this time, the committee emphasizes that the main objectives of any changes should be, first, to reduce or eliminate regulation of activities that do not need to be regulated and, second, to enhance the efficiency of regulation of those activities that should be regulated. We have four observations that are germane to the current debate.

  1. The major source of pressure for regulatory restructuring is the desire for freedom from state rate regulation and over-regulation of policy forms. We support this goal (see our Statement No. 2 and Statement No. 7) and believe that alternatives to the status quo should be judged in large part on this dimension.
  2. Achieving beneficial deregulation does not require creating a federal regulator. The American Insurance Association, for example, has recently suggested the "concept" of having the Congress authorize each state to enact legislation to make available national charters to property-casualty insurers on the same basis as the state grants a state license. Insurers obtaining a national charter could operate in all states without being subject to state rate regulation or prior regulatory review or approval of policy forms. They would remain subject to other forms of regulation and taxation by the states. This concept is promising and merits careful study, including consideration of the alternative of direct federal preemption of state rate regulation and policy form regulation for commercial insurance buyers (with the possible exception of small businesses). Absent a national chartering system or preemption, inefficient price regulation could be discouraged by removing existing state restrictions on insurers exiting any line of business in a state. This might be accomplished through the judicial system (to the extent that such restrictions violate due process and equal protection) or through congressional action.
  3. Assessing the options for more far-reaching federal involvement in insurance regulation requires careful attention to possible efficiency gains from greater centralization and the inevitable risks that accompany greater centralization. Economies of scale in regulation and compliance may well favor centralized regulation of certain activities. Federal regulation, however, could substantially increase the ability of government to engage in inefficient forms of regulation, such as price controls. Although such expansion might seem unlikely at present, it nonetheless represents a material risk. There also is considerable risk that a comprehensive federal guaranty system would eventually, if not immediately, accompany substantial federal regulation. The result would be less market discipline on insurers (i.e., an increase in moral hazard), which in turn would create demands for tighter regulation.
  4. Competition among regulators is desirable. It can encourage efficient regulation of activities that should be regulated and discourage regulation of those that should not. The decentralized, state regulatory system has some advantages, albeit limited, in this regard. International regulatory competition may eventually obviate these advantages, but we are not yet close to this result. It also is not clear how a formal system of dual state/federal regulation might be designed to preserve and/or promote regulatory competition. Moreover, the possibility of federal intervention represents another important dimension of regulatory competition under the current system that has the potential to encourage greater efficiency by state regulators.

Click here for the Shadow Insurance Regulation Committee Website