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“And what manner of man dares to assume the post of insurance commissioner?” LA Weekly columnist Hillel Aron asked recently. It is an important question to consider. Early next year, 29 new governors will take office. Twenty-five of them have the authority — in some cases shared with other executive branch officials — to appoint insurance commissioners.
These new insurance commissioners can have a profound effect on the regulation of insurance and on their states’ economic environment, because the ready availability of reasonably priced insurance is vital to a prosperous economy. Therefore, it is crucial for the new governors to determine how to appoint commissioners who are willing and able to enact policies that promote long-term economic development and consumer choice.
The incoming state insurance commissioners have an opportunity to encourage the development of a vibrant insurance market in which companies are allowed, but not guaranteed, to earn a profit — a market in which insurers are able to charge premiums that are sufficient to cover the risks they assume. This market will attract new entrants, increasing the competition that provides the best insurance protection for consumers.
To that end, insurance commissioners need to be able to understand the often complex issues they face, and have the people skills to work within the department, with other state and federal agencies, and with the private and non-profit sectors.
The regulatory responsibilities of the typical U.S. insurance commissioner are vast and involve a complex industry. The average state insurance code covers hundreds of pages, and is usually accompanied by myriad administrative rules. The number of insurance department employees ranges from a few score in smaller states to a thousand or more in large states.
Overregulation can pose a significant threat to a thriving insurance market. Politicians and the bureaucrats they appoint want to please constituents and lower their costs in the short term. However, overregulation of insurance — such as maximum premium rates or restrictions on the way insurers price policies — can result in higher premiums, less availability of insurance, or both.
The principal social benefit of insurance is the reduction of aggregate uncertainty. Policyholders pay premiums that are small relative to the “pure risk” — chance of loss — they transfer to insurers. If this benefit is missing or too small, entrepreneurs will reduce or avoid investments. Instead, they will hoard money in reserve in order to cover their potential losses from things like fire, liability, and employee injuries, for which insurance is not available, leaving less money for investing and hiring.
Those entrepreneurs will have to pay higher premiums, with resulting lower investments if poor regulation has driven rates too high. At the same time, consumers will have to allocate more expenditures to auto and home insurance, and fewer to the products of the entrepreneurs.
A new commissioner may see overregulation all around him, but he must enforce the law as it exists. He can exercise discretion where permissible, but many of his reform goals will require new legislation. Thus, experience in dealing with legislators is crucial.
A new insurance commissioner will need a sound insurance background, in order to make headway against the pleadings of entrenched regulatory agency bureaucrats, insurance company lobbyists, trial lawyers, and self-styled consumer advocates.
Many insurance department staffers tend to see regulation as a good thing. Therefore, the new state insurance commissioners will need to be most diligent within their own departments. New commissioners must be able to see the biases and the errors in the positions of their staff. They also must be willing to stand against them, while still retaining their cooperation in carrying out extensive statutory duties. If they lack insurance knowledge, their staff may overwhelm them.
This insurance background may come from legal, academic, regulatory, or insurance company experience, as well as agency training.
Legislative experience and insurance knowledge also help to deal with influential organizations, such as the National Conference of Insurance Legislators, which often affects policies adopted at the state level.
Insurance knowledge is also essential for a commissioner to take part in the activities, and to influence the direction, of the National Association of Insurance Commissioners (NAIC), a valuable instrument in pooling technical regulatory expertise, that occasionally ventures into policy areas that may intrude on state regulatory preferences.
A competitive market needs protection against the use of force and fraud. It does not need experts to determine consumers’ needs and preferences and to direct companies on how to meet those needs. Instead, regulators should focus their attention on areas in which consumer knowledge is insufficient, such as the financial condition of licensed insurers.
The challenge of finding state insurance commissioners committed to reform may be great, but this year presents many very good opportunities. The new governors should make the most of them.