This year has seen unprecedented insurance-related activity in
US state legislatures, adding further to the already colossal task
insurers face keeping track of change. For insurers operating on a
multi-state basis this will make the proposed alternative of
regulation by a single Federal body even more appealing.
More than 60 years ago the term ‘overkill’ was coined in the
US to describe weapons that far exceeded a nation’s requirements to
defend itself. Today overkill could just as appropriately be used
to describe the US insurance regulatory scene, reveals a study
undertaken by Wolters Kluwer Financial Services (WKFS), a US-based
risk management and compliance services specialist.
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Insurance compliance and regulatory affairs professionals realise
that staying on top of legislative and regulatory activity has
never been easy, stressed Kathy Donovan, the senior compliance
counsel in WKFS’ Insurance Compliance Solutions unit.
And, she added, it is becoming an increasingly difficult challenge
as insurers face an avalanche of new regulatory legislation.
The wave of regulatory zeal comes at a time when the insurance
industry is not already awash with laws and regulations.
State and federal laws and regulations that pertain directly or
indirectly to the US insurance industry, said Donovan, comprise
nearly 270,000 items, including individual sections of law and
regulation, plus other advisory documents such as bulletins and
attorney general opinions.
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By GlobalDataLooking at the percentage of insurance-relevant state and federal
laws and regulations experiencing activity, she continued that data
show that 6 percent of records were affected in 2007, with an
upward trend expected to reach nearly 10 percent by the end of
2009.
The result is that in 2009 WKFS estimates that more than 25,000
state and federal laws and regulations will change or be created,
said Donovan.
New legislation soars
“Looking at introduced legislation on a year-to-date basis, some
noteworthy data exists,” said Donovan.
“As of July 2009, more than 10,000 pieces of legislation with
potential effects on the insurance industry had been introduced
throughout the US. This level of activity is a 48 percent increase
over the same period in 2007 and 71 percent more than that same
period in 2008.”
She continued that when the regulatory citations that have been
enacted so far in 2009 are analysed by line of business, it is
clear that insurers of all types are facing significant activity
that they must manage. Almost a third (30 percent) of legislative
activity affects all lines of business, while certain activity
applies to only specific lines of business.
For their part, life insurers are having it comparatively easy with
new laws and regulations directed at them accounting for only 7
percent of all sector-specific activity.
Unsurprisingly, amid the huge focus of attention on health care
reform, health insurers have been the most impacted, accounting for
25 percent of sector-specific activity this year.
Drivers of activity
Legislators in the state of Washington are major drivers of
legislative activity this year, noted Donovan. In particular,
Washington has seen a number of bills enacted this year addressing
consumer protection insurance compliance issues and in total there
has been an increase of 169 in bills affecting the insurance
industry.
An example of bills addressing consumer protection emanating from
Washington’s legislature this year is the Life Settlements Model
Act which adopts the provisions of the model formulated in 2007 by
the National Council of Insurance Regulators providing guidelines
for the execution of life settlement contracts. Some 35 states have
now adopted the Act.
Other legislation passed by the state this year includes the
Annuity Sales Act providing for additional regulatory requirements
for insurers and producers when recommending and executing a
purchase or exchange of an annuity. Similar laws have been adopted
by 46 other states.
The state of Minnesota has also had a particularly active
legislative year, recording 83 insurance-relevant citations. These
include a stranger oriented life insurance bill providing
additional regulatory requirements for viatical settlements.
Legislators in New Mexico have also been feverishly at work,
introducing 21 insurance-related bills so far this year compared
with only eight in 2008 as a whole.
A key piece of legislation adopted this year was the Uniform
Securities Act which is intended to harmonise securities
legislation at state and federal government levels. To date 15
other states have adopted similar regulation, according to the
Securities Industry and Financial Markets Association.
In addition to the Uniform Securities Act, other notable
legislation passed in New Mexico focused on health insurers and
included provision of mandated benefits for autism spectrum
disorder suffers and coverage of clinical cancer trials.
A number of other states have also enacted bills that mandate
specific medical benefits in various types of health plans. Autism
spectrum disorder benefits, for example, have been addressed and
enacted in five states thus far this year: Colorado, Connecticut,
Montana, New Mexico, and Texas. Another benefit with significant
action is prosthetic coverage.
Thus far in 2009, Alabama, Arkansas, Iowa, Maryland, Missouri,
Oregon, Texas and Virginia also have enacted bills requiring
certain health benefit plans to provide coverage for
prosthetics.
Attraction of a Federal option
Coping with legislative change is naturally more challenging for
insurers operating on a multi-state basis – to a point where full
national geographical coverage requires compliance across 50
states, the District of Columbia and the five US territories,
American Samoa, Guam, Northern Mariana Islands, Puerto Rico and
Virgin Islands.
For many players in the US life industry the complexities involved
in multiple state compliance have made a much-debated optional
federal charter (OFC) for the industry under which they could
choose between state and federal regulation a particularly
attractive prospect.
Though, understandably, strongly opposed by state regulators under
the banner of the National Association of Insurance Commissioners’
(NAIC), the OFC enjoys wide industry support.
Numbering among its strongest protagonists organisations and
members of the recently formed Optional Federal Charter Coalition
are the American Council of Life Insurers (ACLI), the American
Insurance Association, the Council of Insurance Agents and Brokers,
the Financial Services Roundtable, and the Reinsurance Association
of America.
Voicing the general sentiment of the pro-OFC organisations the
ACLI’s president Frank Keating said in a recent statement: “OFC is
the only insurance regulatory reform concept that addresses the
dynamic and global nature of the insurance marketplace.
“It would create a national regulator with clear authority
delegated by Congress to address new issues and concerns as they
arise.”
The ACLI has also put forward a solid financial argument in support
of the OFC’s introduction including those contained in a study
conducted on its behalf by Laureen Regan, an associate professor at
Temple University’s Fox School of Business and Management.
According to Regan the estimated annual cost of the current state
system of producer licensing in 2007 was some $432 million. Under
an OFC she estimates that producers across all insurance sectors
could save between $268 million and $377 million annually in
compliance costs while in the life sector specifically direct and
indirect cost savings of $269 million annually could be
achieved.
Progress towards an OFC has so far been frustrating for its
backers. On the legislative front the most significant development
this year came in May when Congressional representatives Melissa
Bean and Ed Royce introduced the National Insurance Consumer
Protection Act (NICPA), a revamped version of an earlier bills
introduced unsuccessfully in 2006 and 2007 that would create a
national regulatory system to charter and oversee insurers.
The NICPA would establish an Office of National Insurance (ONI)
within the Department of the Treasury, with a commissioner
appointed by the President subject to approval by the Senate.
The ONI would be authorised to issue charters for national life and
general insurers and reinsurers and issue charters and licenses for
national insurance agencies and producers. A Division of Consumer
Affairs with a presence in every state would also be created.
The concept of federal oversight of the insurance industry is
nothing new and, indeed, has surfaced only to disappear again a
number of times since the 1980s.
However, against the background of the financial crisis which left
many major US insurers sporting massive losses and, in some
instances, in need of federal support, an OFC is undoubtedly closer
to becoming reality than ever before.
EU-style reform
The financial crisis has also set off a regulatory drive for the
oversight of systemic risk. In the European Union (EU), the
European Commission has just adopted legislative proposals that
will, if adopted by the European Parliament, see the introduction
of the European Systemic Risk Board (ESRB) as early as next year,
among other significant changes (see page 6).
The EU-style reform that appears will result in the almost
inevitable introduction of the ESRB, which has also found its way
across the Atlantic to the US.
This was made abundantly clear by the Federal Reserve Board
Chairman Ben Bernanke in testimony before the Congressional
Financial Services Committee in September. The committee oversees,
among other sectors, the insurance industry.
Making one of the strongest calls yet for federal involvement in
regulation of the US insurance industry, Bernanke told the
Congressional committee that “systemically important financial
firms” should be included in a federal regulatory structure.
Supporting his call, Bernanke stressed that the financial crisis
has clearly demonstrated that risks to the financial system can
arise not only in the banking sector, but also from the activities
of other financial firms – such as investment banks and insurance
companies – that traditionally have not been subject to the type of
regulation and consolidated supervision applicable to bank holding
companies.
Spelling out some of the steps required, he continued: “Legislative
change is needed to ensure that systemically important financial
firms are subject to effective consolidated supervision, whether or
not the firm owns a bank.”
In his second proposed step, and one strongly echoing developments
now unfolding in the EU, Bernanke proposed that an “oversight
council” should be established.
Made up of the agencies involved in financial supervision and
regulation, the council would – as with the EU’s proposed ESRB – be
mandated to monitor and identify emerging risks to financial
stability across the entire financial system, to identify
regulatory gaps and to co-ordinate the agencies’ responses to
potential systemic risks.
As a third step, Bernanke proposed that a special resolution
process be created that would allow the government to wind down a
failing systemically important financial institution whose
disorderly collapse would pose substantial risks to the financial
system and the broader economy.
Underscoring Bernake’s federal oversight proposals, highly
respected former Federal Reserve Board Chairman Paul Volker
testifying before the Congressional Financial Services Committee in
September joined the ranks of those supporting federal oversight of
insurers.
Commenting on Volker’s stance Barney Frank, chairman of the
committee noted that an OFC, particularly for life insurers, is on
the committee’s but would not come up for discussion until at least
next year.
However, despite the seemingly slow progress Frank has already made
it clear that federal regulation is no longer a matter of if, but
when.
