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It’s not often that a vast and powerful industry comes before Congress and asks to be regulated, but some of the biggest players in the insurance world are doing just that. Equally unheard of in a time when politicians tend to be more interested in dismantling agencies than creating them, some insurance industry representatives are calling for the formation of an all-new federal body to handle the job. Last week, spokesmen for behemoth financial service providers, as well as many life and property and casualty insurers, told members of the House Commerce Subcommittee on Finance and Hazardous Materials that the current regulatory system is broken, perhaps beyond repair. “Fundamental change is long overdue,” said Robert Mendelsohn, testifying on behalf of the American Insurance Association, which represents 370 property and casualty insurers. “If we don’t act soon, we might find ourselves irrelevant in the future market.” A trillion-dollar business, insurance is the only financial service regulated exclusively on a state-to-state basis. While usurping 50 politically wired state insurance commissioners is not something Congress is likely to do quickly or easily, some in the industry argue it may prove necessary. Pressure has been mounting for one-stop insurance regulation in the wake of the Gramm-Leach-Bliley Act of 1999, which tore down barriers between the banking, securities, and insurance industries. A new federal agency, perhaps part of the Treasury Department or an independent body, is seen as a quick way to give businesses a national platform to sell and underwrite insurance. Under the current system, even a minor change in policy language requires what often amounts to a year-long campaign to win approval from all state commissioners. Furthermore, because the rules are a little different in every state, providers have a hard time offering uniform products, which means higher costs for consumers. Predictably, the state insurance commissioners oppose turning supervision of their industry over to the feds. While conceding that reform is necessary, the National Association of Insurance Commissioners says they are making steady progress toward harmonization of state regulations. “We can indeed walk the walk when it comes to implementing meaningful reform,” Lee Covington, director of insurance for the state of Ohio, told the subcommittee members. Covington also stressed that the commissioners are “focused on initiatives we can implement on our own, without having to go through our state legislators.” Such initiatives include making it easier for companies and agents to get licenses in multiple states, and speeding up the process for introducing new products. PROCEED WITH CAUTION A strong array of groups within the industry support the state commissioners, including independent agents, independent insurers, mutual insurance companies, and some property and casualty companies. “The worst thing I can imagine is to make a quick decision to do away with state regulators. It would turn upside down a multihundred-million-dollar industry,” said Philip Urban, speaking on behalf of three trade groups that underwrite a combined total of $241 billion in annual premiums. “There is pressure everywhere to reform and improve. I think it should be given a chance to work.” But others are skeptical that the insurance commissioners will be able to able to move quickly and effectively enough. “State reform can come, but with 51 regulators, interstate reciprocity is unlikely to achieve a uniform national platform,” said ING Americas Vice Chairman John Turner, testifying on behalf of the Financial Services Roundtable, whose membership is reserved for the 100 largest financial services companies, such as Citigroup Inc., the Chase Manhattan Corp., and Goldman Sachs. “Simply improving the state insurance system given us by the past may not be sufficient.” Furthermore, Turner said, “As American insurers expand internationally to serve an increasingly global financial marketplace, they will need a credible home country regulator. It will be difficult for a state to serve as an effective regulator of multinational companies.” While insurance industry leaders like State Farm Mutual Automobile Insurance and Nationwide Insurance Enterprise are members of the Roundtable, neither company is willing to advocate for federal control on its own — and risk the wrath of state commissioners. A Nationwide spokesman says the company is “still evaluating our corporate position.” A State Farm spokesman explains, “The important issue isn’t where, but how insurance is regulated.” The most open advocates for speedy change are life insurers, which are already facing direct competition from brokerages, mutual funds, and banks. “These noninsurance firms have far more efficient systems of regulation, often with a single, principal federal regulator,” said Drayton Nabers Jr., testifying on behalf of the American Council of Life Insurers. “Without question, the regulatory efficiencies they enjoy translate into very real marketplace advantages.” While life insurers stress that they support the efforts to improve the state-based system, they are also currently drafting legislation that would provide for optional federal oversight for those insurers who do business in multiple states. Meanwhile, as banks and other financial service providers move into the insurance arena, they have been rather shocked at the state of regulatory affairs, says banking specialist Ronald Glancz, a D.C.-based Venable partner. “When they see a system so bifurcated, they are concerned about it,” he says. Furthermore, bankers have found state insurance commissioners to be “more adversarial and resistant to change” than the Office of the Comptroller of the Currency, which, Glancz says, “works hand in glove with the industry.” CONTROVERSIAL PLAN Indeed, the American Bankers Association Insurance Association, perhaps the strongest supporter of federal regulation, has already come up with a detailed blueprint for a new agency. It suggests creating a division within the Treasury Department, patterned after the OCC and the Office of Thrift Supervision. It would be run by a presidentially appointed national insurance commissioner who would serve a five-year term and would have the power to charter, supervise, and regulate insurers and insurance agencies. More controversial, the plan calls for the formation of an entity modeled after the Federal Deposit Insurance Corp. to guarantee insurance policies issued by federally chartered insurers. Treasury Department officials did not respond to calls for comment. Both bankers and insurers favor a system where companies have the choice of seeking a federal charter or operating under state supervision — the same arrangement enjoyed by banks. But to J. Robert Hunter, director of insurance for the Consumer Federation of America, allowing companies to select their own overseer is “a disaster. We’ll go berserk.” Hunter, who served as Texas insurance commissioner under Gov. Ann Richards and federal insurance administrator under Presidents Gerald Ford and Jimmy Carter, warns of a “race to the bottom,” as states try to lure business from the feds by relaxing their regulations. While agreeing with the industry that “states have done a pretty crappy job” of regulating insurance, Hunter is doubtful that the feds would do much better — look at how well they handled savings and loan regulation, he says. One insurance industry insider predicts that it is “highly likely” that legislation providing for federal oversight of insurance will be introduced next session, especially if the Democrats win a majority in Congress. Rep. John Dingell, D-Mich., who has a long history of interest in the issue, is seen as a possible sponsor. Indeed, in prepared testimony, Dingell stated that “if state regulators cannot do the job insurance consumers deserve and require, new regulatory mechanisms must be put in place that will.” Dingell has also cited the case of Martin Frankel, accused of committing a $200 million insurance fraud, as Exhibit A for the shortcomings of state-based regulation. A General Accounting Office report on the Frankel case released last week concluded that regulatory weaknesses in multiple states and a lack of coordination contributed to the delay in detecting the scam. A Dingell spokesperson says the congressman has no immediate plans to introduce such legislation, but did not rule out the possibility. Almost certainly, the battle over insurance oversight is bound to be fierce. As finance subcommittee member Greg Ganske, R-Iowa, warned insurers, “Be careful what you wish for. You may wind up with not one [regulator], but two.” He added, “The political process can get very messy. I would be very, very careful on this issue.”

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