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Best? Maybe Not Good Enough

The U.S. international focus on insurance shifts from 50 states to a new state of mind.

By  Coletta Kemper

Former Rep. Mike Oxley, R-Ohio, said, “Insurance is the glue that holds our economy together.” Oxley is right, and insurance deserves more respect. Our state-by-state regulatory system lacks uniformity and is inefficient, costly to the industry and consumers, and duplicative. Insurance is the only major financial services industry in this country without uniform rules and a federal strategic focus.

The Council has worked for 20 years to improve the inefficiencies of the system for insurance brokers, by leading the effort to establish the National Association of Registered Agents and Brokers (NARAB) as part of the Gramm-Leach-Bliley Act of 1999. The passage of the registry provision was pivotal because it broke the taboo on federal intervention by requiring the states to enact reforms and move towards uniformity.

The Council succeeded again when the Nonadmitted and Reinsurance Reform Act (NRRA) was adopted by Congress in 2010. The law requires the states to enact uniformity in surplus lines regulation and tax collection. Under the NRRA, only the home state can regulate (and tax) a surplus lines transaction. It also encourages the states to create a national set of uniform surplus lines rules and tax sharing system. Provisions of the law went into effect July 21, 2011.

Council members place insurance for business clients worldwide. To serve those clients as they expand abroad, we need a system at home that is efficient, enables businesses to manage their risks globally and doesn’t add to their costs. We also need a system with a uniform set of rules that works with other regulatory schemes around the world.

The NARAB and the NRRA are important milestones in modernizing the country’s insurance system. But much more needs to be done to harmonize our regulatory system and to move insurance up the agenda at the federal level.

The Federal Insurance Office (FIO), created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, will help fill the leadership gap. Dodd-Frank gives the FIO broad authority to monitor all aspects of the insurance industry and identify gaps in the state-based regulatory system. FIO is also charged with coordinating and developing federal policy on prudential aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors (IAIS). In addition, FIO will assist the Secretary of Treasury along with the U.S. Trade Representative in negotiating certain trade agreements.

Other federal agencies also work on behalf of the industry. The U.S. Trade Representative has championed insurance when negotiating trade agreements and with good results. The knowledge and expertise of the negotiation teams is critical to our success in gaining access to growing markets. Likewise, the Commerce Department and the International Trade Administration play a critical role by supporting the industry’s business interests abroad.

Despite the good work of these agencies, what has been missing is someone whose sole job it is to monitor and coordinate strategy for insurance at the federal level. That’s where FIO Director Michael McRaith comes into the picture. It’s his job to make it all happen. With his experience as Illinois’ insurance director and his diplomatic skills, McRaith can work with all the parties to bring a coordinated federal voice to insurance. McRaith understands what’s at stake. In his May testimony before the House Finance Subcommittee on Insurance, Housing and Community Opportunity, he said, “The growing global market implies huge growth opportunities for the U.S. industry and underscores the increased importance of FIO participation in international fora to secure sufficiently robust international standards.”

The Federal Insurance Office’s entry into the “international fora” is a welcome voice to the discussion on international standards underway at the IAIS. The National Association of Insurance Commissioners (NAIC) appointed itself to serve as the U.S. liaison to the IAIS. In that role, the NAIC has acted as a technical advisor, but (rightly) not as a policy advisor. The NAIC has no legal authority to represent the U.S. government’s position on insurance, which is why the role of the Federal Insurance Office is so important.

The standards set for intermediaries by the international supervisors has in part missed the mark. In some areas, the standards reflect a narrow understanding of the intermediaries’ role in the market, they rely too much on a Euro-centric approach to regulation, and they are far from the “best” regulations the world offers.

We’re also concerned that the standards will add another layer of regulation, which conflict with local regulation if not drafted at a high enough level. If “best practices” are the goal, they need to be just that—best.

The Federal Insurance Office has a lot to offer to the discussion, but its involvement has to be guided by a national strategy on insurance. And that strategy needs to be developed in concert with the industry.

McRaith raised another good point in his testimony. “The U.S. economy and consumers benefit from fact-based appraisals of best regulatory practices developed elsewhere,” he said, “even if those practices deviate from practices historically employed by state-based regulators.”

Enough said.

Kemper is vice president of Industry Affairs.

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