Federal regulation could be an option for property insurers

Apr 14, 2008

South Florida Sun-Sentinel–April 13, 2008

By Becky Yerak
Chicago Tribune

At a recent insurance conference, Allstate Corp.’s investor relations chief was giving a rundown of how many states sell certain products. Your Choice Home is in 15 states, and Your Choice Auto is in 48 states, Robert Block said.

No, "46 states," he clarified a moment later.

Who can blame the guy for getting his numbers jumbled?

For more than 135 years, insurers largely have been regulated on a state-by-state basis. But that system could get shaken up under a Treasury Department proposal unveiled earlier this month that would give individual companies the choice of being regulated primarily by the U.S. government or of continuing to be regulated by individual states.

Florida consumer watchdogs worry that a so-called optional federal charter would allow insurers to choose the weakest regulator and it would undo consumer protections in place at the state level. Meanwhile, the insurance industry is divided on the issue with many national insurers supporting it because they argue that the process of getting, say, 50 different approvals for the same product is burdensome.

Northbrook, Ill.-based Allstate, for one, said it is "encouraged" by the Bush administration’s proposal.

"If done correctly, a federal insurance-regulatory system could reduce costs by eliminating inefficiencies, streamline the process of making new products available to consumers and ensure a consistent level of consumer protection in each of the 50 states," Allstate spokesman Rich Halberg said.

Florida Insurance Commissioner Kevin McCarty said that he agrees states can improve in certain areas — such as how insurers are licensed and agents are appointed – but he said an optional federal charter would allow insurers to pick the regulatory body that’s most lenient.

"I’m deeply concerned the race to go to a federal optional charter is really a way to get around Florida consumer protection regulations," he said. "It’s a recipe for disaster."

David Sampson, president of the Property Casualty Insurers Association of America, echoed some of McCarty’s concerns, saying in a statement that states’ "experience in regulating our business is invaluable and would not be easily replicated at the federal level."

Many smaller or regional insurers are ambivalent or they oppose federal regulation because they don’t want to give national competitors an advantage in addition to size. There’s also a concern that the weather, demographics and financial make-up of states differ too much to create one set of laws governing insurance.

John Auer, president of St. Petersburg-based American Strategic Insurance Co., said he doesn’t have a position because he’s never operated under federal insurance laws.

"I don’t know what it’d be like, so I’d probably opt for what I know," he said.

Optional federal chartering is only one element of a massive overhaul of the U.S. financial services industry proposed by Treasury Secretary Henry Paulson. The restructuring would touch every institution, from investment banks to mortgage brokers.

The American Bankers Association also has blasted parts of the plan, including a call to abolish thrift charters.

"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," the group said in a statement.

No one expects changes to occur overnight. The Treasury Department acknowledged that the debate in Congress over optional federal charter bills has been "difficult and ongoing."

Allstate’s biggest rival, Bloomington, Ill.-based State Farm, also supports Paulson’s call for optional federal charters. It cited an excerpt from Paulson’s overhaul blueprint.

Under the state-based structure, rates of automobile and homeowners insurance often are regulated.

"While numerous arguments have been made to justify such rate regulation, they are unpersuasive, especially since several states leave insurers largely free to set their own rates," the Treasury report said.

If national insurers have trouble keeping track of state laws, the situation is similar in Florida where legislators seem to pass new regulations every year, said Bert Gindy, vice president of governmental relations for Florida Farm Bureau General Insurance Co.

"A great deal of this small company’s resources have been dedicated to keeping up with all of the regulatory mandates and legislative changes," Gindy wrote in an e-mail. "For this reason alone, this company would certainly want to take a look at the pros and cons of Federal regulation."