Insurance Regulation Is About to Get Tougher

Critics of insurance industry regulation have long called the industry’s only national regulator “toothless.” But the National Assn. of Insurance Commissioners is about to reveal its fangs on an aggressive program designed to protect consumers who invest in insurance policies.

That program--so-called regulatory accreditation--was launched more than two years ago, but it gains some teeth this January, when the NAIC will start to impose penalties against insurers in any state that doesn’t toe the line.

That’s spurring a flurry of activity by both legislators and regulators to pass a number of laws and comply with a host of technical guidelines that are meant to make insurance regulation more strict and consistent.

For consumers, that’s good news. While much of the action is behind the scenes and technical, the result should be noticeable to everyone: a healthier insurance industry with fewer company failures and better protection for policyholders when insurance companies do fail.

It’s worth noting that the NAIC, which sets standards for insurance regulators, has made several overtures in past years to improve insurance reporting. But many of the efforts have been ignored because the NAIC had no authority to impose penalties.

This time, the penalty for operating in an unaccredited state could be stiff. In the worst case, insurers that are headquartered in non-accredited states--those that didn’t meet the regulatory guidelines--may be banned from doing business in accredited states.

Why punish companies rather than rogue regulators? Regulators maintain their hands have been tied by state laws that weren’t strong enough to make them effective overseers of their industry. And time after time, legislative efforts to improve insurance laws were shot down by heavy insurance industry lobbying.

The accreditation effort proved different for one simple reason: Influential congressmen were threatening to create a strong national regulator for the insurance industry as the result of a congressional investigation into a rash of insurance company failures.

The investigation, led by Rep. John D. Dingell (D-Mich.), noted that the fractured nature of insurance regulation made it difficult for consumers to know the true health of their companies. Additionally, unlike government guarantees to bank depositors, there was nothing standard about insurance industry guaranty associations.

The associations are designed to make good on insurer promises to policyholders, but limitations on association coverages varied from state to state, and some states offered no guarantees.

Meanwhile, insurance company financial statements were so complex that even professional rating services--such as Moody’s, Standard & Poor’s and A.M. Best--seemed incapable of properly assessing risks to investors, a committee report said.

Some of these problems remain. However, national accreditation addresses some of the biggest shortcomings by requiring that every state pass 18 different laws designed to give regulators more authority and give consumers more protection. Among the laws required, for example, are those establishing guaranty funds, which back insurance policies similar to the way the federal government backs bank deposits. Most states have these funds, but a few didn’t prior to the NAIC’s program. Additionally, regulators must hire sufficient staff and adhere to certain minimum examination standards. As a result, state insurance departments have grown at three times the rate of state governments overall, and they’ve been nearly exempt from the drastic budget slashing that’s hitting many other state agencies, the NAIC says.

Additionally, nearly every state--including those that haven’t yet asked to be accredited--has passed some of the model laws the NAIC supports. Over the long haul, that should make state regulation somewhat more consistent and efficient, said Robert Hunter, president of the National Insurance Consumers Organization.

It’s worth noting that the industry is in significantly better shape than it was in 1991, when the accreditation program was launched. At year-end 1990, Weiss Research reported that only 16.2% of the nation’s insurance companies rated grades of A or B--Weiss’ highest ratings. Today Weiss--arguably the toughest of the insurance rating concerns--says 19% of the industry rates a B or better.

Failures are also down dramatically from their 1991 peak. Only seven companies, with $1.4 billion in assets, have failed in 1993, compared to 40 failed companies with $45 billion in assets in 1991.

The dramatic improvement is the result of several factors, including a renewed commitment on the part of many insurers to make their investment portfolios more conservative, according to industry experts. However, some believe the scrutiny caused by the NAIC accreditation program has also played a role.

Still, the program is far from a panacea. The General Accounting Office has been auditing the program annually since its inception. And in recent testimony to Congress, U.S. Assistant Comptroller Gen. Richard L. Fogel said the GAO still sees significant shortcomings. The problems lie mainly in three areas: inconsistent interpretation of compliance, reluctance on the part of state legislatures to pass the requisite laws and inadequate documentation to show why NAIC auditors sometimes deviate from their own rules.

“NAIC’s standards have been a catalyst in some states to make improvements in insurance regulation,” Fogel said. But the “accreditation program still does not convincingly demonstrate that accredited states can effectively regulate insurer solvency.”