Insurers Back U.S. Oversight

The insurance industry, exempt from national oversight since the 1940s, may become subject to federal rules as the result of legislative proposals being written in the wake of an ever-widening scandal.

Currently, insurers are regulated only at the state level.

One controversial proposal, still in the draft stage, would set federal standards for market conduct, rates, forms and licensing -- a move that traditionally regulation-averse insurance groups now say they support.

However, consumer advocates say the current draft falls far short of what’s really needed. They want to craft a new proposal -- or dramatically change the existing one -- to impose even tougher rules.

Although there are still wide differences between the two sides, the fact that both industry executives and consumer representatives are discussing the parameters of federal regulation marks a stark departure from the past.

“Five years ago, our members would have said no to any federal involvement whatsoever,” acknowledged Joseph Annotti, vice president of the Property Casualty Insurance Assn. of America. “But increasing frustration with disjointed state regulation is beginning to turn the question from being ‘state versus federal’ to being ‘good regulation versus bad regulation.’

“What we need is a well-regulated industry,” Annotti added. “If the federal government can provide that, so be it.”

The regulatory momentum comes from a growing probe into the insurance industry that was launched in October by New York Atty. Gen. Eliot Spitzer. That’s when he accused giant broker Marsh & McLennan Cos. of conspiring with several large insurers to rig bids and inflate the cost of commercial policies.

Since then, regulators in other states also have become engaged. Last month, California Insurance Commissioner John Garamendi sued four of the nation’s biggest insurance companies -- MetLife Inc., Prudential Financial Inc., Cigna Corp. and UnumProvident Corp. -- for allegedly steering kickbacks to a San Diego-based broker. That firm, Universal Life Resources Inc., has vowed to cooperate with state investigators as part of a settlement agreement.

Although the insurers say they’re innocent of wrongdoing, some have changed their practices.

At the same time, consumer advocates who have long pushed for federal oversight of the insurance industry have become emboldened, confident that they’ll never find a better moment to strike. They say that because of the scandal, members of Congress who previously supported whatever the industry wanted are now wary of appearing to favor insurers over consumers.

“We have gone from being on the defensive ... to going on the offensive,” said Robert Hunter, director of insurance for the Consumer Federation of America.

For their part, insurers say they have their own reasons for embracing the idea of federal oversight.

The Gramm-Leach-Bliley Act of 1999 eliminated many of the barriers that had prevented banks, insurers and securities firms from getting into one another’s businesses.

But because banks and securities firms are largely governed by uniform national rules, they’re more nimble than insurance companies in offering new products and services throughout the U.S. Insurers often must file truckloads of separate paperwork in 50 states.

“Why shouldn’t a company that wants to roll out a product nationally be able to do that quickly and efficiently?” asked Julie Rochman, senior vice president of the American Insurance Assn.

There are other motivations too. In the wake of the scandal, a number of state regulators are pushing to tighten their oversight of the industry.

Garamendi, for example, has proposed a law that would require insurance brokers to obtain the best product available for the best price and would demand that all of the broker’s compensation be clearly disclosed to consumers.

Industry officials say the measure sets an unfair double standard. They note that car salespeople and others don’t have to divulge their compensation. What’s more, they contend that Garamendi’s plan would lead to a flood of frivolous suits.

“Are we going to be running into court every time somebody says, ‘You could have gotten me a lower price’?” said Michael McCaffrey, vice president of government affairs at the National Assn. of Insurance and Financial Advisors of California.

Yet even as the industry mobilizes to fight Garamendi’s proposal, regulators in New York, Massachusetts and elsewhere are weighing their own new rules.

“If anything could argue for federal regulation, it’s this,” said one industry executive. “The old saw was that it’s better to deal with 50 monkeys than one gorilla. But when the monkeys are angry, the gorilla starts to look more attractive.”

Whether federal regulation would satisfy either insurance companies or consumer groups remains to be seen. “That will completely depend on what is proposed,” Hunter said.

Rep. Michael G. Oxley (R-Ohio) told a gathering of insurance executives this year that he was working on a bill to create national standards on a host of fronts.

The legislation has not yet been introduced. But industry officials say they’ve seen a draft that already fills 300 pages and has been dubbed the SMART Act, short for State Modernization and Regulatory Transparency. Many believe the bill will be introduced early next year.

Some consumer advocates say the bill is a ruse -- designed to weaken state regulation, not strengthen it.

The insurance industry is “threatening a federal takeover in order to scare our state lawmakers into weakening state consumer protections,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Los Angeles. “The push in Washington, D.C., is to lowest-common-denominator standards.”

However, Hunter said Oxley had already backed away from the original draft of his bill after receiving a torrent of angry phone calls and letters from state insurance commissioners who got wind of the details. Hunter hopes a strengthened bill will be introduced when Congress reconvenes early next year.

Meanwhile, there’s one point on which everyone seems to agree: “Congress is gearing up to address these issues,” said Brian Atchinson, executive director of the Insurance Marketplace Standards Assn. “The sand is running out of the hourglass.”