Industry Divided On Federal Chartering

When Rep. Richard Baker, R-La., chairman of the subcommittee, asked Gasper how long Congress should wait before acting, Gasper said more action will be needed if there is no progress on state regulatory reform.

But, for life insurers, congressional action is already 15 years too late, Gasper said.

Rep. Paul Kanjorski, D-Pa., discussed proposals to create a tiered system. A tiered system might apply only to life insurers, or perhaps to life insurers and certain large commercial risks.

Nicely replied that, if certain segments of the industry, such as life insurance, were carved out, setting up a tiered system might be possible.

"I can see Mr. Gasper's arguments," he said.

But the p-c business is so complex that it could take several years just to understand the implications of OFC, Nicely said.

For his part, Gasper also acknowledged that the two industries are very different. But he noted that Nationwide is also a major p-c company, and even from that perspective, Gasper said that insurers should have a choice.

If Nicely believes that state regulation is better for GEICO, he should have that choice, Gasper said. Nationwide's institutional view, on both the life insurance side and the p-c side, is for choice, he said.

A representative of a major p-c group, the American Insurance Association, Washington, agreed.

Robert Restrepo, president of Allmerica Property & Casualty Companies, a unit of Allmerica Financial Corp., Worcester, Mass., said the level regulatory playing field created by OFC is critical to the long-term viability of the insurance industry.

"The current state regulatory system imposed significant costs on insurers and, ultimately, our customers, as well as the economy at large," Restrepo said.

Moreover, he said, the challenges facing the p-c industry are increasingly national and international in scope.

"Terrorism, natural catastrophes, fraud and asbestos litigation are just some of the major issues the industry faces," he said. "But the current decentralized regulatory system lacks the tools to address these issues in a comprehensive manner."

While AIA also supports reform of state regulation, Restrepo said the process has been slow and uneven.

"For every incremental movement toward greater state regulatory efficiency or uniformity, there are many new state-specific regulatory requirements that result in cost, delay and frustration for insurers with little, if any, consumer benefit," he said.

But Paul Mattera, senior vice president of Liberty Mutual Insurance Company, Boston, said a federal system could undermine the best characteristics of state regulation, including diversity, innovation and responsiveness.

"It is difficult to imagine a single regulatory system working in harmony with the diversity of underlying reparation laws and differing public expectations about the role of insurance regulation," he said.

Mattera raised several questions:

• Will an open and competitive rating law work in a state with a tradition of subsidizing urban driver?
• How responsive will a federal regulator be to market dislocations in individual states caused by extreme weather or seismic activity?
• Can market conduct be fairly assessed by a federal regulator unfamiliar with the underlying state law or court interpretations?

Mattera said efforts to achieve OFC are likely to lead to dual regulation. For example, he said, congressional interest in preempting state solvency regulation in favor of uniform financial requirements enforced by a federal regulator might not extend to rate and form regulation.

This separation of financial regulation from market regulation would present the worst of dual regulation, he said.

The state system needs improvement, Mattera said, but he contended that there is no reason to believe a federal system would be any better.