By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
"There will be more regulation," said Joseph S. Murphy.
The regional executive of the mid-Atlantic region for Zurich might have been stating the obvious, but who has the crystal ball to prognosticate the details of the impending increased regulation? Earlier this spring at a symposium put on by the Chartered Property Casualty Underwriters Society, Murphy and other insurance industry insiders attempted their best Nostradamus impressions.
A main focus of their predictive powers: the debate over state versus federal regulation and the possibility of changes to the McCarran Ferguson Act, the 1945 law that exempts insurers from anti-trust laws and gives states regulatory powers of them.
One organization that has a vested interest in state regulation is the National Association of Insurance Commissioners, and its director of research, Eric C. Nordman, believes that any major changes to the system are "highly unlikely." The insurance industry is weathering the economic storm as well as it is, relative to other financial services sectors, in large part because of state regulation, according to Nordman.
"I don't think the optional federal charter (OFC) is on the table anymore," said Frank Nutter, president of the Reinsurance Association of America, expressing a slightly different take. Why no optional federal charter? Because, according to Nutter, lawmakers do not like the word "optional."
The optional federal charter was never really a viable concept, said Robert Detlefsen, vice president of public policy at the National Association of Mutual Insurance Cos., a trade group opposed to the OFC. That's because, as Nutter hinted, "optional" would never really be an option.
The federal charter would be like a "roach motel," said Detlefsen. Once you got in, you wouldn't be able to get out.
Or as Murphy warned, he wasn't sure Washington, D.C., has the same thing in mind about federal regulation as the insurance industry.
It seems that news about the untenable nature of Florida's property-catastrophe insurance market makes headlines each week, much of it about lawmaking in an attempt to shore up the Florida Hurricane Catastrophe Fund, which according to last count has only $7.6 billion in its covers though it can write up to $29 billion in reinsurance.
Two laws are one recently introduced in the U.S. Senate by Florida's Sen. Bill Nelson, which would allow the Federal Reserve to guarantee bonds from catastrophe funds in Florida, Texas, Louisiana and California, and Nelson's "Homeowners' Defense Act of 2009," introduced in February this year. This last law would set up a National Catastrophe Risk Consortium that would, among other things, coordinate reinsurance deals among state funds and outside capital and provide "liquidity loans" to state and regional CAT pools.
According to Nutter, the Homeowners' Defense Act will frame the property-catastrophe regulatory debate in the year ahead. Essentially, said Nutter, the state of Florida is asking for cash from the U.S. government. If given, the money would open the door for other states to put their hands out.
One could be forgiven for thinking the Homeowners' Defense Act is just a Florida bailout, mused Detlefsen.
Alternative legislative solutions to the problem--far too much property in highly hurricane-exposed coastal areas--could be a policyholder tax benefit or state loans, which would deliver cash and incentives to owners to harden their properties against storm risks, said Nutter.
Nutter and others involved in property insurance and reinsurance feel just as strongly about this issue as perhaps the idea of a federal regulator. When Uncle Sam backs state insurance funds, he is taking business from the private market. Some would say, the most profitable line of business.
April 28, 2009
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