Through most of their history, U.S. insurance companies and their agents have united whenever federal regulation of the industry was attempted, earning a reputation for invincibility that rivals the gun lobby`s.
These days, however, insurance is a house divided, and the widening cracks could enable Congress to subject the industry to federal oversight for the first time.
Indeed, a growing number of insurers are encouraging a federal role, quietly advising key lawmakers in drafting legislation. Most are insisting that the states remain the industry`s primary regulators, but some are even urging that they be regulated exclusively by the federal government.
”Politicians are telling us we`re hurting ourselves because we have this split,” says Gerald Maatman, chief executive of Kemper National Insurance Cos. ”They`re looking for some direction from the industry as to what our position is and getting mixed signals.”
Long Grove-based Kemper itself is threatening to quit the Alliance of American Insurers, a trade group it helped establish 69 years ago. The reason: the alliance`s dead-set opposition to federal involvement, a position Kemper- its second-largest member-no longer supports.
Earlier, Kemper had favored state regulation, but it has become convinced that the states alone can`t handle the job in an era of complex multistate insolvencies.
Now the company favors a national self-regulatory body, overseen by a federal agency, and a national guaranty fund to replace the network of state guaranty funds to which it pays about $1 million a month in assessments.
Kemper`s threatened resignation, which would become effective next July, would be the organization`s second big defection. Metropolitan Life Insurance Co.`s property-and-casualty subsidiary quit last month, citing philosophical differences and the high price of dues. (Kemper, which believes the alliance should merge with one of the other trade groups, says its $2 million in annual dues is another reason for considering withdrawal.)
”The infighting,” says another Illinois insurance executive, ”is bitter at this point.”
Despite the immense size and scope of the insurance industry-insurers collect $475 billion in premiums annually-regulation has been relegated to the states. And Congress has long been content to keep things that way-until lately.
In just the last four months, state regulators have seized six big life insurers. Rating companies have downgraded more than a dozen others, reflecting deteriorating investment portfolios. As a result, lawmakers increasingly see the need for federal action.
When Congress returns in two weeks, its committees will take up legislation that could shake up the insurance industry in two ways.
One group of proposals-at least three variations are expected-would empower a federal agency to govern such basics as how much capital insurers must hold in reserves and where they can invest their assets. This agency also would accredit state regulators, giving it a lever to enforce its decrees.
The Democratic authors of these bills are House Energy and Commerce Committee Chairman John Dingell of Michigan and Sens. Richard Bryan of Nevada and Howard Metzenbaum of Ohio.
The other measure, pushed by Metzenbaum and House Judiciary Committee Chairman Jack Brooks (D-Texas), would repeal the McCarran-Ferguson Act, the 1945 law that gave states the authority to regulate insurance rates and shielded insurance firms from federal antitrust laws, allowing them to pool data used to price policies.
The effects of these proposals would be more than a symbolic slap at state regulators, who many lawmakers contend must share the blame for this year`s insurance company failures and spasms of public panic.
Insurers fear that the loss of their antitrust exemption would swell their costs by forcing them to collect information on their own, a concern most acute at small companies. Many firms also believe establishment of another federal bureaucracy would result only in more paperwork and added expense.
Most of the industry, therefore, is seeing red.
”It`s just incomprehensible to me that anybody could think anything the federal government does in this area would be helpful,” says Lowell Beck, president of the National Association of Independent Insurers in Des Plaines. ”We haven`t changed our view.”
Nor has the Schaumburg-based insurers alliance, despite the moves by Kemper and Metropolitan Property & Casualty Insurance Co. of Warwick, R.I.
Says Rodger Lawson, the alliance`s executive vice president, ”We have never wavered from our position of absolute opposition” to the congressional efforts.
Notwithstanding its successes in Washington, the insurance industry is not monolithic. There are some 3,800 property-and-casualty insurers and 2,200 life and health companies. There are historic splits between these two groups; between small and big companies; and between mutual and shareholder-owned firms.
Indeed, as far back as the 1960s, State Farm Mutual Automobile Insurance Co. broke ranks to call for applying federal antitrust laws to auto insurance and taking rate supervision away from state authorities.
Today, State Farm goes even further. ”We`re clear you`ve got to see states get out of ratemaking” in all kinds of personal insurance, says Pete Ingham, general counsel for the Bloomington, Ill.-based company, the nation`s biggest seller of auto and homeowner`s insurance.
But State Farm was a voice in the wilderness. Whenever anyone suggested tampering with federal law in a way that would affect the industry, insurers quickly set aside their other differences to bury the initiatives.
Leading the rally for the status quo: small, rural insurers, which shy away from the press but have great sway with farm-state delegations.
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”The states have been regulating the insurance industry for 200 years,” notes Gene Grabowski, spokesman for the American Council of Life Insurance.
”We haven`t seen any federal proposal thus far that does a better or more efficient job or that would be more cost-effective.”
As the industry and the current regulatory scheme come under heavier attack, however, more and more insurers are adopting a new view. They contend that the industry should at least sit down with lawmakers to influence legislation that they believe will be adopted sooner or later.
Behind the scenes, for instance, the American Insurance Association and the Independent Insurance Agents of America have been negotiating with House chairmen to shape bills on federal oversight and a partial repeal of the McCarran Act.
”We think you get better results from Congress when you`re straight with them, when you work with them, than sitting in your foxhole waiting for the napalm to be poured on you,” says David Pratt, vice president of the insurance association, which represents property-and-casualty firms.
These two trade groups still want partial exemptions from federal antitrust law, so companies could retain uniform policy forms and an industrywide database of actuarial tables used to calculate insurance risks. But they say the law should apply to insurers in other regards.
The result would be a setup such as Illinois has, in which states would have no authority over rates but prosecutors could come in using federal law if companies fix prices to gouge policyholders or squeeze out competitors.
These insurers also welcome the adoption of national minimum standards, eliminating the need to meet requirements that can vary significantly from state to state.
Allstate Insurance Co. of Northbrook has also come around to the State Farm position-despite its status as the largest member of the uncompromising National Association of Independent Insurers.
”In many states, we`ve seen such a politicization of insurance regulation that politics has become as important as effective and proper regulation of the insurance business,” complains Robert Pike, general counsel to Allstate, a Sears, Roebuck and Co. subsidiary.
”The fear is that politicization of the process in the future will be even greater than it is now,” he continues. ”If that happens, then I think more companies and more interests will be asking the federal government to relieve (the industry) of 50 conflicting state regulatory mechanisms.”
Nevertheless, the company believes all the current proposals miss the largest point by failing to address the states` ratemaking authority. ”None of them want to deal with the underlying problem in our industry, which is not rate adequacy but rate inadequacy,” Pike says.
Insurers need only point to California to emphasize their concern in this area. Insurance Commissioner John Garamendi recently imposed a $2.5 billion refund of auto insurance premiums, as authorized by voters in a 1988 referendum called Proposition 103. As the No. 1 and No. 3 auto insurers in that state, State Farm and Allstate have a large stake in whether that action ultimately holds up in court; between them they have nearly 5 million policyholders in the state.
Pike thinks calls for broad reform will continue to be drowned out, however, by small firms that operate in only one or two states and thus are untroubled by the continental patchwork of regulation.
These rural insurers, which fret that federal regulation would allow giant companies to overwhelm them, are ”far more effective politically,”
Pike says. ”They have better grass-roots networks than the large companies;
they`re more persuasive with government officials. Ultimately, they`ll carry the day.”
In March, a group of companies formed the Insurance Solvency Coalition in an effort to create an industry solution to the problem. Its steering committee includes American International Group Inc., a property-and-casualty giant, and Marsh & McLennan Cos., the world`s largest insurance broker.
Their draft proposal calls for a two-tier regulatory scheme, with federal chartering for commercial property-and-casualty insurers and state regulation for everyone else. This plan might be more politically feasible than the idea of ending state rate-setting power over personal insurance lines.
Jana Gill, an attorney for the coalition, says the Dingell approach is
”consistent in what it`s trying to accomplish, but it doesn`t go far enough.
”It`s a big change from the way insurance has traditionally been regulated. People have concerns about whether it`s achievable, or how soon it could be achieved, (but) we think everyone`s aware of the problems that have developed, and now is the time to do something fairly significant.”