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Stating the case: debate over a federal insurance regulator role spurs state legislators into action

WATERSHED MOMENT: New York State Sen. James Seward, immediate past president of the National Conference of Insurance Legislators, said he believes 2010 could be the year when the state vs. federal regulatory issue comes to a head.

As the debate over state and federal insurance regulation spills into 2010, there has been no shortage of legislative activity. A consumer-oriented theme played heavily in 2009's legislation and regulatory measures, largely in response to the fallout from the September 2008 Financial crisis.

An analysis by Wolters Kluwer Financial Services revealed slightly more than 10,000 pieces of legislation with the potential to impact the insurance industry were introduced in the first six months of 2009. That marked a 70% increase over the same period in 2008, and was up 50% from 2007.

About 2,300 of those bills had been enacted as of Oct. 1, 2009, according to Wolters Kluwer.

Credit scoring amid widespread layoffs, incremental moves to broaden access to health coverage and data-compliance reporting requirements were among the consumer-oriented, state-level issues that gained traction. These moves came in the shadow of sweeping efforts at the federal level to bring about health care reform; continued talk of an optional federal charter; and creation of both a systemic regulator and a consumer protection agency.

According to the Wolters Kluwer study, close to 24,900 state and federal laws or regulations that affect the U.S. insurance industry will have been changed or created in 2009. Fully 30% of the activity affects all lines of business, the report said.

In addition to monitoring financial solvency, advocates of the state regulatory scheme have been emphasizing their consumer protection role from "the initial underwriting practice all the way through the claims process," according to Kathy Donovan, senior compliance counsel at Wolters Kluwer's insurance compliance unit.

"We're seeing that continuing theme," Donovan said. "Perhaps in some cases, it's tied with the economic struggles that we have. So it's not just health insurance, it's not financial-market reform, but it's also the economy that we're facing. That's the mission that they have."

Pressure to Comply

Donovan said the average insurance company will feel added pressure to track information and manage deadlines.

"I think that's where the pressure itself will be, knowing that they truly know the universe of those laws, regulations and bulletins that are impacting their specific business,' Donovan said.

Many will face the challenge with fewer resources. More than half of the insurance professionals Celent surveyed in its September 2009 U.S. Insurance Compliance Survey expect compliance costs to increase by up to 50%. Only 41% anticipate additional funding to address added requirements.

The level of discourse on regulation shows no signs of slowing in 2010 amid rallying cries for greater consistency.

As 2009 drew to a close, Allstate rolled out a national advertising campaign to champion the concept of a federal insurance regulator. The ads advocate the passage of HR 1880, the National Insurance Consumer Protection Act. The bill, pending in committee, would establish a federal charter system for approval of insurance products and services. Allstate would like to see federal charter provisions incorporated into financial regulatory reform. The move, in part, would help carriers streamline compliance and lobbying efforts.

New York State Sen. James Seward, immediate past president of the National Conference of Insurance Legislators, said he believes 2010 could be the year when the state-versus-federal regulatory issue comes to a head.

Seward said the threat of federal intervention in the insurance markets continues to be a huge issue for NCOIL and has had a unifying effect. "This increased [legislative] activity is definitely attributable to showing the feds that we in fact have our act together at the state level and can make a good system even better," Seward said.

But Seward acknowledges that NCOIL's efforts toward uniformity must contend with the underlying states' rights issue, which provides both subtext and friction within the larger debate. His home state exemplifies a jurisdiction that has the wherewithal and market size to go it alone on certain issues, if it chooses.

Common Causes

Thirty-six states now comprise the Interstate Insurance Product Regulation Commission, including three that joined in 2009. Yet New York State has not joined the regulatory compact that covers certain insurance products, Including life insurance, annuities, disability income and long-term care insurance, according to the organization's Web site.

"Whether New York joins the I1PRC will be another key issue in 2010," said Seward, who supports such a move.

Seward's home state was one of 11 to adopt NCOIL's model bill to regulate the life settlement industry in 2009.

The NCOIL model law requires a two-year waiting period before a life insurance policy can be sold to a third party, and it specifically bans stranger-originated life insurance, often called STOLI. A competing model law from the National Association of Insurance Commissioners, which uses a five-year ban, has been adopted in seven states.

It's not the only issue that divides NCOIL and NAIC. NAIC floated a proposal in September to create the National Insurance Supervisory Commission, which states would conceivably work through to adopt rules and achieve consistency on regulations.

Under NAIC's draft proposal, if states did not adopt rules within a limited time period, that implementation would be handled by the proposed Office of National Insurance within the U.S. Treasury Department.

The supervisory commission proposal was criticized by those who fear that state-level legislative authority, established through elections, would be usurped through legislation that Congress may pass on behalf of the NAIC.

"State insurance commissioners are part of the executive branch and the NISC proposal would seize state legislative authority for the introduction and passage of insurance legislation by vesting it in the hands of state insurance commissioners, 75% of whom are appointed officials" said Rhode Island State Rep. Brian Kennedy, a former NCOIL president.

Kennedy is one of the chief critics of NAIC's commission proposal, which was drafted in an attempt to address issues relating to insurance uniformity. He noted that each year the uniformity issue grows more difficult, and he wonders if there is a viable resolution short of arm-twisting.

"I don't know how uniformity can be accomplished," Kennedy said. "But I think you're going to see a lot more discussions on that particular issue between legislators and state insurance regulators."

Different Paths

Kennedy also chairs a standing committee on communications, financial services and interstate commerce for the National Conference of State Legislatures. He suggested that much state-level insurance legislation is based on models from either NCOIL or NAIC, but neither organization can guarantee that their model acts will be introduced at the state level.

Kennedy noted that legislative passage of insurance legislation can hinge on the relationship an insurance commissioner has with the legislative body. Pro-active commissioners, he said, are generally inclined to bring the latest measures or approaches into play for consideration by state legislators.

"My insurance commissioner usually gets five out of six bills every year that he brings forward," Kennedy said.

For now, Seward and Kennedy are both waiting for further developments at the federal level. Seward said many health insurance issues have been put on hold at the state level in anticipation of Congressional action on health care. At the same time, he said many states also have served as laboratories on improving health care and he's concerned that federal reform may jeopardize those gains.

Kennedy expects both NCOIL and NCSL members to continue lobbying their respective federal representatives, touting the strengths of a state-based regulatory system--especially as consumer guardians. But they may face some push-back on that issue.

Celent's survey showed 21% of compliance professionals believe consumer-protection concerns will be the main driver for increased federal involvement in regulation. Another 15% cited data reporting; solvency reviews and pricing ranked third and fourth, respectively.

Celent noted that state lawmakers have taken an interest in protecting consumer data to prevent fraud and identity theft. Massachusetts has approved legislation that requires any business that gathers personal information about state residents to encrypt portable devices, wireless transmissions and public networks, according to the report. Almost 60% of those surveyed said their own data compliance efforts increased in the past year.

Donovan said the New Jersey Department of Banking and Insurance recently asked insurers to report on how they notify consumers about the use of credit scoring in the underwriting process. Credit scoring is permitted in New Jersey but it must accommodate extraordinary life events.

Donovan said that NCOIL recently added its own provisions to its model on credit scoring to adjust for extraordinary life events, such as job loss, divorce or the death of a spouse or child.

"Once again, they've recognized that there are financial issues facing consumers out there, and they're responding."

* The News: Legislative and regulatory activity that affects the insurance industry was up 70% in the first seven months of 2009.

* The Situation: The debate over a federal role in insurance regulation has yet to be resolved.

* What it Means: Insurers will face growing pressure to track and act on compliance-related issues.

Widening Dependent-Care Coverage

In 2009, these 10 states expanded access to health insurance through changes in dependent eligibility provisions. Most dealt with age limitations; some addressed medical leave from school.

Alaska: Dependent health coverage for students who take medical leaves of absence from school.

Colorado: Dependent health coverage for persons under 25 years of age; coverage for students who take medical leave of absence.

Idaho: Dependent definition revised to: unmarried child under 25 who receives more than half of financial support from the parents.

Illinois: Parents with insurance that covers dependents have the right to elect coverage for qualifying dependents up to age 26; to age 30 for military veteran dependents.

Nebraska: Extends the limiting dependent age on sickness and accident policies to 30.

New Hampshire: Revises the definition of "dependent" by deleting "unmarried" requirement.

New York: Allows unmarried children through age 29 to be covered under a parent's group health policy.

Ohio: Allows unmarried children until age 28 to be covered under a parent's health insurance policy. Pennsylvania: Allows uninsured single adult children up to age 30 to be covered by their parents' health insurance plan, contingent on employers' willingness to offer the benefit.

Wisconsin: Allows unmarried children until age 27 to be covered under a parent's health insurance.

Source: Wolters Kluwer Financial Services

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Growing Federal Role

Celent surveyed 2010 individuals on current and future insurance compliance trends, through an arrangement with the Association of Insurance Compliance Professionals.

 For the lines in which a federal presence is expected, what type of involvement is likely?  Consumer Issues           21%  Data Reporting        15%  Solvency Reviews          14%  Pricing          13%  Product Vailability      12%  Market Conduct          11%  Forms            8%  Product Mix              5%  Source: Celent  Note: Table made from bar graph. 

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