First, Do No Harm

It’s the time of year when state legislatures and Congress are hard at work tinkering with insurance laws. I believe that the mantra of each of these deliberative bodies should be: First, do no harm. Under the guise of protecting consumers, some measures that seemed like a good idea at the time of enactment end up doing more harm than good. Some of these are promulgated innocently; others demagogically because they curry favor with the public and press.

After any natural disaster, there is a tendency by some consumer advocates and governmental types to try to read into policies coverages that are not there. For example, in the Gulf region, many sought to find flood coverage in homeowners policies because insureds wished it were so after the fact, even though it was expressly excluded. Regulators who espouse a different view do so at the risk of further drying up any coastal insurance markets for their constituents or causing considerable premium increases. Furthermore, attempts to change the plain meaning of policy language post-event violate the most basic tenets of contract law.

After the busy 2005 hurricane season, the Florida legislature passed a law making wind deductibles cumulative per hurricane season. This measure was hailed far and wide in that state as pro-consumer, but may not have been experienced that way by policyholders who faced premium increases that many could not afford.

States that artificially suppress rates or create quasi-governmental residual markets that sell insurance at below actuarially responsible rates put the financial stability of its citizens at risk. Sooner or later, the public coffers—or the citizens themselves, through assessments—have to bail out the under-funded entities. In addition, it inhibits private insurance companies from effectively competing where there is no level playing field.

In the United States, there are approximately 7,000 to 8,000 licensed insurance companies. Our industry is neither monolithic nor monopolistic. It also is not a utility. Every state, in effect, competes with every other state for the attention and capital of these companies. A state that imposes onerous regulatory oversight and punitive measures such as excess profits laws, layers of bureaucratic review or cumbersome filing procedures for forms and rates may think that it is doing its citizens a favor when the opposite is the case. As companies flee unfriendly venues, the law of supply and demand inexorably will lead to scarcity, lesser quality of products and higher prices. A healthy private insurance marketplace where insurance companies compete for business is the best regulator of insurance.

It is tough for insurance companies to transact business in my own state, Florida. We have the geographic misfortune of having our peninsular nose sticking right into hurricane alley. There is nothing we can do about that. However, most insurance company executives will tell you that from a regulatory standpoint, Florida is a difficult state in which to conduct business. We do not help ourselves in attracting companies to do business here.

This year, Congress will consider repealing or significantly amending the McCarran-Ferguson Act as well as enacting optional federal charters for companies and agents. I hope it passes neither. McCarran-Ferguson allows companies to share data on causes of loss, which leads to rate development. Without this ability, regional companies may have a tough time developing credible data on their own and thus may withdraw from uncertain markets. Optional federal charters deregulate forms, create confusion for consumers and may purport to centralize protection for policyholders and agents far from their homes. Proponents should be careful what they ask for. “Optional” federal charters may turn into “mandatory” federal regulation and if the industry gets a punitive federal insurance commissioner, there is no fleeing to friendlier jurisdictions.

Don’t get me wrong, regulation of insurance is important and necessary. Consumer protection and reasonable rules of the road through forms regulation is laudable. Modernization and uniformity from state to state is necessary and can only be truly accomplished via targeted federal law. In some cases, a private/governmental partnership is salutary, such as when insuring terrorism through TRIA. But, for my money, I believe that an unfettered, healthy, competitive insurance market is best for consumers, agents and companies. To over-regulate it is to do more harm than good.

Alex Soto
President