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PHOENIX-Unless the insurance regulatory system keeps pace with evolving insurance and financial markets, traditional insurance will lose relevance for many commercial buyers, a risk manager warns.
"Those buyers will either find new markets or develop their own," said Richard C. Heydinger, director of risk management services for Hallmark Cards Inc. in Kansas City, Mo.
Mr. Heydinger recalled a recent meeting with Hallmark's treasurer regarding a task force set up to explore integrating management of the company's financial risks with its property/casualty risks. He said the company's financial suppliers and its property/casualty insurers each were looking at ways to integrate the two forms of risk within their products.
Mr. Heydinger said that later the same week, " I was visiting a potential new leading-edge supplier that just happens to be offshore who showed me models of integrated currency exchange risks, interest rate risks and commodity price movement risks in the same financial and risk transfer scheme with the P/C risks.
"Unless the traditional insurance suppliers move quickly with these emerging market trends and adapt their products, operations and technology to meet the buyers' needs in a streamlined, cost-effective way, the traditional market will be itself replaced by others. And unless the regulation changes to permit this transition in a timely fashion, the replacement firm is likely to be offshore."
Mr. Heydinger sparked a panel debate over commercial deregulation during a session at the 63rd annual National Assn. of Insurance Brokers meeting in Phoenix last week.
Glenn Pomeroy, North Dakota's commissioner of insurance, agreed that regulation must evolve to keep pace with insurance industry changes.
Mr. Pomeroy, who is slated to be the next president of the National Assn. of Insurance Commissioners, described the NAIC's new white paper on commercial insurance deregulation as "a good analysis of the need to provide more flexibility to the commercial insurance marketplace" (see story, page 1).
While Mr. Pomeroy predicted there will be some deregulation of commercial insurance, Gary Richardson, Republican majority whip in the Arizona Senate and vp of the National Conference of Insurance Legislators, said he is still undecided on the commercial insurance deregulation issue.
"There are very strong reasons and arguments for commercial deregulation," Sen. Richardson said. "However, there also are very strong and compelling arguments that at least one feature in most of the existing proposals needs to be either dropped or modified substantially."
That feature, contained in many of the deregulation proposals, would take commercial insurers out of guaranty funds, he said. "That very attempt undermines the principle behind the insurance process."
While commercial insurance contracts are transacted between sophisticated buyers and insurers, the idea of ending guaranty fund protection "fails to embrace third-party liability cases where the victim of a negligent act is neither the insurer nor insured, but a seriously injured party," Sen. Richardson said.
There have been cases where "so-called sophisticated insurers and so-called sophisticated insureds have gone sophisticatedly bankrupt, leaving uncompensated victims of highway accidents, industrial pollution and product liability," he said.
Sen. Richardson went on to say that he believes not many state legislators will support proposals that exempt commercial insurance from guaranty funds. He did say, however, that there are sound reasons that do support the need for deregulation.
For example, "we've learned that the existing hodgepodge of state laws, state regulation and state rules and procedures have driven 40% of the commercial insurance business out of the country to the so-called alternative market," he said. And it can take longer than seven years for an insurer to become licensed in every state, he said.
Dennis H. Chookaszian, chairman and chief executive officer of CNA Insurance Cos. in Chicago, shared his own views on why commercial insurance deregulation is needed.
"We at CNA spend $375 million a year on regulation," he said. "Of that, about $180 million is spent on the payment of premium-based taxes of some form or another. We file 48,000 premium-based tax returns and have 350 full-time-equivalent people doing regulatory activity. That's the effect of regulation."
Ms. Pomeroy countered that he thinks the effect of regulation, at the state level, is in consumer protection.
"I concede there are costs," he said. "I'm willing to concede that we as insurance regulators need to work very hard to identify what the unnecessary costs are and I think there are some, clearly."
Sen. Richardson summed up by recommending that all parties involved in commercial deregulation go slow.
"Go slow, do it right and make sure we have no unintended consequences," he said.
"With my career in the legislature, 10% to 15% of the bills passed every year are solving problems that we created with the well-intended legislation passed the year before. If we're going to err, err on the side of going slow, making sure we've dotted every 'i' and crossed every 't' before we move on any further."
Mr. Heydinger, however, cautioned the NCOIL vp that he does not have unlimited time in which to drive his company's cost of risk down.
"Things are moving much quicker in the industry than regulation has in the past," he said.