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IT COMES AS NO SURPRISE that the deregulation of commercial lines has to wind its way through a lengthy period of deliberation by regulators before it becomes a reality.
The National Assn. of Insurance Commissioners, after about two years of study, probably will need about three more months to complete a draft of a paper on deregulating commercial insurance transactions (BI, May 26).
Once that proposal is ready, it will be discussed for months by the NAIC before it wins the approval of, or is rejected by, the association of state regulators.
We can only hope that once the NAIC leaders have agreed that commercial lines insurance regulations should be reduced, that individual states will quickly do so.
Dismantling regulation of rates, forms and market restrictions for large commercial buyers is overdue. At this stage, in fact, it really is a bit like closing the door after the horses are out of the barn.
Over the past decade, large, sophisticated buyers of commercial insurance have left the traditional market-and therefore the constraints of state regulation-in droves, opting for self-insurance and a variety of alternative risk financing vehicles. They also are buying billions of dollars of insurance in Bermuda, where insurers are free to underwrite what the customer wants without first filing rates and forms with multiple regulators.
The trend to opt out of the conventional insurance market is now being followed in earnest by numerous middle-market companies, and even small companies are banding together to take advantage of alternative market benefits-not the least of which is freedom from the state regulatory system.
The current regulatory system, while intended to protect consumers, actually serves to restrain the nation's insurers from competing with the many alternative facilities and options, as well as some non-U.S. companies. It saddles them with billions of dollars of costs to comply with 50 sets of paperwork and hampers their ability to develop innovative and flexible coverage solutions for their policyholders. While this is not news to our readers, we wonder why it has taken the NAIC so long to recognize and act on this.
The NAIC's draft proposals to date for deregulating commercial lines coverage are welcome. They chiefly call for lifting regulation of rates, forms and market access for "industrial insureds," and also address problems of inconsistent form approval among all states and jurisdictions.
One of the issues the NAIC has yet to decide is what constitutes an "industrial insured." We hope that the bar is not set too high, excluding smaller, yet no less sophisticated, buyers from availing themselves of the benefits of deregulation.
Also to be determined is whether guaranty fund protection still will be imposed on policyholders eligible for deregulated coverage. Because the philosophy of deregulation is that sophisticated buyers can hold their own, we think guaranty fund protection is unnecessary.
Some argue that the guaranty fund protection exists not only to protect policyholders but also to protect the innocent third-party claimant that would have no one to pay a judgment if both the insurer and the policyholder went broke. There are a host of reasons that this concern is overblown. First, it's unlikely that both policyholder and insurer will go broke. Furthermore, the limits on claims payments by most guaranty funds are so low that in the event both the insurer and policyholder go broke, claimants would recover little. Finally, there is no guaranty fund protection for those self-insuring or using offshore insurers, which is a major reason for deregulating commercial lines in the United States: to make U.S. commercial insurers more competitive with offshore insurers.
Some surplus lines markets argue against deregulation, saying there is no need for it because they already are free from much regulation by the states. We think they actually may fear competition from newly deregulated insurers. However, they are unlikely to see any more competition than they already have from the surplus lines units of admitted companies-or from offshore markets like Bermuda.
Ultimately, the process of deregulation will shift responsibility for assessing the security of insurers to the buyers. As long as they are willing to assume that duty-and the risk of insurer failure-then regulators shouldn't stand in their way. Caveat emptor.