I recently sat with Nick Gerhart to discuss the regulatory environment for U.S. insurance carriers. Nick offers a broad perspective on regulation based on his experience: After roles at two different carriers, Nick served as Iowa insurance commissioner, and he currently is chief administrative officer at Farm Bureau Financial Services.
Nick is recognized as a thought leader for innovation and is regularly called on to speak and moderate at insurtech conferences and events. During our discussion, Nick described the foundation for the state-based regulatory environment, the advantages and challenges of decentralized oversight and how the system is adapting in light of innovation.
This is the first of a three-part series and focuses on the regulatory framework insurers face. In the second part, Nick will provide the regulator’s perspective, with a focus on the goals and tactics of the commissioner’s office. Finally, in the third installment, we will cover the best practices of the insurers in compliance reporting.
Part I: The Regulatory Framework
You served as the chief regulator in Iowa: How do regulatory practices in Iowa compare with other states?
Every state essentially has the same mission. Iowa has one of the largest domestic industries, so we have to focus a lot on the issues that go along with having a lot of domiciled companies. We have over 220 companies domiciled in Iowa. I believe that is the eighth most in the country; therefore, we are a top-10 state in the number of domiciled carriers. So, how we focus may be a bit different than if we only had a handful of domestic carriers. Due to the number of companies domiciled in Iowa, we must have a technical skill set and ability to completely understand the all facets of the industry.
Level-setting: What are the goals of the office of the insurance commissioner?
First and foremost, the goal is to protect the consumer. You do that through monitoring a company’s solvency and financial status. You also make sure that companies are following rules and regulations and all the laws on the books.
A lot of folks don’t recognize how complex that regulatory framework is, so you really spend your time not only on financial solvency but also on the market side, making sure that rules are followed.
See also: Time to Revisit State-Based Regulation?
Even if a state has fewer companies domiciled, is it still interested in solvency? Or is this outsourced to the state of domicile?
That’s a good question. There are two sides – the financial side and the market side. On the financial side, there’s great deference to the lead state. For instance, if you are the lead state regulator of a group that is doing business in multiple states, there will be great deference to that regulator and his or her team that is reviewing those financials and that file. Any regulator can check and have their own views, obviously. But, there’s going to be great deference to that lead state.
Is this the same for market conduct?
On the market side, there’s not nearly as much deference. In fact, while I was commissioner, the NAIC was undertaking an accreditation standard for the market side. On the financial side, every state is accredited by the NAIC. And through this process, there’s much more cohesiveness and deference to that lead state. That doesn’t exist as much on the market side.
So, backing up a second, I’d like to touch on the topic of state-based regulation vs. federal regulation. Is this the right way to regulate this market?
I think it’s a good thing, because it’s local. A lot of insurance is local.
The feds have done a lot of work – whether it’s CMS, the Department of Labor or Treasury – that encroaches on state insurance regulators. I submit that this encroachment creates confusion and is counterproductive. I personally do not believe a federal regulator is going to do a better job and, in fact, believe it would lead to poorer results and hurt consumers. In my opinion, the federal government did not do exemplary work during the financial crisis, and I believe insurance regulators actually performed and executed quite well during that financially stressful time. In looking at that crisis, I have concluded that I do not want federal regulators or prescriptive banking standards forced upon the insurance industry.
State insurance commissioners are either elected by the people they serve or are appointed by a governor or other official or agency head. Those are held accountable at that local level and are part of the communities they serve. On countless occasions, I was stopped by people and asked about insurance issues. It would be very difficult to get that accountability or access if insurance were regulated at a federal level.
Are there areas where the states could improve?
There are some areas: They can do a better job of working together on the market side. But that’s why the National Association of Insurance Commisioners, the NAIC, exists – to create model laws that will create more uniformity across all states. And again, the states have done a tremendous job on the financial side.
The market side has more room to improve – at least as far as coordination. Regulators have made tremendous progress in recent years, though. In the last six years, by collaborating and coordinating through the NAIC, monumental modernization has occurred. As an example, annuity suitability, ORSA, principal-based reserving, corporate governance, credit for reinsurance and now cyber model laws have all been created and passed in numerous states. Passing a model law out of the NAIC is important because it provides a state a solid model to guide through the legislative process.
What is the downside of state regulation?
There are certainly challenges with the state-based system. One is, at the state level, having resources to do the job. The state of Iowa is really an international regulator as we’re the lead state for Transamerica/Aegon and group-wide supervisor for Principal Financial. We have firms in Iowa with significant international footprints, so Iowa regulates alongside international peers from all over the world. I believe it is critical that Iowa resource the insurance division appropriately, as limiting resources too much ultimately hurts the ability to regulate effectively.
After resources, I think the biggest challenge for states is uniformity issues. An emerging challenge is keeping up with all the technological advances and innovation emerging from the insurtech and fintech area.
Is regulation keeping up with innovation?
Whether or not the old regulatory framework is still relevant today – I believe we will soon have a debate around that and how to modernize. The use of data is going to be a challenge for regulators, whether it’s genetic testing in life insurance or some other topic. There are a lot of issues in the innovation space that regulators are going to have to step up and meet because, if consumers demand change, the answer shouldn’t necessarily be, “We can’t do that.” Maybe we need to look at the rules and the laws and make a concerted effort to modernize.
Over the years, a number of people have come into my office frustrated at the limitations of the current rules and said, “That law’s stupid.” I have to inform them that just because it is illogical doesn’t mean that you can get rid of it. That’s not the commissioner’s job. The legislature passes the laws. The commissioner interprets and enforces the laws. Commissioners do not pass the law, so, when individuals are frustrated, often that frustration is misplaced.
See also: The Coming Changes in Regulation
All in all, you would say that state-based regulation is the better answer?
I would put the state system up against a federally based system any day.
At the same time, we are the only country, to my knowledge, that has 56 different jurisdictions regulating insurers. Every other nation has a federal one. This poses challenges for international groups; certainly, some reinsurers are facing these issues. It is for that reason that we must coordinate better and speak with a unified voice.
As I have said, I do think the state system is remarkably better for consumers. When I was commissioner, the phone number on my business card went right to my office. I talked to consumers every day who called me directly. I would answer my phone, and they would be shocked that I would answer. There is genuine appeal in that.
When something goes wrong, insurance quickly becomes very personal. Sometimes, it’s bad things happening intentionally or willfully, while other times it’s just misunderstandings. Insurance is incredibly complex. I’d much rather have a system where there is accountability at the state level. You have people working for their citizens whom they go to church with and see around the state.
That’s a much better system than a federal bureaucracy that might have 10 regional offices where it’s impersonal and you have no idea who in the heck you’re talking to.