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February 18, 2016

What Is Right Balance for Regulators?

Summary:

No one, including regulators, can stop technological advances, but a careful balance must be struck. Start-ups can go too far, too fast.

Photo Courtesy of Thomas Hawk

As Iowa’s insurance commissioner, I meet with many innovators whose work affects the insurance industry. A major topic we discuss is the continual debate of innovation vs. regulatory oversight. This debate will be front and center during the Global Insurance Symposium in Des Moines when federal regulators, state regulators, industry leaders and leading innovators come together for discussions on the “right” way to bring innovation into the insurance industry.

I see three schools of thought in the debate:

  • Those who want nothing changed because insurance regulation has worked for more than 150 years
  • Those who suggest oversight by insurance regulators isn’t needed because innovations and market forces don’t require the same type of scrutiny that regulators have performed in the past
  • Those who feel that regulations and oversight are needed but that regulators should move quickly to keep up with emerging technological developments

Innovation is happening, and regulators realize it. No one, including regulators, can stop technological advances. Luckily, I have found that my colleagues who regulate the insurance industry desire to see innovation succeed because it will, generally, enhance the consumer experience. The focus of regulators is to enforce the laws in our states and to protect our consumers. It is that constant focus that ensures a healthy and robust market. And it is that focus that allows the market to work during an insolvency of a carrier, as Iowa witnessed recently during the liquidation of CoOportunity Health.

But wanting to work with innovators doesn’t mean insurance regulators are going to turn a blind eye to how innovations and new technologies within the industry are affecting consumers. I do not believe the fundamentals of the insurance business need to be disrupted. Innovations within an industry that is highly regulated, complex and vital to our economy and nation need to occur within the confines of our regulatory structure. Innovators who are attempting to disrupt the insurance industry outside the bounds of our regulatory structure and who are not following state regulations will likely face significant problems.

So, just as Goldilocks finally found the perfect fit at the home of the three bears, insurance regulators are working diligently to find the perfect fit of the proper regulation to protect consumers for innovations and the technology affecting the insurance industry.   Regulators want the insurance business to continue to innovate and adapt to meet customer needs and expectations. Improving the customer experience through technology, quicker underwriting and increasing efficiency adds to the value of insurance for consumers. I know many smart people are working on creative projects to do these types of things and much more.

The insurance business is arguably becoming less complex because technology simplifies and evens out that complexity. Many existing insurance companies will face challenges as data continues to be harvested and as digital opportunities become more obvious. The continuous innovation in the industry is both positive and exciting.

However, insurance carriers face incredible issues, and, therefore, the regulators who supervise these firms must clearly understand the complexity of the industry and the external factors that weigh upon the industry.

A few issues industry participants must deal with:

  • Perpetual low interest rates that make it difficult for insurers’ investment yields to match up with liabilities;
  • Catastrophic storms that may wipe out an entire year’s underwriting profit in a matter of hours;
  • Increasing technological demands within numerous legacy systems;
  • International regulators working toward capital standards that may not align with the business of insurance in the U.S.

I believe regulators, insurance carriers and innovators can work together to harmonize and streamline regulations in an effort to keep up with market demands. However, the heart of insurance regulation beats to protect consumers. Compromising on financial oversight and strong consumer protections is not up for negotiation. Ensuring companies are properly licensed and producers are trained and licensed is critical, and ensuring companies maintain a strong financial position is equally critical.

Innovators who wish to bear risk for a fee or distribute products to consumers will need to comply with insurance law. Additionally, innovators looking to launch a vertical play into the industry through a creative service, model or underwriting tool need to make sure they do not run afoul of legal rules and provisions that deal with discriminatory pricing and use of data. It is a lot to absorb for an entrepreneur, but it is not impossible, and the upside may very well be worth it.

I absolutely encourage companies looking to innovate in the insurance industry to proceed, but I urge them to do so both with the understanding of insurance law and the role of the regulator and with strong internal compliance and controls. Innovators and entrepreneurs who proceed down the right path are the most likely to have regulators excited to see them succeed.

Insurance is still a complex industry. Can and should it be made simpler? Yes. I believe that, through innovation and continued digital evolution, it will. Should the industry focus on how to continue to enhance consumer experience and put the consumer in the center of everything? Yes, and I know that is occurring within many new ideas and businesses that are beginning and evolving.

Insurance, at its core, is a business of promises. It is an industry that has passed the test of time, and I believe, through innovation and continual improvement, it will remain strong and vibrant for the next 100 years.

If you are an innovator or entrepreneur and are looking for a program to learn about how to address insurance regulatory issues within your business as well as the role of a state insurance regulator, I would again encourage you to attend our 3rd Global Insurance Symposium in Des Moines, Iowa. This is the first conference where innovation and regulatory issues truly converge. This is your opportunity to learn from state insurance regulators, the Federal Reserve, the U.S. Department of Commerce, seasoned insurance executives, start-up entrepreneurs (the second class of the Global Insurance Accelerator will have a demo day for the 2016 class), venture capital investors and leading innovative thought leaders. No other meeting has assembled a group like this.

Everyone will benefit from the unique learning experiences, and, more importantly, relationships will emerge. Register here today!

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About the Author

Nick Gerhart served as insurance commissioner of the state of Iowa from Feb. 1, 2013 to January, 2017. Gerhart served on the National Association of Insurance Commissioners (NAIC) executive committee, life and annuity committee, financial condition committee and international committee. In addition, Gerhart was a board member of the National Insurance Producer Registry (NIPR).

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