Regulators threaten vitality of US insurers

US insurers are in danger of being hamstrung in their ability to do business freely and underwrite risks with certainly and on a proper actuarial basis by regulators—at state, federal and international levels.

That is the view of David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America (PCIAA), speaking ahead of the organisation’s annual conference in Boston. Sampson says the majority of the body’s strategic goals for 2013 and objectives for 2014 revolve around this theme.

The PCIAA board set four strategic priorities for 2013. The first of these, Sampson says, was to look to protect product certainty and the sanctity of insurance contracts in the US.

This goal stems from a worrying trend that was noted following the heavy losses stemming from Hurricane Sandy last year when, he says, politicians looked to retrospectively change elements of insurance contracts such as deductibles, and moratoriums were imposed on policy cancellations.

“We must resist the many threats we have seen to the sanctity of insurance contracts. If a policy is priced in a certain way on a certain basis, we cannot allow the terms and conditions simply to be overturned by political considerations. How regulators and officials react after a big catastrophe is essential to the future stability of the market.”

PCIAA’s second strategic priority was enhancing solvency protection and the third was to promote sound supervision of the market. These two objectives overlap in some areas as they involve ensuring regulators—at every level—understand the insurance industry and regulate it appropriately.

Sampson notes that currently there are many bodies—including regulators at state, federal and international levels, and rating agencies—which could potentially either change the goalposts for insurers or confuse the picture in terms of what appropriate solvency requirements should be.

In addition to this, PCIAA is focused on ensuring risks it deems as uninsurable are not forced back on to the private sector. Specifically it has been building a case to ensure that the Terrorism Risk Insurance Act (TRIA) is reauthorised.

In terms of the third goal of promoting sound supervision, the body has been working hard, Sampson says, to influence government and non-government entities to prevent them passing duplicative or inappropriate regulatory requirements on insurers.

“The economic vitality, competitiveness and diversity of the private market faces peril at all levels due to arbitrary and unnecessary regulatory requirements,” Sampson says. “A number of regulatory models are currently gathering steam, which we do not believe are suitable for our members. It seems some regulators are seeking a one-size-fits-all approach and that simply does not take into account differences even at an international level between the insurance landscapes in the US and Europe.”

"If a policy is priced in a certain way on a certain basis, we cannot allow the terms and conditions simply to be overturned by political considerations."

A recent example of bad regulation closer to home involves the Department of Housing and Urban Development (HUD), says Sampson. It has passed a new rule, known as disparate impact theory, that could allow it to invalidate longstanding underwriting and ratemaking practices for homeowners’ insurance on the basis they have been discriminatory—even though there may be no intent to discriminate. Depending on the outcome of forthcoming legal rulings, PCIAA is preparing to take legal action on behalf of its members over this issue.

The fourth strategic goal of the body has been to manage external threats, whether they be legal, economic or political in their nature, that could impact its members. Some of these include reforms to corporation tax in the US, which Sampson fears could negatively hit insurers, and dealing with the implications of the Affordable Care Act, which impacts many areas of insurance, including workers’ compensation policies.

Coming back to the theme of overzealous regulation, that touches many of PCIAA’s objectives, Sampson describes many regulators as having an “angst-centric” view and of unfairly trying to link the insurance industry to the banking sector in terms of the type of regulatory oversights that are needed.

Many of the organisation’s goals for 2013 are also evident in some of the specific objectives he identifies for 2014. The regulatory issue “is snowballing” and is already affecting some of PCIAA’s members with international operations, he says, while the row with HUD over disparate impact theory will also remain on the agenda for the foreseeable future.

Another specific objective is to seek clarification around changes made last year to the National Flood Insurance Program which, he says, have been problematic and caused confusion for both policyholders and the insurers that front that programme.

Finally, the reauthorisation of TRIA remains central to the PCIAA’s agenda. Sampson says it is vital the bill is passed again, mainly because he believes terrorism risk is simply not something that can be underwritten by the private sector.

He admits the debate is not an easy one. There are many legislators now in Congress who were not there when the terrorism attacks of September 11, 2001 occurred, and who are pushing for a market-based solution. But he feels this is unrealistic.

“Terrorism as a risk is fundamentally different from anything else our members underwrite,” he says. “Yes, there is a lot of capacity coming into the market at the moment—but how stable is that, and how would it begin to price terrorism risks?

“The fact is the only organisation that has all the data and the facts around the threat of terrorism is the federal government, and that is why the risk should sit at that level. The basis of covering this risk is simply not there. It is a matter of economic security as well as national security and it should be treated as such.”