Insurance and financial services companies are highly regulated. Despite the need to comply, many take the approach that it is better not to engage regulators and legislators until they are required to do so. Far too often, when they decide to engage, it is too late.
There is one truth in insurance regulation; it is always better to ask for permission rather than forgiveness. Asking for forgiveness includes bringing your checkbook, and a pen that has enough ink to write many zeros.
Insurance regulators and legislators in the 50 states work through the National Association of Insurance Commissioners, National Conference of Insurance Legislators, National Conference of State Legislators and The American Legislative Exchange Council. These organizations draft model laws and regulations that are adopted in the states and utilized to regulate insurance companies and producers. The organizations meet on conference calls and at in-person meetings throughout the year. If an insurance company is not represented, that company could literally become impaired if the wrong provision is adopted. It is not due to evil intent, but the regulatory equivalent of a foul ball.
The need to be represented extends to all lines of coverage. However, two examples come from the discussions of the original NAIC Life Insurance Illustrations Model Regulation. A proposal was near adoption to provide annual reports to policyholders. The provision would have also required that a separate disclosure be sent to all policyholders and not be sent with the annual report. Most regulators were not aware that the annual report was of no use to term life insurance policy owners. One company advised, through my firm, that the cost to them would be considerable. Once the fact that the disclosure meant nothing to term insurers and the cost of the separate disclosure was so high it would severely impact the insurer was related to the regulators, they realized the error and changed the regulation to remove the requirement of the separate mailing. This regulatory foul ball could have severely impacted the company and the cost that would have been passed on to the consumer. There was no evil intent. It was simply a misunderstanding.
A second issue saw representatives from the largest life insurance agent trade association agreeing with certain regulators that proposed language which would not allow an insurance policy application to be submitted to be underwritten until a proper illustration had been presented to the consumer. The Chairman of the committee was an actuary from a rural state who had never been involved in insurance sales. The trade association representatives also had no experience in sales. Having been a salesman, I heard stories detailing the fact that twice during a salesman’s career he had written life insurance policies on new clients who died from accidents before the policies were issued. However, because the policies were submitted to underwriting, the families received the full death benefits.
It was important to point out the fact that no one is served by requiring that a policy submission be delayed until the proper illustration is delivered. As the Chairman lived in a rural state it would be very difficult to have an agent drive into a rural area or from his or her office in order to sell a small or medium size life insurance policy only to return back home and have to drive all the way back yet again to complete the sale once the proper illustration was in hand. In fact, it is likely that the agent would not do so, the policy would not be sold, and no benefit would be available to the surviving family. It was clear that there needed to be a better answer as consumers and their families could be hurt if the provision was adopted. The group settled on my suggestion that the delivery of the illustration must be made no later than the time of the delivery of the policy. Once again, simply explaining how the industry worked saved what could have been a very bad provision from being adopted nationally.
These examples reveal how critical it is for insurers to share how regulatory provisions can impact consumers. Not participating in the regulatory process is often like sitting in the ballpark looking at your phone instead of watching for foul balls. If you do not keep your head up and participate, it is possible that you can be hit hard, often with lasting effects.
Many companies are opposed to hiring outside counsel or in-house staff to handle legislative and regulatory affairs. Many believed that “someone else will take care of the issue” and defend the industry. The value of hiring outside counsel is that they can speak on behalf of a number of industry members because if one industry member will be hurt, it is likely that others would be as well.
Finally, the concept of the best defense is a good offense certainly fits within the regulatory and legislative scheme. Companies that seek to expand their markets and product lines must receive approval prior to the expansion. The difference between approval of a new form or line of business for a company that simply mails the forms to the insurance department as opposed to a company that takes the time to meet with the regulator and explain the policy, coverage, and consumer name is remarkable. Companies that rely on remote discussions often find themselves involved in correspondence chains that can last months or even years. Whereas, a company that brings the forms to the regulator and offers to answer any and all questions face-to-face, often can receive approval much more quickly because the regulator better understands the product and the intent of the company marketing a product.
As an example, a well-respected insurer had submitted a new, uncomplicated annuity form for approval to a state that had seen its staff downsized dramatically. The form should have been approved quickly but had been sitting on an analyst’s desk for 2 ½ years! A simple informal visit with the division chief drew an immediate response and the form was reviewed and approved with apologies to the client for the oversight. The client recognized that the regulatory and legislative liaison function had become part of the profit center rather than simply an expense. The same type of results were achieved with banking and finance company regulators.
An outside firm can work to open lines of communications with policymakers and work for approval of new forms and fashion remedies for clients, including drafting or amending laws and regulations by working with regulators and legislators, often without identifying the client.
It is always important to beware of foul balls at all times. Participation in the regulatory and legislative process can be critical in monitoring for foul balls and the value should not be underestimated.
Posted in: Insurance