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Commentary: A Crazy Quilt Of Rules


Eliot Spitzer has done it again. When he filed suit on Oct. 14 against some of the biggest players in the insurance industry, he not only alleged fraud. The New York State Attorney General also uncovered yet another massive hole in financial regulation -- not to mention widespread complacency among regulators. Now another corner of the finance industry must rewrite its rules as companies renounce practices that got them into trouble

But fixing insurance regulation is far beyond Spitzer's bailiwick. The system is a mess. Washington has struggled to get a say over the industry, leaving each state to oversee insurance in its own way. That means 50 state insurance commissioners, 50 sets of laws, and 50 different sets of rates. In some states, legislators bowing to populist pressure have regulated personal insurance so tightly that few companies will do business there. In others, lawmakers have been so cowed by the commercial insurance industry's lobbying power that they have never banned such dubious practices as contingency commissions. And in some states the revolving door never stops spinning as commissioners quit to head up insurers, and vice versa.

Today's system was forged in the 19th century, when the states took the lead in regulating everything from railroads to utilities while Washington stayed on the sidelines. These days, the patchwork regulation results in massive overlap, byzantine policies, and idiosyncratic procedures. Nevada has insisted that some documents be filed on pink paper. Wisconsin is famous for asking companies to hand-write a slash through every zero on paper forms filed with the state. New York's bureaucratic approval process can delay new insurance products by many months.

Insurers, sick of the cost and hassle of complying with 50 state regulators, have long lobbied Washington to wrest some authority away from the states. But state commissioners, backed by their hometown members of Congress, often beat back the effort. Says Julie Rochman of the American Insurance Assn.: "While the rest of the financial-services sector has been modernized, insurance has been left behind."

What's needed is a streamlined set of national standards. That would cut costs for insurers and their customers and free up state authorities to focus on issues that matter: protecting consumers from fraud, and making sure insurers are financially sound and obey the law.

A new congressional bill dubbed SMART, for State Modernization & Regulatory Transparency, might achieve this. Crafted by Representative Richard Baker (R-La.), the proposal would require states to adopt common standards, accelerate the process for getting products to market, and end state approvals of premium rates. There wouldn't be a national regulator, but SMART calls for a seven-person board of state and federal officials to help arbitrate disputes among insurers and regulators and to address thorny regulatory issues. "Our goal is a system that enhances competition and accountability," says Baker.

Some argue that the status quo is fine. Says California Insurance Commissioner John Garamendi: "The more regulators you have, the better the opportunity to find a problem." Maybe so, but it took an outsider -- Spitzer -- to get action. It's time to stop saddling a global industry with a regulatory system dating back to the era of the iron horse.

By Diane Brady with Amy Borrus in Washington


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