IRMI Update—Issue #137
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
May 17, 2006
In This Issue
Colleague,
A few years ago I decided to take on the project of updating
The Wrap-up Guide to produce the fourth edition in my "spare time." Well, I didn't have as much
spare time as I thought, and the project took more than a year longer than expected,
but I am proud of the result. The real credit goes to a panel of industry experts
who shared their substantial knowledge and expertise on owner and contractor
controlled insurance programs (OCIPs and CCIPs).
We tried to build on Gary Bird's past work to update and improve his book,
and I think Gary would be pleased. If your company is contemplating any major
construction projects—or is a construction company—you should consider reading
this book. Learn more.
By the way, we are also donating a portion of the sales of the guide to the Spencer Educational
Foundation. Thus, your purchase will support risk management and insurance
education at U.S. colleges and universities.
We sincerely appreciate the trust and confidence you place in IRMI when you
rely on our information services, and we pledge to do everything in our power
to keep you ahead of your competition.
I would like to thank everyone who took the time to respond to my last editorial
about the proposed dual regulatory system for insurance. Many good points were
made, both pro and con. This is an important debate for the industry, and your
opinion matters. Scroll down to peruse selected reader responses as well as
summaries of the great new articles we have added to IRMI.com in the last 2
weeks.
Thank you for subscribing to IRMI Update and recommending it to your colleagues.
All the best,
Jack
Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI
Consider Using Standby Letters of Credit—A
letter of credit (LOC) is an undertaking, usually on the part of a bank at the
request of one of the bank's customers (the "Applicant"), to pay a named Beneficiary
(to whom the LOC is addressed) a specified amount of money or to deliver an
item of value if the Beneficiary presents to the bank documents in compliance
with the terms and conditions specified in the LOC. There are two types of LOCs:
(1) Documentary (a/k/a commercial), which pay for compliant shipping documents
for the sale of merchandise to the Applicant; and (2) "Standbys," which do not
cover the sale or purchase of merchandise but pay for the Beneficiary's compliant
documents declaring that (a) the Beneficiary has complied with Beneficiary's
contract with the Applicant, or (b) the Applicant has failed to comply with
Applicant's contract with the Beneficiary. The Beneficiaries may be insurers,
reinsurers, or any party to a contract.
Standbys are a widely used vehicle for payment for innumerable types of business
transactions, such as:
- A landlord to pay for a tenant or lessee's obligations.
- A buyer of a corporation to guarantee the delivery of the shares of
stock after receipt of payment.
- A financial institution granting a line of credit for a major real estate
development
The risk or credit manager of any entity should make certain that the LOC
that benefits their entity is (1) reviewed by the entity's bank standby LOC
manager, and (2) be issued subject to the ISP98 (International Standby Practice).
What is the ISP98? Prior to January 1, 1999, we only had the "Uniform Customs
and Practice for Documentary Credits" (known as the "UCP500"). The UCP is mentioned
in Article 5 of the Uniform Commercial Code as "...standard practice of financial
institutions that regularly issue letters of credit...." But the UCP was not
designed for "standbys." Then, the ISP98, specifically designed for "standbys,"
became effective for those LOCs issued subject to it. The ISP98 is a set of
rules developed by the Institute of International
Banking Law and Practice, published by the International Chamber of Commerce,
and endorsed by the United Nations Commission on International Trade.
By: Alexis Meizoso
International Operations Manager, Ocean Bank
Miami
www.oceanbank.com
Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll
acknowledge your contribution as we did for Alexis.
Schedule a demo of IRMI Online at no obligation—any reference at your time of choice. You must see for yourself
how this information resource can make your job easier. Now taking appointments.
There are now over 700 risk management and insurance articles on IRMI.com.
Below you'll find summaries of some recent additions with links to the articles.
In IRMI Update 136, Jack Gibson discussed
the possibility of establishing an optional federal charter for insurance companies
(the proposed National Insurance Act of 2006, S. 2509). Under such a system,
insurers would choose whether they fall under federal or state insurance department
regulation. As expected, the views expressed were varied and strong. Some of
these are reprinted below.
-
Anything is better than the system that we have now. It is like dealing
with 50 different countries. Federal licensing seems like a good idea to
me.
—Gary Hattan, Senior Vice President, Allied North
America, Atlanta
-
Not once, ever, in the history of the United States has any program run
by or sponsored by the federal government EVER cost the citizens less money,
or run more efficiently, than even a severely screwed up state run program.
We seem to have forgotten the oxymoron "I'm from the federal government
and I'm here to help!" Reform all the states at the same time—and on the
same basis—would be my suggestion.
—Thomas Davis, President, Davis American, Ltd., Oak
Brook, IL
-
I agree the option to choose a federal charter is probably a good idea
for large national carriers and for larger agencies and brokers from a licensing
standpoint. We are a larger local broker who has many clients who operate
on a multistate basis. We also operate a large national program. This requires
our firm, most of our producers, and many support staff be licensed in all
states for property/casualty, surplus lines, and group benefits. We spend
an exorbitant amount of money on licensing fees, bonds, and consulting fees
for an outside firm to facilitate the licensing process and to help keep
us legal. We have employees who do nothing but licensing and surplus lines
tax filing on a fulltime basis. No two states have the same licensing laws.
Until recently forced to give in, not all states allowed nonresident licensing
for all lines. It is a confusing morass of state laws and regulations and
almost impossible to be completely legal at all times in all states but
we try very hard to achieve this goal.
Most, if not all states, have licensing reciprocity language built into
their licensing laws. This is a joke. Even though our employees and our
firm may have all the appropriate licenses in Ohio, other states may have
more stringent requirements to become licensed for the same lines, require
bonds not required in Ohio, or require a written exam be taken even though
we have taken all such exams required by Ohio. [...] The ability to be licensed
as a broker/agent under one set of rules would be greatly welcomed and much
more efficient for us. The federal charter legislation being proposed should
also be extended to include surplus lines licensing to make national licensing
truly efficient for all firms like ours who would choose this option.
—Hal Rindels, Vice President—Marketing, Britton-Gallagher
& Associates, Inc., Cleveland
-
There is no question that the current regulatory system for the insurance
industry needs an overhaul, but a one-size-fits-all scheme that creates
a new federal bureaucracy is not the answer. Although the need for greater
efficiency and uniformity is clear, optional federal chartering, federal
regulation, and the creation of a new federal bureaucracy go too far ...
the equivalent of throwing the baby out with the bathwater. A good middle-ground
approach to regulatory reform is the State Modernization and Regulatory
Transparency (SMART) Act proposed by Chairman Mike Oxley and Subcommittee
Chairman Richard Baker. SMART would improve and modernize state insurance
regulation without creating a federal regulator.
—Kirke Machon, President, Machon & Machon Inc., Park
Ridge, IL
-
In my early days as a transactional lawyer for a major law firm, I recall
combing the files of a few insurance companies to ascertain their legal
documents were in order before a major transaction. I approached with trepidation
a huge filing cabinet full of "certificates of authority" from many different
states' insurance commissioners, along with the mountains of correspondence
that it took to become authorized as an insurance company in each state.
Whenever a new insurance policy form was written, a new mountain of correspondence
was necessary with each state to gain approval.
The variety of laws in the 50 states that governed insurance agents proved
another surprise. Some state laws required agents to be residents and included
other legal obstacles to competition that seemed designed to protect local
agents rather than the consumer. It struck me that if other industries were
subjected to this type of tribal regulatory structure, costs would go through
the roof. What if General Motors were forced to manufacture 50 different
kinds of cars for each model it sold, shipping a different version of each
car to each state? Now that I work for a large customer of insurance products,
efficiency is even more important to me. Although I favor state's rights
in many areas, insurance regulation is begging for national consistency.
One question troubles me, however. How will insurance policies be interpreted?
Each state has a well-developed body of judge-made caselaw which settles
questions such as the general duties an insurance company owes to its customers,
which cannot be abrogated. Will all existing state cases be ignored, while
we clog the federal courts trying to forge national answers to the same
questions? That does not sound appealing to me. These thoughts, of course,
are my own opinions and not those of my employer.
—Wes Schlenker, Assistant General Counsel, Texas
Industries, Inc., Dallas
-
Another federal agency? I certainly hope not, you only have to look at
the morass the Department of Homeland Security made of the Katrina situation.
Consolidation for the sake of becoming "fast and efficient" doesn't appear
to be something our federal government has the skill sets to accomplish.
We can certainly all agree that state regulations can be difficult and burdensome
to deal with, but I think it sounds like a walk in the park compared to
trying understand and comply with federal ones. Have you looked at a copy
of the Federal Income Tax Code? I don't want to even imagine what a federal
insurance rules and regulations book would be like....
—Robyn Burgess, Account Manager, Van Gilder Insurance
Corp., Colorado Springs
-
A business that is fundamentally interstate in nature and frequently
international in scope should not be regulated by 50 different state regulatory
bodies. There should be one set of federal rules that govern all insurers
and brokers even if they are only operating intrastate. If you permit dual
regulatory systems, you create potential conflicts and confusion. A dual
regulatory system would likely encourage large insurers and large brokers
to establish one or more companies that would be federally regulated and
then establish perhaps as many as 50 or more companies that would each be
subject to only one state regulation. This would allow large insurers and
brokers the option to select the regulatory scheme most beneficial to them.
We already are seeing ample evidence where big business will challenge
state regulations on the grounds that they are superseded by federal regulation
(e.g., ERISA) and at other times will seek state regulation if more favorable
(e.g., a federally chartered bank will set up a state chartered bank in
North Dakota to have more latitude in interest rates than federal regulations
permit). A purely local/regional insurer would be at some disadvantage as
their influence at the federal level would be less than it might be in the
single state or multiple states where they operate. No doubt, a federal
regulatory scheme would accelerate the consolidation or merger by smaller
carriers, but this trend is inevitable for economic reasons.
While there are still thousands of insurers in this country, with some
excellent smaller or regional carriers, the fact is that it is an inefficient
system where a few large insurers already dominate much of the marketplace.
If small carriers were not able to lay off large portions of their risk
to reinsurers, most would not be in business anyway. All roads point to
the need for financially stronger insurers and a single federal regulation
of that industry.
—Rolf Neuschaefer, Bond Manager, Robert E. Harris
Insurance Agency, Costa Mesa, CA
-
The dual system as it is currently being proposed will be an absolute
nightmare. While I don't like more federal regulation either, I believe
it is inevitable and frankly, logical, and the sooner we deal with it, the
better.
—Nancy Blair Benson, CPCU, ARM, Principal, Risk Analysis
& Insurance Consulting, Hellertown, PA
-
I've long held the view that our state licensing and regulatory system
is extremely inefficient and should be replaced by a national regulatory
system. A dual approach would also be inefficient, but may be a necessary
transition step toward eventual disbandment of the state insurance departments.
Under the current state licensing system, I must be licensed in 6 different
states due to the various locations of my clients' operations. However,
I am aware of other brokers that must be licensed in many more states than
me. From my perspective, this is a money grab by each of the insurance departments,
as I conduct my business more or less the same way in each of these states.
In addition to the various state license fees, the administrative burden
to apply for a license in so many states is very costly when we are already
stretched thin in our efforts to provide quality service to our clients.
Count me in favor of a federal charter!
—Kevin Still, Client Executive, Marsh USA, New York
-
A federal insurance regulatory system may sound
more uniform and show promise of a more efficient system, but unfortunately
it is not compatible with the state charters and constitutions. The country
was founded with a certain degree of self-management delegated to the states
from the federal level. As such, the laws, statutes, and constitutions in
the 50+ jurisdictions were written with the specific needs and wishes of
each of those jurisdictions in mind. A federal system that acknowledges
such a complicated system would, in simple terms, be unwieldy and far more
complex than the current system. The current system is not unduly burdensome.
To the contrary, it keeps the playing field as even as possible across the
large national companies and the smaller regional companies. Those that
are more efficient on the claims side, and are able to better stratify/quantify
the risks insured, are those that can more efficiently compete in the various
jurisdictions.
—Michael Marsh, President, Midland Claims Service,
Inc., Billings, MT
-
As an individual working for a broker with a national market focus, I
feel it would be a great benefit to have the option of being regulated by
a federal agency. The current system does not have the uniformity that a
federal program could provide. Also, with the state of the insurance market
today, anything to make our processes easier, more efficient, and less expensive
should be taken into consideration.
—Daniel Baisch, Vice President Marketing, Willis
of Michigan, Inc., Novi, MI
-
The last thing we need is another federal agency. The majority of state
insurance departments have a good handle on what is needed by agents, companies,
and the buying public, and work very hard on making sure the public is protected.
Every time we get the Feds involved, it becomes more cumbersome, less efficient,
and much more costly for everyone. While we are at it, why don't we just
eliminate all state government and put the Feds in charge of everything
since they do such a great job on everything else?
—Judi Richards, Account Manager, Tanenbaum-Harber
of Florida LLC, Miami
-
I am a small agency in Pennsylvania and am in favor of a federal charter
for agents. In today's mobile world, I have clients who have multiple businesses
and homes in multiple locations. The hurdles of licensing in each state
are not only cumbersome but can create a nightmare if you have business
in a state and you miss a renewal of the license. Forget honest mistakes
... the state simply hammers the agent and smiles all the way to the bank.
Silly system. Yes, the various laws of each state do dictate the coverage
grants available, and the agent should be familiar with the current laws,
but the timing of the markets and restrictive filing procedures makes it
difficult at best to transact business in multiple states.
—Mark Kinsey, Vice President, PKG Insurance Associates,
Inc., Doylestown, PA
-
With regard to your inquiry concerning optional federal regulation over
the insurance industry, like you, I am always wary of increased federal
intrusion into what has been the dominant role of insurance regulation by
the states. However, I agree that the current system is grossly inefficient
and wrought with too much bureaucracy and influence peddling, especially
by big banks. Be careful of what you wish for. You might actually get it.
The other complications are the role of coverage issues, such as WC reform
and having a national workers compensation program instead of the states
controlling same. All in all, I actually like the idea but am very wary
of the details of such a plan.
Jack Patton, President, J. M. Patton Associates,
Inc., Philadelphia
-
I cannot help but think of the old saw, "I am from the IRS and am here
to help you," as my response to the proposed federal chartering of P&C insurers.
While we are occasionally made to suffer with a demigod commissioner (with
due respect to Mr. Garamendi), the current system, even with flaws, is far
preferable to the creation of yet another federal bureaucracy. Stated differently,
give me three "out of control" commissioners for every sound-bite grabbing
member of Congress who will no doubt mess things up in no time.
The industry should continue to move to uniform state laws, and yet allow
for local or regional nuances in market regulation. And, Jack, your argument
that a federal system will aid the "global" insurers is nothing more than
spouting the large company "we need to be competitive" claptrap. Global
insures operate in an amazing range of regulatory requirements, and I would
suggest that dealing with 50 state commissioners is far less daunting than
entering the emerging markets in Asia. Following your logic, let's just
skip federal chartering and cede the jurisdiction to a new UN Secretariat!
—Ron Musto, Senior Claims Coordinator, InterWest
Insurance Services, Inc., Folsom, CA
-
I won't argue that the current form of state regulation is in need of
repair/change, but an Optional Federal Charter (OFC) is NOT THE ANSWER!
As a "regular" P&C agent, I would not have an "option" if I do business
with companies that opt for OFC and others that opt for state charter. I
would have to deal with two sets of regulators—one of which is a huge federal
structure that I expect will be about as responsive as FEMA! How about the
poor consumer who will be left to deal with a regulator in Washington DC
versus their home states on matters that may be extremely localized in nature?
Add to that the fact that this would also "deregulate" forms and destroy
the consumer's ability to reasonably compare "standard policies" from one
company to the next and I must say that in my evaluation, this would be
a total mess. I support change, but feel strongly that the SMART Act with
its balanced approach to modernizing state regulation, is a much more "reasonable"
answer. If the industry works together, I believe that we can improve the
system, but the OFC proposal is not the answer.
—Robert Slocum, CPCU, CIC, President, The Slocum
Agency, Inc., Warwick, RI
-
Regarding federalization of insurance: Can you say FEMA? Or Homeland
Security? I think I prefer 50 political footballs to one super bowl where
it's all or nothing. Can you imagine the insurance agent and company models
being in control of the federal government? Sounds like a huge headache,
at best.
—Stan Dreckman, Owner, Huggins/Dreckman Ins. Agency,
Inc., Long Beach, CA
-
Big mistake! Any efficiency efforts should be done on the state level
with the NAIC leading the changes.
—John Wasmer, Adjunct Professor (Insurance CE), Fairleigh
Dickinson University, Teaneck, NJ
-
I agree with giving the option precisely because of the reasons outlined
in your report. It is too expensive and unwieldy in terms of forms and rules
to have all 50 states act individually.
—Richard Weigle, CFO, Ferguson Financial Group, Inc.,
Pecatonica, Il
-
I am completely against federal charter. The state system has its problems,
but the thought of a federal agency regulating or at least attempting to
regulate our industry is frightening.
—Stephen Gerstman, Senior Vice President, Western
World Insurance Group, Franklin Lakes, NJ
-
Simply put, this is a no brainer. Being regulated by one body versus
50 can only improve and help standardize our industry. Think about how great
it would be to have a single uniform way of reporting. It would most likely
lead to facilitating the simplification of the way we do our business as
well as our insurers and brokers.
—Mark Ryan, Director - Casualty Insurance, Oxy Inc.,
Dallas
-
From the perspective of the management of insurance products in most
states, a single federal regulator makes almost too much sense to me. However,
given the politics in 50 plus jurisdictions, I don't hold out much hope
for passage, but maybe this will goad the states into even more reform of
the current hodge-podge of regulation.
—William Safreed, Sr. Product Specialist, Nationwide
Insurance, Columbus, OH
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