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. GA
-
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,
OH
-
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, TX
-
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. CO
-
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, NY
-
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, FL
-
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, PA
-
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
IRMI Update is sent to subscribers by plain text e-mail twice
each month. To initiate your free subscription, use the
e-mail registration form.
|
|