Recently in these pages the top executives of two bank-insurance associations weighed in on the debate over the creation of a federal insurance charter.

Tim King, president of the ABA Insurance group, presented the case for the creation of a dual charter system, similar to the banking industry's state and national charters. Richard Starr, chairman of the Financial Institutions Insurance Association, argued against the need for a federal insurance charter, apparently throwing his group's support behind the effort by the National Association of Insurance Commissioners to create more uniformity in state regulation of insurance. But neither argument was fully convincing.

To me, the issue isn't whether a federal charter will improve regulation by providing competition between regulators (dual or dueling charters). The issue is what to do with a failed regulatory structure.

Because it seems that state regulation of insurance has failed in some important ways. It has failed the insurers. It has failed insurance sales professionals. And, most importantly, it has failed the insurance consumer.

Failing the insurers. By creating a state-by-state bureaucratic tangle, the individual state insurance departments actually interfere with interstate commerce. Insurers must file for product approval in each state in which they want to do business, and in too many cases have to sell different versions of a product from state to state in order to sell the product at all.

Why is insurance the only substantial industry that is regulated primarily by the individual states rather than the federal government? Imagine if the mutual fund industry was faced with similar regulation, with each mutual fund required to be registered and approved in each state. And their individual investments in stocks and bonds subject to quarterly review by each state "mutual fund" department.

Why are our mutual fund and securities brokerage industries the world leaders? And why do the major insurance companies of Europe appear to be more prepared for global competition than our own? While there are many partial answers to these questions, the role of state regulation does stand out as a key difference between the two industries, and between the European and U.S. experience with insurance.

One way that state regulation has not failed life insurance companies is the buffer it has created to preserve the special tax benefits enjoyed by the industry. For example, the tax-free inside buildup in a life insurance policy might be at risk under federal regulation.

Failing the insurance professionals. Why do survey after survey indicate that insurance agents are the least trusted or admired financial services professionals? Why do so many life insurance agents leave the profession after a few years? Why are there fewer life insurance agents today than ten years ago?

One mission of insurance regulation should be to enhance the professionalism of insurance sales people. But under state regulation we have experienced relatively light requirements for licensing, on the one hand, and increasingly onerous continuing education requirements on the other.

Compare the track record of the self-regulatory organization in the federally regulated securities industry with its counterpart in the state regulated insurance industry. In the securities world, the National Association of Securities Dealers operates as an extension of the regulator (the SEC), even conducting enforcement actions and meting out punishment to sales people and broker/dealers. By contrast, the Insurance Marketplace Standards Association appears to function apart from the individual states' regulatory apparatus, and is a belated industry response to sales conduct issues.

Another way that state regulation seems to fail insurance agents is the lack of clear lines of responsibility for supervision of the insurance agent. Unlike in the securities world, where an investment sales person is a registered representative of one, and only one, broker/dealer, an insurance agent can be appointed by many insurance companies, and most are. When a registered representative makes a mistake, or cheats a customer, it is clear that the supervising broker/dealer has some responsibility for the rep's behavior. When an insurance agent crosses the line, it is unclear who was supposed to supervise the agent's behavior.

Failing the consumer. Most importantly, state-by-state regulation of insurance has failed the consumer. While the central purpose of insurance regulation is to protect the insurance customer, the existing state regulation actually discourages competition.

The anti-competitive behavior of some state insurance departments in the long struggle for bank insurance powers has been well documented. Mismanagement of auto insurance regulation in some states has created a looking-glass world of unbelievably high auto insurance premiums side-by-side with insurance companies fleeing the market.

But the most glaring aspect of the anti-competitive stance of state insurance departments is their failure to require disclosure of commissions.

Disclosure of fees is required in banking. It is required in the mortgage industry. It is required in the securities industry. But it is not required, not even debated, in the state regulated insurance industry. Here it seems that state regulation helps to obfuscate outsized distribution costs and the consumer benefits of radical industry change.

So the issue isn't whether a federal insurance charter should be created to encourage improvement in state insurance regulation. It is whether state insurance regulation should be given more time to clean up its act.


Mr. Kehrer is president of Kenneth Kehrer Associates, a consulting firm in Princeton, N.J.

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