When it comes to regulating commerce, business has been showing a pronounced fondness for federal oversight. The game works something like this: A particular industry--packaged food, or financial services, or whatever--decides that dealing with 50 state regulators has grown too onerous in today's world of cross-border commerce. The industry petitions Congress to come up with one set of national rules to take the place of those multiple, pesky state regulations.
It sounds reasonable enough. Even state officials concede the legitimate frustrations of a corporation that has to get licensed in 50 states, pay 50 filing fees and learn 50 sets of rules.
The problem is that it's not just the redundancy and the awkwardness that businesses are trying to get out from under when they petition for federal oversight. They are banking on one other thing: a set of federal regulations considerably weaker than those being imposed these days by many of the tougher states. American business likes to complain about the regulatory intrusiveness of Uncle Sam, but the truth is that it likes to have Uncle Sam rescue it from serious state- level oversight.
State regulators understand this game, but they have seldom been able to get together to come up with reciprocal sets of rules and regulations that would undercut business's pro-Washington oversight argument. Turf fights, political differences and the inconsistencies in state laws have all served to hamstring state officials interested in coordinating regulatory activity.
Which is why an effort currently flowing out of California, Florida and Texas is worth noting. Last December, the three most-populous states signed a landmark agreement to cooperate in insurance regulation, a process that has traditionally been state-managed but has been in danger of going federal since 2000, when Congress passed a huge financial services overhaul. That law contained specific language warning that unless states began moving toward a uniform method for regulating insurance companies, federal oversight would be imminent.
According to Florida's chief financial officer, Tom Gallagher, under whose purview insurance falls in the Sunshine State, efforts to work together on insurance regulation have for years been hampered by disagreements over how high to set the regulatory bar. States that tended to be easy on the insurance industry didn't want to change their ways just to get uniformity. "I think there was a sense," says Gallagher, "that the states that didn't have rigorous standards would drive the train."
Rather than waiting for consensus, however, Gallagher and his counterparts, John Garamendi in California and Jose Montemayor in Texas, decided to move on their own in a specific area: annuities and life insurance. "Markets can be pretty different for things like property and casualty," says Gallagher. "California has earthquakes, we have hurricanes. But annuities and life are the same everywhere. We figured that together we're 26 percent of the market, so let's come together on that."
Under the Florida-California-Texas agreement, known formally as the Multi-State Review Project, insurers can submit a single application to offer their products in any of the states and start doing business in all of them. It's a system, says Garamendi, that allows for fast, efficient review of new products "while assuring the gold standard of protection for consumers."
It is not, however, a system that the entire insurance industry is enthusiastic about. Among other things, it codifies the relatively rigorous treatment common to the bigger states, rather than the lighter form of regulation typical of many small ones. Not only are some of the small states worried about this, but some insurance companies are continuing to agitate for a federal takeover. There have even been rumors of industry boycotts of the big three for annuities and life insurance.
Nevertheless, the three-state deal is showing industry support. Shortly after Gallagher and his counterparts cemented their agreement, New England Life stepped up to become the first company to take advantage of the three-for-one deal.
The three-state compact may in fact be a harbinger of things to come. This December, the National Association of State Insurance Commissioners will release a draft document proposing uniform state regulations for 24 insurance products. Meanwhile, several states are considering joining the big-three compact in advance of the association's effort. Perhaps more important, the tri-state deal at least temporarily lessens the pressure for sweeping federal oversight.
The California-Florida-Texas compact suggests that states really can come together and, in essence, preempt federal preemption. That three states have proved they can do it in insurance could be a sign that it can be done in other key areas of commerce. Short of such cooperation, the long-term odds are nearly always in favor of a federal takeover, regardless of whether the public interest lies in that direction or not.
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