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Caution Needed Before Lawmakers Eliminate Insurance Regulation

March 31, 2009 By Lee Egerstrom, Economic Development Fellow

The old proverb about being "penny wise and pound foolish" is getting tiresome as governments at state and local levels wrestle with slumping revenue and budget shortfalls. Under the circumstances, the warning hasn't been overworked.

Buried in the governor's budget proposal for the coming biennium is a minor change to the way the state Commerce Department would handle insurance offerings sold to Minnesota consumers. The change, if approved by the Legislature, would produce minor department cost savings by eliminating three state jobs.

Unfortunately, it would also eliminate prior state approval of property and casualty insurance products sold in the state. In place of the so-called "prior approval" approach to insurance regulation, Minnesota would adopt a "file and use" registration for insurance products.

Promised, but not specifically required, would be occasional audits after the fact for the Commerce Department to determine whether the insurance products are in compliance with Minnesota law and regulations.

What would trigger such audits? Consumer complaints to the Commerce Department or state Attorney General's Office? Law suits brought by individuals or groups when insurance coverage fails to meet consumer expectations?

According to the Commerce Department's section of the governor's 2010-11 budget proposal, the change would involve insurance productions other than workers' compensation, annuities and health insurance, except for dental, excess accident and health policies, and vision insurance.

That means policies such as boat insurance, crop-hail insurance, directors and officers insurance, medical malpractice insurance, professional liability insurance and pet insurance, for a few prominent examples, would no longer be given prior approval before flying through the market place.

Minnesota has had its current prior approval system in place since 1969. The American Association of Insurance Services noted in October last year that 38 states have similar consumer protection regulations.

It should be noted that these states don't think protecting consumers and requiring insurance companies to compete on the so-called level playing field is particularly burdensome for companies. Alabama, Mississippi, Texas and South Dakota are among states requiring prior review.   

On Tuesday, the day this was written, Federal Reserve Chairman Ben Bernanke informed Congress he wants the Fed to have more authority to regulate insurance companies to avoid more problems as now encountered with AIG. Yes, AIG is an insurance company, not a bank, and is as caught up as any banking institution in the nation's current financial crisis.

He specifically referred to AIG and insurance companies as "non-bank financial firms," an apt description. But, that horse has left the barn. Minnesotans are rightfully angry as they debate whether federal regulators were asleep at the wheel or improperly equipped to ward off the financial collapse that has thrown the country into deep recession. 

Less regulation and oversight didn't work in Washington; it is dangerous to assume it will work in St. Paul.

We can be penny-wise and pound-foolish. But in choosing to do so, we must ignore another great old saying that has served us well over time. "An ounce of protection is worth a pound of cure."

Three state jobs hang in the balance. And a lot of protection and cure.
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