Summary
Federal chartering is a threat to small insurance companies and to Verisk Analytics (VRSK), Inc. Congress is considering legislation that might make federal chartering a reality. Verisk could lose access to data and revenue if this proposal becomes law.
Analysis
For decades the insurance industry has been regulated by the individual states, not the federal government. This is in contrast to the banking and securities industries, which are subject to federal regulation.
The American Insurance Association, representing the biggest property and casualty insurance companies (e.g., The Travelers Companies, Inc., CNA Financial Corporation, Hartford Financial Services Group, Inc., The Chubb Corporation, Zurich North America, et. al.), has been advocating the creation of an optional federal charter. The argument used to promote an optional federal charter is that it would streamline the provision of insurance by eliminating the need to create 50 different insurance policy designs to comply with individual state laws, and avoid having to file statutory reports in every state.
Smaller insurance companies, many of whom are mutuals represented by NAMIC, have long opposed an optional federal charter. These small insurers operate in a limited number of states and benefit from the inefficiencies imposed on large insurers by the varying state laws.
A recent proposal to create a Federal Insurance Office could be a first step in the process of extending federal regulation to the insurance industry. The inability of state regulation to avoid to near-collapse of AIG has raised calls for increased federal regulation of the insurance industry. If federal charters become available for insurance companies, it is likely the larger companies would elect to switch from state regulation to federal regulation. This would potentially to accelerate the consolidation already underway in the P&C insurance industry, and could free insurers from having to report policy data to the state regulators.
If this occurs, one company that could be adversely affected is Verisk Analytics, Inc. Verisk could experience loss of revenue as the Industry consolidates, and it could experience loss of policy data if insurers are no longer required to submit data to the state regulators. Furthermore, insurers who are now able to write a single policy across 50 states may no longer need to purchase advisory loss costs from Verisk, because they have enough policy data themselves to accurately rate risk on a nationwide level.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
