Financial Services Reform

For the most part, the insurance industry escaped the glare of the financial services reform proposal rolled out in Congress recently by Senator Dodd (who is not running for re-election). However, the proposal does recommend the creation of an office of national insurance within the Treasury Department to monitor the insurance industry and assess ways to modernize insurance regulation. Specifically, the proposed national insurance office would evaluate the merits of providing insurers with the option for federal charters, and thus federal regulation. It is hard to imagine a Congressionally-created, federal office of anything concluding that state regulation is a more favorable framework, but my instincts and my sense of history tell me that this is another small step in the slow drift toward a dual regulatory system similar to the one that oversees the banking industry. We can only hope that a federal system of insurance regulation would be more diligent and well-informed than the regulatory framework that was charged with keeping the activities of our banking giants under control.

Discretionary Authority – Another One Bites the Dust

The KY Department of Insurance last week issued Advisory Opinion 2010-01, stating its opinion that “discretionary clauses deceptively affect the risk purported to be assumed in any policy and as such, any forms containing discretionary clauses may be disapproved.” This opinion rescinds Advisory Opinion 2008-05, which KY issued a couple years ago to advise that the department would allow discretionary clauses so long as the insurer construed and interpreted the benefits according to the policy and did not use the discretionary clause to deny benefits otherwise promised by the policy. In the wake of recent similar activity in TX, this is a pretty clear sign that regulatory pressure on discretionary clauses is not going away or lessening, as some industry insiders thought it might after the initial wave of state activity against these provisions several years ago.

Readability

The NAIC Spring meeting scheduled for late March in Denver will include a public hearing to focus on readability and plain language of insurance contracts and other consumer materials distributed by insurance companies, across all lines of business. I have not seen an agenda for the hearing. Maybe they intend to focus on some of the more exotic contracts that came to prominence in the financial meltdown (credit default swaps etc). But I do think there is a growing regulatory sense that insurers’ policies need to do more than just achieve minimum “reading ease” (Flesch) test scores or re-package the same wording and provisions into a Q and A format. Maybe we are seeing the start of another regulatory cycle of legislative action to make insurance policies more understandable to lay person purchasers, similar to the movement that swept the insurance industry about a generation ago. Such regulatory efforts would no doubt have substantial impacts on disability policy language drafting and product development efforts in general.