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Tony Ondrusek is founder and publisher of Insurance & Financial Advisor and IFAwebnews.com.

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Kevin Sullivan is a lawyer and former Nevada Insurance Commissioner, and recently retired as the chief ethics and compliance officer for Allstate. According to Pittsburgh-based Compliance Assurance Corporation, Mr. Sullivan will assume a leadership role with the soon-to-be-announced American Council of Regulatory Compliance. The firm issued the following editorial from Mr. Sullivan related to federal oversight of the insurance industry, and what carriers and brokers can expect.

1. Where the industry is

The current debate regarding the Federal government’s overhaul of regulatory powers within the insurance industry took an interesting turn when the Obama administration recently (June 17) announced its proposed regulatory reforms. A key aspect was missing and an unexpected decision was made.

Rather than implement an optional federal charter or a sweeping regulatory change, the administration proposed a national office of insurance to oversee the industry. This announcement was met with a sigh of relief in state insurance offices across the country.

2. What was announced

State insurance regulators dodged a bullet related to their on-going regulatory powers. While President Obama did not address or outline insurance reform during his press conference, an 85-page document issued by the White House outlines a new Office of National Insurance. This “Office” is to be included within the U.S. Treasury and would monitor all aspects of the industry.

The report was highly critical of the current insurance regulatory system calling it “highly fragmented, inconsistent and inefficient”. The report targeted what the administration views as “tremendous differences in regulatory adequacy and consumer protection among the states”.

3. What this means

This report, along with other factors, seems to support arguments for some form of national oversight coming in the near future. Proponents of Federal oversight (optional or otherwise) are rallying around this report and other factors (e.g. Reps. Melissa Bean (D-Ill.) and Ed Royce’s (R-Calif.) proposed bill calling for an Optional Federal charter).

The report includes proposals to improve the system of insurance regulation in accordance with six principles. They include effective systemic risk regulation, meaningful and consistent consumer protection, and increased national uniformity “either through a federal charter or effective action by the states”.

This last portion of the report is critical. The administration is putting the states on notice; get your collective regulatory houses in order…or we will “through a federal charter”. Attention Insurance Commissioners, take note of the missing term “Optional”.

As a former Insurance Commissioner and a Chief Compliance Officer for a large insurer, I have a unique perspective on this situation.  I believe that Americans deserve a regulatory system that leverages technology and empowers them to assure themselves that they are dealing with competent and capable players who offer honest products and services at competitive prices.   There are interesting times ahead as insurers and regulators alike jockey for position in preserving their particular interest in the status quo. There is hope for the consumer, only if the Obama efforts lead to a critical examination of the outdated insurance regulatory structure that the country has been saddled with for decades.

4. What will regulators do

To ensure they remain in their current positions, insurance departments must be perceived as regulating more uniformly and effectively. Regardless of how that translates specifically, the outcome means more regulatory scrutiny.

Insurance Commissioners and their respective staffs are “gearing-up” for increased activity. David Sampson, chairman and CEO of PCIAA, focused on this issue in his opening remarks at their annual meeting, “We anticipate a fundamentally changed environment where the ‘default setting’ is more intrusive regulation (in the insurance industry).”

5. What should insurers do?

Insurers should expect that fundamental change to manifest itself in more market conduct exams, deeper analysis in exams, and possibly larger regulatory fines. It would be prudent for insurers to understand this issue and plan accordingly.

In most cases, insurers have adopted ad hoc approaches to regulatory compliance. Often activities associated with compliance rely heavily on manual non-programmatic approaches. They are labor intensive, expensive, and generally not audit-ready.

Insurers should seek out technology based tools that help to ensure that tasks related to compliance are communicated, understood, executed and documented. Adoption of technology (if done properly) to automate these processes should SAVE money in decreased labor costs, legacy tools, etc.  Compliance software tailored for insurance is hard to find but it definitely be worth searching it out.

6. Final Warning

As a compliance officer, one of the things I strove to avoid was validation of my regulatory compliance program by market conduct examiners … or worse, encountering a class-action lawyer.

The signals are clear, those who pay attention and prepare will be able to conduct business in this new environment with little or no change related to regulatory issues; those who do not will run the risks of more costs, negative press, or something far worse.