insurance non- cyclical fee income financial services industryAs credit unions search for non-cyclical fee income moves into the insurance business, the agenda of state regulators becomes yet another issue managers have to follow.

Insurance is the only major financial services industry that is still regulated primarily by the states. The National Association of Insurance Commissioners, which is the standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories, groups together the state regulators and coordinates activities and policies as the state agencies fight a perennial battle to keep a federal insurance regulator from being established.

The good news is that agency business doesn't attract much regulatory attention, according to Matt Chesky, SVP and director of corporate sales at Insuritas, an East Windsor, Conn.-based firm that helps financial institutions set up their own insurance programs.

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"Generally, regulators are focused on carriers, not agencies," said Chesky, whose company has provided turnkey insurance agencies to 75 credit unions. "Agencies aren't assuming any underwriting risk."

In general, regulators have gotten comfortable with the idea of credit unions selling insurance since Gramm-Leach-Bliley first permitted them to do so, Chesky noted. Likewise, on the credit union side, there doesn't seem to be any major issues looming on the regulatory front.

"The NCUA takes sort of a blanket approach to CUSOs, treating all CUSOs as equal," Chesky said.

But their primary focus is on CUSOs that create balance-sheet risk for the credit union, he added.

"Insurance agencies don't create any balance sheet risk," Chesky said. As a result, that business doesn't attract much regulatory concern. "We don't see anything on the horizon."

Credit unions generally won't build an insurance business from scratch but acquiring one comes with some concerns, according to Jamie Bisker, senior analyst for property & casualty coverage at Aite Group, a Boston-based research and advisory firm.

"If it is a physically operating company, it will have complied with existing regulations," Bisker said. "The credit union will do its due diligence to verify this."

Otherwise, the main consideration given the state-based regulation is that agents be licensed to operate in that state.

Lake Michigan Insurance Agency, a subsidiary of the $3.5 billion Lake Michigan Credit Union in Grand Rapids, Mich., avoids cross-border issues by confining its insurance operations to the state.

"We deal only with the regulator in Michigan," Don Bratt, SVP for marketing at LMIA. "We don't see any challenges on the horizon."

Most of the major issues that preoccupy the National Association of Insurance Commissioners will have little immediate impact on the limited insurance operations of credit unions.

While there is considerable pressure at the international level to establish global insurance standards, rules for insurers deemed to be global and systemically important financial institutions are not likely to affect day-to-day operations of most life or property and casualty insurers in the U.S.

"Metropolitan Life was designated systemically important, but there's not going to be too many insurers facing that problem," Bisker said.

Likewise, the ongoing push to establish a federal insurance charter or otherwise install federal regulation of insurance is not likely to gain much traction with a Republican majority in both houses of Congress that opposes new regulations.

"We think it is fairly unlikely," Chesky said.

For one thing, the insurance industry varies enormously from state to state. In Florida and Michigan, for instance, national carriers no longer sell housing insurance because of particular state issues. There is little incentive for states to pool efforts at regulation under those circumstances, Chesky said.

"The states are very keen on holding on to that power to regulation insurance," Bisker said.

Nonetheless, the creation of a Federal Insurance Office by Dodd-Frank means the possibility cannot be ruled out. The ostensible purpose of the FIO is to channel information about insurance regulation to federal agencies, including the newly-established Financial Stability Oversight Council that brings together federal regulators, and to provide a federal spokesman for international meetings. But some see it as the potential seed for a full-blown federal regulatory bureaucracy.

Indeed, a report from the Treasury Department in late 2013, also mandated by Dodd-Frank, concluded there is a compelling argument for federal insurance regulation, at least for the big, globally active, diversified insurance companies.

In the meantime, what may be more important for credit unions are the incremental changes and tweaks that will affect the patchwork of state regulations across the country.

An annual report card on state insurance regulation produced by the Washington-based public policy think tank R Street Institute and published in December ranked the states on several regulatory categories and calculated an overall grade that ranged in from A+ for Vermont to F for California and North Carolina. The report found, in fact, that in 2014, most state legislatures did little to move the needle on regulation.

Florida created a regulatory framework for private insurers to offer flood coverage, and eliminated the assessments in place since 2007 for a hurricane catastrophe fund. California set up a regulatory framework for ride-sharing companies like Uber, which included insurance requirements. Connecticut prohibited insurers from imposing extra requirements on homeowners in areas prone to windstorms.

Aside from these specific state issues, the report identified some regulatory issues that span state borders. It noted that about half the states have adopted model legislation from the National Conference of Insurance Legislators that prohibits the use of credit scores as the sole factor in determining rates.

Regulatory modernization is an area that has seen more collaborative efforts, the report noted. The Interstate Insurance Product Regulation Commission was established in 2006 to streamline approval of life insurance products and help insurers compete with banks and securities firms in innovating new products.

The insurers based in the 44 state signatories to the Interstate Insurance Product Regulation Commission can make a single filing for new products in life, annuity, disability and long-term care insurance and then offer it in all signatory states once it is approved.

Meanwhile, insurance regulators are slowly adapting to the digital age. The report noted that 18 states allow customers to access insurance documents online, 24 states allow companies to send notifications by web only once customers have opted in, and 37 states now permit drivers to show electronic proof of insurance when stopped by police.

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