Citing both "significant benefits" and risks to consumer users, the FTC has released a new staff report, based on its December 2004 File-Sharing Workshop. The workshop record includes presentations by various witnesses who testified on how P2P works, risks to consumers, technological, governmental and private responses, and effects on efficiency, competition, copyright and the music distribution industry.
The report declined to make specific recommendations about intellectual property issues in light of the impending decision of the United States Supreme Court in Metro-
Goldwyn Mayer Studios v. Grokster, Ltd., 380 F.3d 1154 (9th Cir.).
See: Unintended Consequences: MGM v. Grokster Sources (Feb. 3, 2005).
The full report is available online now: Peer-to-Peer File-Sharing Technology: Consumer Protection and Competition Issues (51 pages, PDF)
Thanks to BeSpacific for this source. beSpacific: FTC Issues Peer-to-Peer File Sharing Report
Not long ago, I did some research into the recent history of the struggle between state and federal regulators, each of which want to have the big job (and big budget and headcount) of regulating the largely self-organized global insurance network. As we have seen in recent scandals, there are plenty of opportunities for the unscrupulous to take advantage of the complexities of this byzantine industry, yet somehow it runs, grows, absorbs horrendous losses from earthquakes, hurricanes and terrorist attacks and still survives and attracts new capital. Would it be as robust if its regulation became less diverse, more interconnected, more of a monoculture? If it were federalized, as proposed by some and opposed by others? A new chapter in the saga of federalization proposals was written this month in the committee rooms of the U.S. Congress, under Rep. Oxley.
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Those who think that the solution to any thorny economic problem is to have the United States Government run it should think first about 1) the Postal Service 2) the War in Iraq and 3) government handling of intelligence prior to September 11. With that firmly in mind, let's review some of the thrust and parry that has been going on in the last few years over who gets to make sure the insurance industry is regulated "efficiently." As we do, let's not forget that someone should make sure that it is also robust, and able to absorb financial shocks like September 11 and Hurricane Andrew.
The rhetorical record grew this month with testimony in hearings and a presentation by the National Association of Insurance Commissioners (NAIC) before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. "Impact of SMART Act on State Insurance Regulation" (June 16, 2005) (PDF). Keep in mind that since the McCarran-Ferguson Act was passed decades ago, the federal government has left insurance regulation to state law, with only minor reservations, as reviewed in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993).
For the acronymically challenged, here is a lexicon of some of the dueling manifestos floated over the past few years.
Optional Federal Charter for Insurers ("OFC"). The OFC champions propose to create a federal insurance charter like the existing federal bank charter. Those insurance companies that got a federal charter could elect to be regulated by the federal government instead of by every state where it sells insurance. Insiders sometimes refer to this as being regulated by "One giant gorilla instead of 50 chimpanzees." The organization of insurance legislators in the various states (NCOIL) opposes OFC, concerned that states would be unable to shape insurance regulation to local needs, like making insurance companies subsidize bad drivers in metropolitan areas or purchasers of expensive homes right on the beach. A new federal regulatory regime would create thousands of jobs both in the government and private industry to provide and comply with the new federal regulation, which would be competing with the existing state regulation. Some state insurance regulators may be concerned that their roles will diminish in importance, and that if enough big insurers (such as those operating in all fifty states) switch to federal charters, state revenues for insurance department budgets (based on premium taxes) would plummet.
Oxley “Road Map” and “SMART” Bill. Early in 2004 speech, (see: New Momentum for Letting U.S. Help Regulate Nation's Insurers (March 14, 2004)) House Financial Services Committee Chair Michael G. Oxley of Ohio unveiled what he called a “Road Map” of changes he says are needed in state insurance law, to get more uniformity and efficiency. Feeling a breeze, the NAIC (which has no legislative authority) came back with a draft for implementing some of Rep. Oxley's proposals in state law, and called it a “Framework.” In 2004, Rep. Richard H. Baker of Louisiana joined Rep. Oxley to sponsor the State Modernization And Regulatory Transparency Act ("SMART"). Its purpose would be to make the Road Map into law. If it became law, SMART would leave state regulators in place, but override some of the state rules that Baker/Oxley see as inefficient (like state rate approval). They would also require the state insurance commissioners to agree on standard regulations, and put a federal overseer in place to knock heads ("mediation and enforcement") in case of disagreement. Some think that without such a federal referee, states will never agree on standard regulations. A long history shows even agreeing on model insurance laws and regulations has been slow going and often leaves major states refusing to enact the model laws agreed to by their own insurance commissioners. SMART seems like a stalking horse or trial balloon intended to motivate state legislatures to hurry up and agree or see the feds stepping in with the classic line: "We're from Washington and we're here to help you."
NAIC Responses to Federal Initiatives ("Interstate Compact"). Sure enough, the NAIC blinked and came up with an improved proposal, their “Framework” of modernization plans, including uniform standards for licensing agents and brokers, supervising insurer's conduct in the marketplace and handling the mundane but bread-and-butter work of regulating insurance policy language, premium rates and company financial solvency. To move their cooperation along, the NAIC members created an Interstate Insurance Product Regulation Compact (“Interstate Compact”) that included many of the reforms called for by Baker/Oxley. They have since been working to get major states to become signatories to the Interstate Compact, by which they would voluntarily agree to implement the regulatory reforms.
Many key states have a poor history of following, and a tendency to want to lead. This can be a disaster on the dance floor and also in "voluntary" organizations of proud players who are nominally peers but who know that some are more equal than others. In late 2003, for example, California, Florida and Texas agreed to work together to standardize approval procedures for certain life and annuity products. Illinois, Pennsylvania and New York also have a history of going their own way in insurance regulation. Getting these heavies to cooperate could take longer than Baker/Oxley are willing to wait.
The latest episode in the circling of these sumo wrestlers was a hearing on June 16 before the Baker Subcommittee (clearly a more wieldy title than "The Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises") In the announcement of the hearing ("Baker Subcommittee to Continue Oversight of Insurance Markets"), Rep. Baker said: “Of all areas of regulation which our Committee has examined, insurance regulation is easily one of the most in need of modernization and uniformity. Price controls and patchwork regulation benefit neither consumers nor providers. I look forward to hearing from our panel of commissioners their views on the SMART proposal and our efforts to bring insurance regulation into the 21st Century."
Rep. Oxley said, “As a former State legislator and member of NCOIL, I have been one of the strongest proponents of the NAIC and its efforts. But as we have demonstrated throughout the hearings in this Committee over the past three years and the numerous hearings held previously in the old Commerce and Banking Committees, the States cannot get the job done by themselves. The collective action barrier to getting legislatures and regulators to act in complete unison is, and will always be, insurmountable, absent Congressional legislation.”
The usual cast of characters at these hearings again appeared last week, represented by six present or former insurance commissioners from states (Illinois, Pennsylvania, New York, Ohio and Arkansas) that have been active in the NAIC's movement to preserve its member's authority.
NAIC President, Hon. M. Diane Koken (Insurance Commissioner of the Commonwealth of Pennsylvania) declared the NAIC's public service orientation and timeliness at achieving modernization without sacrificing consumer protection. She then went on to tell Congress what they really felt about SMART: "Third, the draft SMART Act incorporates unacceptable levels of federal preemption that would create both legal and practical problems for the insurance industry and its customers. A thorough analysis of the SMART Act by 117 insurance regulatory experts from your home states identifies concerns where the bill would preempt many important state laws that protect consumers from unfair or discriminatory marketing, inadequate or excessive rates, and unsound products. Federal preemption of state insurance regulation denies your Congressional constituents the benefits of important state services and protections, as has already been proven in existing federal programs, such as FEMA in its administration of the National Flood Insurance Program, and ERISA through its taking away state authority to assist your constituents. The states believe it is constructive to point out basic constitutional, legal, and operational problems that would undermine the SMART Act’s stated purposes." Her full testimony is online, including the reports of seven teams of regulatory officials and staff. (51 pages in PDF)
One of the strengths of complex systems is the capacity of its components to interact independently because of the existence of diversity. That independence has repeatedly been shown to protect the overall system from vunerability to unexpected consequences that lead to cascading failures in "monoculture" systems that are highly interlinked. (See: Unintended Consequences: Reading: Barabasi, Linked: The New Science of Networks (2003))
The vulnerability of monoculture systems to catastrophic results of otherwise survivable errors or attacks has been observed again and again, from the Irish Potato Famine (Fraser, "Conservation Ecology: Social vulnerability and ecological fragility: building bridges between social and natural sciences using the Irish Potato Famine as a case study" (2003) to the recent New England electrical blackout (Unintended Consequences: Blackout Report: Maintenance, Training and Communication Errors (2003). During the Blackout of 2003, only the systems that were able to independently decide to disconnect from the "efficiency" of the centralized, unified controls avoided being sucked into the collapse of the highly connected network.
Looking back on decades of ill-conceived centralized government "solutions" to insurance availability and affordability "crises" in state after state, in automobile insurance, workers compensation insurance, medical malpractice insurance and product liability insurance, we see a record of attempts to solve political problems with price controls and lock-ins that caused long-term damage to the whole economic system. If our decentralized insurance system gets federalized, mistakes that would have an impact on only one state may impact every insurance transaction in the entire nation. Time will tell if the game of "chicken" going on between state and federal regulators has a net positive or negative effect. Whatever happens, I'm counting on unintended consequences.
Gregg Easterbrook reviewed Diamond's current book, "Collapse," in a January 2005 review in the New York Times that caught my eye. It is a successor volume to "Guns, Germs and Steel," for which Diamond won a Pulitzer Prize. Easterbrook's review called them "magnificent books: extraordinary in erudition and originality," but probably wrong. Those with a background in complexity theory may lack Easterbrook's skepticism.
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Diamond's main point in "Guns" is that the dramatic differences between the rate and extent of cultural development in various global regions is not a result of differences in intelligence due to race or ethnicity. Instead, Western European culture (for example) is dramatically different from that of sub-Saharan villagers (for example) due to differences in the starting resources, environment and geography for those cultures. "Starting," in this sense being measured in geological age ... back from the initial evolution of human society, presence of indigenous plants and animals in various continents and the impacts of the Ice Age and the subsequent rise of the sea level separating once-joined islands and continents.
Bringing his expertise in evolutionary biology and biogeography, he studies multiple instances of differences in climate, prehistoric availability of native plants and animals, and geography that affected the spread of new technology across regions. Those technologies included such basic skills as crop raising, domestication of indigenous animals and tool use. Once a locale got a "head start," its resulting population growth and food surplus enabled it to advance much faster than isolated cultures without access to the same technology and resources. As those with such a head start advanced, they left the less fortunate farther and farther behind as their technological development compounded. The head start people sometimes subjugated or exterminated the less fortunate, as the natives of America experienced.
Easterbrook criticizes Diamond for not giving more weight to "culture and human thought as forces in history," describing Diamond's as "single-explanation" theories that "come perilously close to determinism." I found Diamond persuasive in "Guns" and look forward to reading "Collapse," in which he turns from applying his theories to the success of societies to the failure of those that were once successful.
In his epilogue, Diamond gives a nod to complexity and chaos theories, and acknowledges the role of individual leaders, as well as that of chance in determining the direction of history. Students of the science of complex networks and "cascading failure" will see parallels in Diamond's evaluation of the vulnerability of ancient China to the perverse whims of its centralized government and the resilience of politically fire-walled modern Europe. Students of the theories of "disruptive technologies," the economics of networks and "tipping points" will see parallels in Diamond's description of the head start obtained by chance that enabled the beneficiary culture to dominate or wipe out neighboring cultures without the same advantages.
You may judge for yourself after reading this valuable, well-writen and fascinating book by a professor of physiology at UCLA School of Medicine, author of "The Third Chimpanzee". Jared Diamond, "Guns, Germs and Steel."
Abstract:
The Terrorism Risk Insurance Act (TRIA) requires insurers to offer commercial insurance that will pay on claims that occur from a terrorist attack, and for losses on the scale of 9/11, TRIA provides a "backstop" in the form of free reinsurance. The authors describe the evolving terrorist threat with the goal of comparing the underlying risk of attack to the architecture of financial protection that has been facilitated by TRIA.
RAND Corporation has made a PDF version of this 92-page peer-reviewed paper, "Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act" (ISBN: 0-8330-3822-2), available free online at this time.
Thanks to Insurance Journal for pointing to this resource.
See also: Unintended Consequences: Terror Insurance Market Overview (Dec. 18, 2004)
Members of the self-insured workers compensation group AIK Comp will be assessed almost $100 million retroactively to cover losses on workers comp insurance written in prior years at premiums discounted to below the level needed to cover reserves. See: Unintended Consequences: AIK Comp Paid Discounts (December 14, 2004)
Members had been assessed not long after AIK Comp was placed into rehabilitation, but only about half paid, leaving the self-insured group unable to meet current obligations to injured workers. Legal challenges to the assessment were sent to mediation, which has now ended, leaving the rehabilitator with authority to proceed against the objecting members. Source: AIK COMP Members Assessed $97M, Insurance Journal (June 16, 2005).
The April 7, 2005 court order ending mediation set June 15 as a deadline for the Rehabilitator to file an estimated deficit figure and assessment plan as well as procedures by which interested parties may contest those filings.
More information is at AIK Comp's website.
Recent investigations by state and federal regulators have led the insurance industry to turn away from the use of controversial "contingent commissions" that compensated insurance brokers for bringing to insurers risks meeting certain volume or profitability goals.
At a recent Standard & Poor's conference, brokerage executives were quoted as expecting greater transparency coming as a result of the recent investigations. That transparency will include the disclosure of the higher commissions brokers are negotiating. Source: S&P Conference: With End of Contingent Commissions, Brokers Find Ways to Plug the Hole Insurance Journal, June 14, 2005.
Increased disclosure to insurance purchasers of all compensation received from insurance companies by agents and brokers is a key goal of model laws proposed by the National Association of Insurance Commissioners (NAIC). Any such law and implementing regulation would have to be enacted by each state's legislative and regulatory authority individually. The NAIC has no power beyond persuasion.
The NAIC model law is not without controversy. In November of 2004, Connecticut Attorney General Richard Blumenthal called the model law "a shadow of what it should be," that "fails to address the key defects in the current system." See: Unintended Consequences: NAIC Model Law on Broker Disclosures Criticized by CT A.G. Blumenthal (November 17, 2004). See also: Unintended Consequences: Testimony to Senate Panel on Insurance Brokers (November 17, 2005).
Risk Retention Reporter has reported 2004 premium for risk retention groups (RRGs) neared $2.2 billion, up from $1.7 billion for 2003. During the three soft market years (98, 99 and 00) RRG premiums were essentially flat. Source: Insurance Journal, June 15, 2005 Risk Retention Group Premium Soars Above $2 Billion.
Under the federal Liability Risk Retention Act, RRGs licensed in one state can write liability insurance on a variety of property-casualty risks in other states without having to comply with the usual licensing requirements imposed on "foreign" insurers. During hard markets, RRGs tend to expand the geographical scope of their writings and take on risks "commercial" insurers decline. Unfortunately for their insureds, insureds in RRGs are not eligible for coverage from their state insurance guaranty funds that pay claims against insolvent insurers. As a result, if a RRG fails (as they sometimes do in soft markets), the policyholders (and claimants against them) may find payment of their claims to be delayed, heavily discounted or unavailable.
Such problems have come to light recently in connection with the insolvency of several RRGs associated with Reciprocal of America (ROA). ROA and its RRGs recently were declared insolvent, leaving thousands of hospitals and physicians suddenly without insurance and without assurance that claims already made against those companies would be paid in full.
See also: Unintended Consequences: Impact of Reciprocal of America on Mainstreet Professionals (April 17, 2005).
A new study from Wharton, funded by the AIA, concludes that while contingent commissions can be the subject of abuse, they may also benefit policyholders in some ways, especially if they involve profit-based contingencies. Aligning the intermediaries interests with the insurers may relieve the spector of adverse selection and the "winners curse," by providing insurers with more confidence in the quality of the risk being placed. This may encourage more competitive bidding for business.
This Wharton study was funded by the American Insurance Association (AIA), and is available in full text online at Insurance Journal's website. Cummins & Doherty, "The Economics of Insurance Intermediaries," Wharton School, May 20, 2005.
Source: Insurance Journal. Wharton Study Finds Agents, Brokers Play Critical Role in Buying Process
See also: Unintended Consequences: Testimony to Senate Panel on Insurance Brokers
And: Unintended Consequences: NAIC Model Law on Broker Disclosures Criticized by CT A.G. Blumenthal
Medical malpractice rate hikes are not being caused by increased patient claims or higher jury verdicts, according to the nonprofit Foundation for Taxpayer and Consumer Rights (FTCR). The organization cites a new study by the Kaiser Family Foundation (KFF) that looks at medmal claim data over a period from 1991 to 2003. Per doctor, the claims count has declined over that period and after being adjusted for inflation, rose only 1.7% annually and actually fell since 2001, according to the KFF study available at http://www.kff.org/insurance/7328.cfm.
Source: "KFF: Medical Malpractice Claims Stable; FTCR Reports Time to Focus on Insurers' Practices" Insurance Journal May 31, 2005
Dartmouth Prof. Amitabh Chandra, with Shantanu Nundy and Seth A. Seabury have again published results of quantitative study correlating growth of medical malpractice payments to the growth in the cost of health care. They criticize "preoccupation with data on judgments, extreme awards, or specific specialities (that) results in an incomplete understanding of the growth of physician malpractice payments." The Growth Of Physician Medical Malpractice Payments: Evidence From The National Practitioner Data Bank -- Chandra et al., 10.1377/hlthaff.w5.240 -- Health Affairs
See also:
Unintended Consequences: Causes of the Medical Malpractice Crisis?