Politics Puts Insurance Regulators in a Bind

In May 2005, a coalition of insurance companies hosted a fundraiser for Jim Poolman, the elected insurance commissioner of North Dakota, at a Washington restaurant called the Caucus Room.

Two months later, Poolman helped spearhead the coalition's efforts to change the way life insurance is regulated. The change would alter long-standing prescriptions for how much money insurers must keep in reserve -- a crucial variable that can influence profit, the premiums they charge and their ability to pay claims.

The initiative, which has been in development ever since, is now entering an advanced stage and is one of the prime items on the agenda as state insurance regulators from across the country gather this weekend in Minneapolis.

At a time when the Obama administration is trying to figure out what role the federal government should play in the regulation of insurers, the move to remake policy is a case study of the tensions within the current system of state-based regulation.

Although campaign fundraising is standard fare for politicians, it is unusual for financial regulators. They are typically appointed, keeping them at least a step removed from the intersection of money and politics. But in 11 states plus the Virgin Islands, state insurance commissioners must run for office, and some take contributions from the interests they regulate. Through an assembly of state regulators called the National Association of Insurance Commissioners, they can help shape regulatory policy on a national scale.

What's more, insurance regulators routinely move from wielding power over the industry to working for it. As in other areas of government, the revolving door can give officials an incentive to please the businesses they oversee while they have the power.

"The downside of running for office, being an elected official, is having to raise money," Poolman said, "because there always could be a perception that there's a self-interest involved with somebody giving you a contribution."

Poolman said he wasn't influenced by the money.

The coalition that helped Poolman raise funds in 2005 was created to transform one of the fundamentals of insurance regulation. The amount insurers must keep in reserve had long been dictated by standard formulas. In place of the formulas, the coalition wanted regulators to create a system of "principles-based reserving," which would give insurers greater discretion.

A key aim was to let companies reduce what they considered to be excessive reserves.

Advocates say allowing insurers to keep less money in reserve would enable them to cut premiums. Indeed, the coalition that raised funds for Poolman calls itself the Affordable Life Insurance Alliance.

Some industry officials say the initiative could leave insurers and policyholders at greater risk.