Where the Internet Is Going – Can Insurance Keep Up?

If I say the name Mary Meeker, what do you think?  She was one of the luminous equity analysts during the gilded dot.com age which now seems so long ago.  I met her in the late 90’s and was favorably impressed by her intelligence, knowledge, and no-nonsense attitude.  She loaned me the only copy of a report she had and trusted me to get it back to her by the end of the conference…so her judgment can’t be all bad either (yes, she got her report back).  Her reputation was sullied when media types began casting about for villains to fit their morality tales about the dot.com meltdown, but little of the mud stuck because she was guilty of nothing more than evangelizing for an industry she believed in. 

Mary continues to analyze and write for Morgan Stanley.  Her latest five-year prognostication (along with some good current metrics) on the Internet is now available, and I’d say it’s required reading for insurance technology types who want to know where the waves are going in order to be able to ride them.  If you want a summary of her report, check out Alacra’s Barry Graubart here.  If you want to dive directly into her 147-slide Economy + Internet Trends, here you go. 

Not only do I hope insurance technology will keep up with the Internet, I hope it will fully leverage the platform, the software, the computer, and the tool…that the Internet is.

Speaking of thought-stimulating presentations, many of you saw the YouTube classic Shift Happens a year or two ago but you may want to check out the most current version: Did You Know 3.0  Alvin Toffler coined the term Future Shock with his book of the same name forty years ago…but the future keeps shocking us.

Why Not Nationalize the NAIC?

Insurance in the United States is, of course, historically and currently regulated not by the federal government but by the individual states.  However, the 50 state insurance commissioners have for decades coordinated their activities through the National Association of Insurance Commissioners (NAIC), an organization of their own creation and support.  Why not make the NAIC an arm of the federal government and give the U.S. President the right to appoint its leadership (just as he appoints the head of the Treasury and the Federal Reserve).  We could call the head the national insurance commissioner.  The NAIC would thus become the federal regulatory arm for insurance, and the 50 state insurance departments would be its field organization.  We would thus no longer need high-level insurance commissioners for each state (maybe there could be a deputy commissioner for each region of the country), and we could save a lot of money by consolidating many functions which are duplicated in the 50 individual state insurance departments.  The money saved could be used to fund any additional staff required in Washington (the NAIC already has some staff there, by the way) and for strengthening the oversight functions which are sparse and beleagured in many states.  With this approach, we would have federal regulation, but with a local touch.  And we wouldn’t have increased the size of government vis-a-vis the private sector – only made the governmental function more effective by uniting its fragmented energies.

No new taxes would be needed to fund this approach.  States typically aren’t spending on regulation all the premium taxes they collect from insurance companies anyway.  In fact, states typically spend only a fraction of the premium taxes they collect on the operation of their insurance departments.  The majority of those funds go into the general revenues of the states. 

While we’re at it, as part of this change, why don’t we require premium taxes to be disclosed on each policy?  I sure wouldn’t like it if sales taxes were not disclosed on the receipts from my retail purchases.  Would you prefer that sales taxes be buried in the price of the products you buy and not be disclosed to you?  Premium taxes are levied on all forms of insurance written but are not disclosed to the consumers and businesses who are ultimately paying the tax.  But I digress.

I like the idea of nationalizing the NAIC (i.e. having single federal-state system) better than an optional federal charter for a couple of reasons.  First, one regulatory system for insurance will be cheaper than two.  Second, one regulatory system will be fairer than two.  Critics of the optional federal charter are right when they say it creates the environment for regulatory arbitrage, where insurers will choose the regulator they assume will be most supportive of their interests.  That won’t always be in the interests of policyholders for whom the regulatory function exists in the first place.  Sports teams don’t get to pick their referees. 

So what’s wrong with state regulation and why shouldn’t we stick with that?  Well, I do concede that the devil we know is sometimes more desirable than the devil we don’t.  And I don’t believe federal regulators will individually be better than state regulators.  I do believe, however, that state regulation is an anachronism in our time.  It is one of the few commercial activities that is still regulated this 18th-century way, depriving insurance of the scale advantages enjoyed by almost all other financial services, not to mention manufacturing and other industries.  Its most destructive effect is to retard productivity and innovation by essentially requiring that there be 50 different ways to do something.  Having worked in both banking technology and insurance technology I can tell you that banking automation (including debit cards, ATM’s, credit cards, etc.) wouldn’t be where it is today if there were 50 different sets of rules about how to process a deposit or withdrawal.  So, even if the quality of regulation did not improve with nationalizing the function, the road to greater productivity and innovation, and therefore lower prices and better products, would be paved.  Do auto insurance buyers in Ohio have needs so different from drivers in Indiana that each requires its own separate regulatory agency?  Do policyholders in those two states know they are paying for this redundancy? 

There is yet another rather glaring and current argument for national and against state regulation: AIG.  Now the argument that proponents of state regulation have made regarding AIG has been that the insurance subsidiaries of AIG are all in good shape, and indeed that seems to be the case.  But if the doctor says that all the body parts he was caring for were in good shape when some other body part caused the patient’s death, what good is that?  We need a regulatory function of sufficient size and scope to oversee the size and scope of companies that it’s regulating.

So, there you have it.  No more 50-state regulation.  No more talk of optional federal chartering.  Just convert the NAIC from its advisory status to having full regulatory status as an extension of the executive branch of the federal government.  No, it wouldn’t be painless.  And it wouldn’t be easy.  But it would be logical.  And practical.

AIG Disgraced; Who’s Next?

Far from restraining the AIG lynch mob (see most recent post: Will No One Restrain the AIG Lynching Mob?), politicians continue to fall over themselves trying to get to the front line of that mob.  The president appeared on Jay Leno last night to express his shock and dismay that AIG would pay bonuses (Obama Talks Economy, Puppies With Leno) while his Congress was advancing a bill to tax practically all of the bonuses paid this year to employees of bailed-out firms (House Approves 90% Tax on Bonuses After Bailouts).  You’d think AIG was the source of all evil in the financial world, and that all that was necessary to right the country’s economic ship was to make sure AIG is blamed…and is made to suffer.  And you’d think our government leaders have no more important problems to solve than to take charge of incentive compensation planning for the financial services industry.

Much of the public can be forgiven for its rage against AIG since all they know of the firm are those three letters and whatever snippet of fact the media has doled out to them in the bite-sized chunks in which news is now consumed.  But our government leaders cannot be so easily forgiven for pandering to fact-starved populist rage.  Neither can those of us in the insurance industry who know AIG as a fellow participant in that industry be so easily forgiven if we join in the chorus that would seem to blame AIG for all that is wrong with our current financial and economic world.  

You and I know that AIG is composed of individuals much like us: people who have mortgages, pay bills and taxes (oh, yes, lots of those), send children to college, have health issues, and on and on.  To a bruised public, AIG is just a bunch of greedy rich guys…because that’s what their government leaders and the professional news media are telling them.  In fact, the moral of their story is that “Wall Street greed” has brought on this crisis, as if greed knows no other address.  On the contrary, the dictionary defines greed ”an overwhelming desire to have more of something, such as money, than is actually needed,” and there’s not a door in America where that temptation has not knocked.  Greed is not defined by how much you have, but by how much more you want than what you have or need.  Some of the biggest critics of greed are themselves animated by envy – and such baser motives know no class distinctions.

I am in no way trying to whitewash AIG and whatever errors may have been committed by them.  And if there are scoundrels there, they ought to be identified, tried, and made to suffer for their mischief.  But to tarnish an entire company, largely for decisions that the government had approved before they became public seems at best a waste of precious time and at worst a wrong that harms not just the victims but the perpetrators and the observers as well.

When the country sobers up after lynching AIG, they will recognize that we are no closer to getting our economic engine on track.  When that happens, will we begin to focus on solving problems or will we just look for another whipping boy?  If the latter, be careful – it might just be your employer.

Will No One Restrain the AIG Lynching Mob?

Apparently, the most pressing economic issue of the last few days is that AIG is paying out bonuses.  We’re told by the news media that the public is highly outraged.  Politicians are competing with each other to see who can be the most offended by it.  The president has ordered the Secretary of the Treasury to pursue every legal avenue to stop payment and Congress says it can enact a tax to confiscate 100% of those bonuses from the recipients.  Whoa!  We need leaders to restrain mobs, not egg them on.

Do I think AIG is justified in paying out bonuses?  I don’t know whether they are or not because I don’t know the particulars.  If a bonus is a contractual commitment and especially if it is owed to an employee who worked in a division of AIG completely unrelated to the need for government aid, then I don’t see how you can automatically rule it out.  When you start saying it’s okay for government to abrograte contracts between private citizens, you’re giving the politicians an awful lot of power. 

The purpose of a bonus is to make part of a person’s compensation contingent on what they do.  If the person fulfills his or her part, is it fair to unilaterally, without discussion, to deprive them of what they earned?  If I analyzed the specifics of each bonus payment I might be against them all, but how can I be against all of them if I have not analyzed the specifics of any of them?

I have a number of concerns about the AIG bailout – all of them more important than whether or not bonuses get paid.  The biggest one regards credit default swaps (CDS).  Since this was an unregulated market and parties entered into these contracts fully aware of the risk of default without government guarantee, then why are these parties being bailed out?  Nonetheless, I don’t pretend to have enough facts or intelligence to unravel the AIG bailout, much less how to get the economy growing again.  I have to trust that brighter minds with full-time dedication will do that.  But how can they if a mob mentality urges them to major on minors?  And they then succumb to that temptation?

Let’s put it this way, if AIG were allowed to recover all the bonuses paid since the bailout, and if it never paid out another bonus as long as it existed, how much better off would we be as a country?

Right now the country is very frustrated with our ecomomic plight, and rightfully so.  But if our leaders allow that frustration to be focused on peripheral issues and don’t help channel energy in the right direction, we’ll stay mired in the problems and postpone our turnaround.

Anecdotal Brights Spots for Insurance and IT in Buffett and IBM

Given the comments to my recent post Recent Signs of IT Spending for Insurance Remain Encouraging, I know that many of us are watching developments week by week, if not day by day, looking for indications of economic direction for our industry.

In the midst of all the darkening economic reportage we’ve seen two bright stars in recent days: one was in Insurance and the other was in Information Technology.  For people in insurance technology, that’s the best daily double you can get.

Insurance was highlighted in Warren Buffett’s annual letter to Berkshire Hathaway shareholders (click here for the complete text).  After a beginning in which he acknowledged the worst year in Berkshire Hathaway’s history and that he foresaw continuing economic woes for the U.S. and the world in the short term, he then emphasized that the future was on our side.  And he went to to describe how pleased he was that the insurance business was foundational to BH:

[W]e are fortunate that Berkshire’s two most important businesses – our insurance and utility groups – produce earnings that are not correlated to those of the general economy. Both businesses delivered outstanding results in 2008 and have excellent prospects. 

 

That the industry our technology serves is so prized by the most famously successful investor of our generation should be strong comfort to us.  And that his conviction is undaunted by the current negative circumstances is all the more encouraging.

As for technology itself, this week IBM reaffirmed its profit guidance for 2009 resisting the negative direction of the S&P 500 and the Dow Jones Industrial Average, both of which slid into new negative territory (see Bloomberg story here).  A lot of bad news has come forth since IBM first announced their expected 2009 earnings on January 20th.  That they would now reaffirm that guidance is therefore particularly encouraging.  We know that IBM is not only a giant as information technology companies go, but it is also especially strong in the insurance industry.  Information technology provides the greatest source for productivity improvement in any industry.  Economic downturns don’t lessen the need for improvements in productivity; if anything, they increase it.  It’s no surprise then that a technology supplier would have better prospects than other suppliers at a time like this.

Thus we have in recent days seen specific examples of leaders in both insurance and technology expressing strength and optimism – albeit a cautious optimism.  Therefore, to be in insurance technology at a time like this is one of the better places to be.  I know that these “anecdotal bright spots” are indeed only anecdotal.  But they are also bright!