What are the problems confronting local governments, and how are they solving them?

A LOT OF PEOPLE DON'T TRUST insurance companies--for good reason. Insurance companies are notorious for taking customers' money and then finding creative ways to avoid paying claims. They price-gouge the

The reason? They're regulated by a crazy quilt of different agencies for every state and the District of Columbia, with no federal oversight. And those regulatory agencies are too frequently more cozy with the insurance industry than with the consumers they are charged with protecting from it. After all, their budgets often rely entirely on the fees paid by insurance companies they regulate.

Recently, though, there's been talk of tossing the current system and bringing the insurance industry under the federal umbrella. But not because they're sticking up for black consumers or other aggrieved policy holders. No, like most political moves, the regulatory change is being pushed by the industry itself. In the past, the industry has been wary of switching to a federal system, preferring instead the more lax state regulators and disorganized state watchdog groups.

But in 1999, Congress passed the financial modernization law which created powerful new competitors to the insurance industry: banks and securities firms, which can now, for example, offer long-term investment packages that compete with life insurance. The insurance companies, at least the big ones, now seem to feel that they would be better off with regulations set nationally instead of facing 51 different sets of state regs.

The insurance industry, though, has one small problem in trying to change the system. State insurance commissions collect more than $10 billion in state taxes and fees from the industry, while spending less than $1 billion regulating it--and they're not about to give up that much dough without a fight.

In an attempt to persuade the insurance industry to slow the move towards federal regulation, the National Association of Insurance Commissioners (NAIC) is frantically working, for example, to allow companies selling insurance in more than one state to file just one set of rates and forms to an organization set up under NAIC. A 10-state test has been scheduled for later this spring.

But none of the current proposals would do much to protect consumers--just the state regulators, and maybe the insurance industry. And should we really trust anything that gives a sweeter deal to an industry that has been able to manipulate regulation at will for decades?

The preceding piece is drawn from "The Riskiest Business" in the March 2001 issue of Governing Magazine.