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Public Policy Analysis & Opinion The establishment seeks a federal charter The American Enterprise Institute weighs in By Kevin P. Hennosy
The American Enterprise Institute (AEI) has issued a report that advocates an optional federal charter for insurance companies. This statement means that the idea of state insurance regulation continues to fall from favor in the boardrooms of America’s business elite. The basic argument presented by Peter Wallison, an AEI resident scholar, focuses on the competitive inequity created by differing regulatory structures for insurance companies, banks and securities firms. The AEI statement explains, “Banks can obtain swift approval of new products, and securities firms have few approval requirements, but insurance companies are regulated solely at the state level and must obtain approval from fifty-one state regulators in order to offer a product or service nationally. “Although the National Association of Insurance Commissioners (NAIC) has been working for years to create a modernized and uniform state regulatory system, such a system has not yet been achieved and seems unlikely to be realized in the near future. Under these circumstances, an optional federal chartering system for insurance companies seems to be an idea whose time has come,” according to Wallison. For many years, the AEI beat an incessant drum urging the transfer of regulatory jurisdiction from the federal government to the states. In a report released in early March 2006, the AEI espoused the creation of an optional federal charter for insurers. Traditionally, the AEI has used the following modus operandi: Reversal The AEI reverses itself with the call for federal insurance oversight. Without drawing attention to the policy reversal, the think tank explains its flip flop by blaming the states for not deregulating fast enough after the 1999 repeal of the Glass-Steagall Act of 1933. One can quibble with the extent of competitive change that occurred after the repeal of the venerable act, which established legal firewalls between the three financial services sectors, helping to rebuild the American financial system after its collapse in 1929. Decades of seriously damaging court decisions and Federal Reserve Board rulings had weakened the Glass-Steagall Act so much that competition among banks, insurers and life insurance companies was already rampant by the time the act was repealed. As early as April 7, 1998, the financial historian Ron Chernow told The New York Times, “[The Act] is so riddled with loopholes at this point that it is effectively dead—Congress just refuses to give the last rites and bury it.” The true change brought on by repeal related to the ability of financial institutions from one sector to own an institution in another sector. Investment and commercial banks have been hesitant to buy or establish insurance companies that are not subject to the subservient world of banking supervision. Ownership and not competition seems to be inhibited. It is important to note that the AEI points toward the notoriously docile Office of Comptroller of the Currency (OCC) when it discusses an optional federal charter. By highlighting the OCC, the AEI is very clear that the national framework that it is now advocating should not be loaded down with consumer protections or enforcement mechanisms. As Wallison points out, the banking lobby proposed an optional federal charter even when it was clear that the Congress would repeal the Glass-Steagall Act. This new competitive environment forced insurance companies and their associations to consider the advantages of a new regulatory framework; and at an AEI conference in June 1999, the American Bankers Insurance Association—an affiliate of the American Bankers Association—proposed the idea of an optional federal charter for insurance companies. President Clinton did not sign the repeal legislation until November 12, 1999, so it’s difficult to see how the proposal responds to the post-repeal market. The “Fetcher Bill” phase The AEI report seems to be part of a growing campaign to revive the optional federal charter legislation. Many observers expect legislation to be introduced this year, but no one expects its passage. Opponents of the optional federal charter proposal still rally behind the banner of the State Modernization and Regulatory Transparency (SMART) Act. This proposed legislation may actually be introduced this year as well. Once again, no one expects this legislation to pass. Regular readers of this column will recognize the elaborate ruse being carried out with the introduction of each piece of insurance legislation. The old name for such legislation is “Fetcher Bills.” While they cannot pass, members of Congress can use the legislation to attract campaign donations from interested parties. A major shift Still, the move by the AEI should not go unnoticed by those who support a streamlined but effective system of state insurance regulation. The AEI is not an industry trade association that sends out cheerleading press releases for membership consumption. The AEI is a think tank that melds policy development and political action into one powerful force. At times it serves as a government in waiting. Proposals honed by the AEI result in laws, insurgencies and wars. The AEI is not just any think tank. Ideologically the AEI represents the far-right cornerstone of the American business establishment. I do not mean the Main Street business perspective. The AEI speaks for the Big Guys and not for the business person who advertises by sponsoring a tee-ball team. The AEI traditionally argues for policies that encourage business consolidation that local and regional concerns have difficulty competing against. It is difficult to see the AEI’s policies benefiting the interest of the local insurance producer. Concentrated power In 1943, Lewis H. Brown, then chairman of the board of Johns-Manville Corp. formed the AEI. The think tank was created to serve as a platform for policy recommendations that serve the interest of America’s largest industrial concerns. Today, the AEI’s Board of Trustees still lists representative magnates from the traditional manufacturing, transportation and natural resource sectors such as: Lee R. Raymond, vice chairman, chairman and CEO (Retired), Exxon Mobil Corp.; John V. Faraci, chairman and CEO, International Paper Co.; Martin M. Koffel, chairman and CEO, URS Corp.; John A. Luke, Jr., chairman and CEO MeadWestvaco Corp.; and William S. Stavropoulos, chairman, Dow Chemical Co. Nevertheless, over the years, financial services, health and pharmaceutical concerns have taken up a greater share of the seats on the board of trustees. To those with an interest in insurance, it is difficult to look past the name of Edward B. Rust, Jr., chairman and CEO, State Farm Insurance Companies on the list of trustees. The financial services sector also lists AEI board members like Harvey Golub, chairman and CEO (Retired), American Express Company, among others trustees. With regard to health care financing and pharmaceutical perspectives Wilson H. Taylor, chairman emeritus, CIGNA Corp.: L. Ben Lytle, chairman and CEO, AXIA Health Management, LLC, and Raymond V. Gilmartin, special adviser to the executive committee Merck & Co., Inc. Traditionally, the AEI has favored candidates for its board and officer positions who hold both governmental experience and/or impeccable political networks. At least two former Treasury secretaries, William Simon and Paul O’Neill, have served on the AEI board. So has Vice President Richard Cheney. The prototypical AEI activist might be the group’s current president, Christopher DeMuth. He served as staff assistant to President Richard M. Nixon (1969-1970) and then moved to the Office of Manage-ment and Budget. Two years after leaving the White House, his formal resumé picks up as an attorney for a lobbying law firm. During the Carter Administration, DeMuth worked for transportation concerns. In 1981, he became executive director of a presidential commission on deregulation. He became president of the AEI in 1986, where he also served as editor of a journal advocating business deregulation. DeMuth’s direct interest in insurance seems to have taken off in a big way when he was named to the board of the Insurance Services Office (ISO), serving from 1992-1996. Since 2004, DeMuth has served on the board of State Farm Mutual Automobile Insurance Co. With assets, experience and power of the type that the AEI commands, the think tank has grown accustomed to winning. Inept Wallison places much of the blame for the shortcomings of the state regulatory system at the front door of the NAIC. Wallison questions the NAIC’s opposition to the SMART Act, which the association announced in a letter to House Financial Services Chairman Michael Oxley (R-Ohio) in March 2005. “The NAIC’s uncompromising opposition was unusual because the organization was responding to what was clearly an effort on the part of Chairman Oxley to preserve state regulation of insurance while achieving what all sides in the debate referred to as ‘modernization’ of insurance regulation,” according to Wallison. Here Wallison raises an excellent point. The letter did represent a political flip flop for the NAIC; however, I would argue the NAIC was correcting a serious mistake. The SMART Act is a fine thing in concept, but it was always loaded with too many deregulatory provisions in order to attract support from carriers and national brokers. The debate was never about “modernization of insurance regulation,” and the NAIC should never have accepted the invitation to debate using that term. The debate has always been about “deregulation” and not “modernization.” The NAIC made a strategic error in accepting the spurious description. The NAIC should have launched a defense of regulation, but instead the leadership fawned all over the SMART Act proposal initially. The NAIC leadership made promises to congressional leaders that they reneged on, and a turn-coat is less respected than an opponent in politics. Over the past decade, the NAIC has tried to appease the most radical factions of the national and international business community. As anyone with the least bit of political sense and historical perspective predicted when the NAIC started down this road, appeasement only invites more aggressive behavior. The AEI entry into this debate demonstrates that appeasement did not work for the NAIC. It was only in the months that immediately followed New York Attorney General Eliot Spitzer’s investigation into anticompetitive behavior in commercial insurance markets that the NAIC took a stand. For “one brief shining moment,” the NAIC behaved like a political vertebrate. Wallison cites the NAIC letter to Oxley: “Our concerns are deeply rooted in the basic structure of the SMART Act that mandates federal preemption of state laws and regulations, federal supervision of state regulations, and complete de-regulation for all states. We do not believe that tweaking the language of the SMART Act discussion draft can resolve these basic conflicts.” The Spitzer investigation and the withdrawal of NAIC support stopped the SMART Act in its tracks for a short time. Yet, no one should have expected the debate to be over. The debate dates back to 1866 when the first insurance federal charter bill was introduced in Congress. More needed to be done by state officials by way of investigation and reform. As soon as the news media moved on to other stories, Spitzer moved on too. Without the protection of Empire State prosecutors, the NAIC lurched back to resume its bad habits that have become so ingrained under Cathy Weatherford’s failed leadership. The NAIC offers too many slogans and promises where solutions and actions are needed. Groups like the AEI play for keeps. * The author |
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