Public Policy Analysis & Opinion
New Jersey official given federal role in systemic-risk regulation of Prudential
On August 29, 2016, the National Association of Insurance Commissioners (NAIC) announced its designation of the New Jersey director of insurance regulation to the association’s seat on the Treasury’s Financial Stability Oversight Council (FSOC).
The Dodd-Frank Act created the FSOC to apply public oversight of non-bank financial entities that pose a systemic risk to the economy. This framework echoes the belief of the Federalist (Nationalist) Framers of the U.S. Constitution, who placed jurisdiction for the citizens’ national interests with the federal government.
In a tip of the hat to parochial local interests, the Dodd-Frank Act reserves a seat on the FSOC for the NAIC.
The NAIC announcement explained: “In this role, (Peter) Hartt will represent the interests of the nation’s state insurance regulators on the council.” We can speculate that the public interest lurks somewhere behind that parochial charge.
The announcement quotes Missouri Director of Insurance and NAIC President John M. Huff, who praised Hartt’s selection: “The NAIC and state insurance regulators will be well-served through the selection of Peter. His sound judgment and expertise will be a valuable asset to the proceedings of the FSOC as they review systemic risk in the financial sector.”
We may speculate that Director Huff also held concern for the public interest, but he forgot to mention it as he experienced the ecstasy of love for the NAIC and state insurance regulation.
And that same frenzy and innerglow swept over Director Hartt: “I am honored to have been selected by my fellow regulators to represent state-based insurance regulation,” said Hartt. “I look forward to working with the other financial regulators to promote a stable insurance marketplace and protect the broader financial sector.”
Certainly, the director meant to tip his hat to the public interest-oriented regulation of the business of insurance—and not just the NAIC and state-based insurance regulation.
Nearly as soon as the FSOC opened its doors, the board designated Prudential Insurance Companies as imbued with systemic risk. The New Jersey-based financial behemoth remains under the council’s jurisdiction, and Prudential is an undeniable parochial force in Garden State politics.
For those who possess a sense of a conflict of interest, this appointment seems troublesome. But, then again, anyone with a sense of history understands that this is a “Jersey thing.” Here’s why.
In the late 19th century, John F. Dryden, founder of Prudential, wanted to support a Congressional proposal to create a federal charter for insurance companies. The proposal sought to relieve regional and national firms from the administrative and financial burdens of state regulation, while not offending the provisions of the Paul v. Virginia decision that removed regulatory jurisdiction over insurance from the Congress.
The federal charter proposal: provided for a Federal Insurance Commissioner with no rule making or enforcement authority; limited financial reporting of federally-chartered insurers to filing with the office of the Federal Commissioner and home state regulators; limited state regulatory oversight of federally-chartered insurers to their home state; and, limited taxation of federally-chartered insurers to the company’s home state.
To fight more effectively for this and other proposals for the pretense of federal regulation, Dryden used the company’s political influence to secure an appointment to the U.S. Senate from the New Jersey state legislature. Remember, in the years before the 17th Amendment, state legislatures designated U.S. Senators.
In addition to the proposal described above, Senator Dryden worked with President Theodore Roosevelt in support of a plan that would give District of Columbia-chartered insurance companies entry into any state to conduct business. Since Congress governed the District of Columbia unfettered by democratic government, Roosevelt, Dryden, and others believed this structure could provide a national charter without offending the Court’s Paul decision.
Dryden served a partial term as U.S. Senator from New Jersey from January 29, 1902, to March 4, 1907. He sought another term; however, the legislature deadlocked and he withdrew. Dryden’s efforts to secure a federal charter, unencumbered by national regulatory oversight, failed.
It is also important to note the long-term record of New Jersey Governor Chris Christie and Prudential.
The February 21, 2014, edition of The Huffington Post carried a story that reported on Drumthwacket Foundation, a nonprofit formed to restore the Governor’s mansion in Princeton. The Governor uses the mansion for ceremonial events.
The Huffington Post reported: “John Strangfeld, the chairman of insurance giant Prudential, and his wife, Mary Kay Strangfeld, volunteered to serve in the top two positions on the foundation’s board. They were elected chairman and vice chairman, respectively, by the rest of the board that same month.”
The story finds that the Strangfelds proved to be prolific fundraisers. “Behind the scenes, they helped raise money from other donors to ensure the foundation’s success, and they were good at it. Prudential itself has given gifts totaling at least $150,000 over the last several years.”
Prudential has done well under the Christie administration’s economic development policies. According to The Huffington Post story and other published sources, the Christie administration offered the insurance giant $250 million in tax incentives to move its home office location several blocks.
“Typically, corporate tax breaks are granted on the basis of how many jobs a company will create using the money it’s saving on taxes. At the time of the Prudential deal, New Jersey’s tax incentive programs gave out anaverage of $167,000 per job. But Prudential received three times that, a whopping $527,000 per job, in a deal approved by the Christie-controlled New Jersey Economic Development Authority,” reported The Huffington Post.
In addition, The Huffington Post story mentioned a contribution to the Drumthwacket Foundation from the Cooper Hospital Foundation “at a politically-opportune time.”
“In late 2010, a Christie-appointed task force was considering a proposal to consolidate a number of hospitals in Southern New Jersey, a plan that would have greatly expanded Cooper’s reach. Cooper first appeared on the Drumthwacket donor list in early 2011, at the $25,000 level. The updated donor list was released just weeks after Christie’s task force recommended the state move ahead with the hospital consolidation.”
It is interesting to note another action taken by Garden State officials who encourage hospital consolidation through the insurance marketplace.
Insurance Director Hartt’s division earned attention for its role in a controversy concerning Horizon Blue Cross Blue Shield of New Jersey, which happened to introduce a new policy design that enhanced the competitive strength of large, consolidated hospitals and provider networks.
Critics allege that the insurer wielded cartel power to skew competitive markets in the healthcare provider sector.
In the May 1, 2016, national edition of The Wall Street Journal, the paper reported: “Opponents contend the plan was hatched in secret, rubber-stamped by state regulators, and designed to encourage customers to go to large hospital networks above independent facilities that have provided care for local communities for years.”
The Blue Cross Blue Shield plan is dominant in New Jersey. Again, according to The Wall Street Journal story, the company “has nearly 3.9 million members, more than 50% of the state’s commercial health insurance market, according to state statistics.”
Horizon’s OMNIA policy created a “tier system” for healthcare providers to choose between groups of providers. The system provides clear disincentives for insureds to use insurer-favored healthcare providers, at the expense of other providers. It should be noted that tier systems are not unique to the Horizon product.
From the disfavored providers’ perspective, this system is an unfair and/or anticompetitive intervention into the provider sector by the insurer. Critics observe that the insurer’s intervention was sanctioned by an agency of the Christie administration, which previously endorsed a policy of hospital consolidation.
Yet, the pretense of choice between the two tiers becomes apparent when considering the geographic location of Tier 1 providers, which means many insureds will need to travel long distances in order to avoid out-of-pocket expenses.
In addition, providers relegated to the high-out-of-pocket-cost Tier 2,argue that being walled off from Horizon’s market share damages the providers’ business viability. In November 2015, a subset of the providers grouped into Tier 2 filed suit against the New Jersey Department of Banking and Insurance.
Now that the NAIC has designated a representative to the FSOC who hails from a jurisdiction with a long history and active contemporary record of parochialism, what next?
A super-vote on the FSOC might provide an answer to that question.
A statement delivered to the Senate Banking Committee by the American Council of Life Insurers (ACLI) proposed a series of amendments to the Dodd-Frank Act. One of those proposed amendments suggested: “Special weight should be given to the views of the Council member with insurance expertise and to the primary financial regulatory agency for a company.”
Well, now, thanks to the NAIC, Prudential’s domiciliary state regulator will cast a vote on FSOC policy.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Companies and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NA