Senate committee’s attention settles on property insurance
There are limits to the authority that Congress lent to the states.
By Kevin P. Hennosy
Senator Sherrod Brown (D-Ohio), as chairman of the banking committee, is stepping into the shoes of several U.S. Senators who took a keen interest in insurance issues.
That line of legislators began with Senator Joseph O’Mahoney (D-Wyo.), who brokered the drafting of Public Law 15 of 1945, better known as the McCarran-Ferguson Act. Senator O’Mahoney remained active through the Fifties overseeing the implementation of the act, which required state action in rate and form approval as a replacement for Federal Antitrust enforcement.
We will discuss the congressional intent of the 79-year-old statute later.
In the Sixties, Senator William Proxmire (D-Wis.) pressured the states through oversight to create a national system of property/casualty guaranty funds to honor claims against failed companies.
The “Conscience of the Senate” Senator Philip Hart (D-Mich.) conducted a series of hearings concerning the so-called “antitrust exemption” for insurance, in the Seventies.
Senator Howard Metzenbaum (D-Ohio) became an unabashed critic of the property/casualty insurance sector during an “availability and affordability crisis.”
During the Nineties and first decade of this century, most of insurance public policy debate moved to the U.S. House. After a wave of insolvencies and oversight hearings, “the powerful chairman” of the House Committee on Oversight and Investigation, John Dingell (D-Mich.), introduced a bill that would have applied federal oversight to any insurance company engaging in ceding, or assuming, reinsurance.
When Republicans regained control of the House in 1995, Representative Michael Oxley used oversight hearings to encourage states to deregulate insurance. Oxley seemed to ignore the automatic application of Federal antitrust oversight required under The McCarran-Ferguson Act—and no one went to federal court to call for the implementation of that provision.
For a brief time during the debates on the Affordable Care Act, Senator Harry Reid (D-Nev.) leveled the threat of repealing the provision of The McCarran-Ferguson Act that stays enforced upon “the business of insurance” to the extent that state law regulates such commerce.
In September 2023, Senator Brown chaired a hearing that carried the title: “Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers.” The hearing focused upon the rising cost of homeowners and renters insurance coverage.
In his opening statement, Senator Brown echoed the words of countless insurance producers when he recognized that homeowners insurance “gives families certainty and peace of mind.”
Furthermore, the senator observed, [Insured] “Homeowners are confident that their monthly insurance premiums will provide a backstop against the physical and financial devastation that would ensue if their largest investment is threatened by a natural disaster—a tornado, hurricane, wildfire—or other dangers or accidents.”
Like the closing line of an insurance company commercial, Senator Brown opined, “Knowing they’re covered can help homeowners sleep better at night.” Then, the senator’s comments pivoted; “Or that’s how it’s supposed to work. Increasingly, however, homeowners have faced an unpleasant surprise when it’s time to renew their policies.”
Far from the utopian world that Senator Brown described first, he then presented a dystopian free-fire zone where consumers have fewer choices, pay higher prices, and secure less coverage of suffered losses.
At one point of Senator Brown’s statement, the description of the property insurance sector sounded very much like assessments of the American health insurance sector:
Companies are restricting coverage, raising rates and deductibles, and in some cases, leaving states or geographic areas altogether. As Secretary Yellen recently noted, the result is a “protection gap” that is increasing costs and limiting options for families, and it’s increasing financial stability concerns across the financial system.
Senator Brown recognized that insurers also face increasing premium costs:
U.S. reinsurance rates—the cost of insurance that insurance companies buy to protect themselves by spreading out risk—have reportedly increased by up to 50 percent. These jumps in reinsurance premiums have been driven in part by frequent and more severe natural disasters for themselves and their investors.
Senator Tim Scott (R-S.C.), Ranking Member of the Committee, delivered an opening statement that stressed his work as an insurance producer before entering public service. Senator Scott observed:
[O]ne of the things that we would …. talk about is the PML, the probable maximum loss. Can [an] insurance company calculate accurately, or even in the range of reality, what is a probable maximum loss within a market, whether that market is the Charleston area where we are prone to hurricanes, or whether it’s the state of California, or Ohio with storms and/or other natural disasters, can a company predict the loss that will be incurred, and can they absorb that loss based on the premiums they charge per policy?
Nevertheless, the Palmetto State U.S. Senator also expressed the opinion that policymakers spend too much time and effort focusing on climate issues, rather than “man-made” disasters. To illustrate his point, he mentioned California’s regulatory framework and the role of attorneys’ fees in Florida.
The committee heard from two sources of consumer perspective. Both advocates reflected the chair’s expressed concerns over availability and affordability. Also, the consumer advocates cited the need for funding pre-disaster mitigation, or property hardening, and integration of such risk mitigation activities into claims payment provisions.
Douglas Heller, director of insurance, Consumer Federation of America, presented extensive written testimony centered upon climate change and insurers’ and reinsurers’ responses to it. In addition to rising prices charged to consumers, Heller observed the “hollowing out” of many property insurance policies.
Michelle Norris, executive vice president of external affairs and strategic initiatives for National Church Residences, delivered testimony from the perspective of multi-family housing residents and operators. Norris noted, “At National Church Residences, we have seen the property insurance liability for our affordable housing properties increase by over 400 percent over the last six years.”
Norris reported that at the same time premiums increased for the multi-family sector, underwriters reduced coverage. This situation was not common until recently. Until about 2017, competition and capital “allowed for brokers to structure insurance programs in innovative ways that offered broad coverage terms with high insurance limits and low deductibles.”
The committee also heard testimony from Jerry Theodorou, director of the Finance, Insurance and Trade program at R Street Institute. His comments focused on market competition in the property insurance sector. (More on competition in a moment.)
In decades past, one would have expected one or more insurance trade associations to testify before the Banking Committee, rather than a self-described “center right think tank.”
The R Street Institute emerged in 2012 after the libertarian Heartland Institute caused a furor with a billboard, which compared “believers” in climate change with Ted Kaczynski, The Unabomber. (Follow-up billboards were planned making use of Fidel Castro, Charles Manson, and Osama Bin Laden.) Most of the Heartland Institute’s Washington staff and its insurance sector accounts left to form the R Street Institute.
Like so many nonprofit research organizations, The R Street Institute does not disclose its funders in its Form 990 filings to the Internal Revenue Service, so it is near impossible to know who pays the piper or calls the tune. However, the institute’s filings do document a material grant to the American Ideas Institute, which publishes The American Conservative.
The current state of nonprofit financial reporting does little to provide a useful level of transparency. It is a problem, which fosters “Dark Money” transactions. The journalist Jane Mayer and Senator Sheldon Whitehouse (D-R.I.) have documented the corrosive effect of Dark Money upon American democracy.
But back to the hearing.
The Theodorou testimony also entered investment income into the discussion, which consumer advocates tend to ignore today. In the Eighties and early Nineties, insurance company trade groups fought hard to keep investment income out of the National Association of Insurance Commissioners (NAIC) Property Casualty Report on Profitability By Line By State. When the NAIC added investment income, it showed that insurers generally suffered a slight loss on premiums but made up for that loss with investments. Theodorou data—oddly more current than the industry files with the NAIC—showed a continuation of that trend.
The R Street Institute’s testimony also discussed market competition in the property insurance sector. Theodorou touted the sector’s low score on the Herfindahl-Hirschman Index. (HHI). The property/casualty sector returns an HHI of 297 and the homeowners sector scores an average of 621. The R Street testimony explained:
If the HHI is higher than 1,800, the market is considered by the Department of Justice—in accordance with longstanding policy—to be highly concentrated. If it is between 1,000 and 1,800, it is moderately concentrated. If the HHI is below 1,000, the market is considered competitive, not concentrated. The lower the HHI, the more competitive the market.
Of course, regular readers of this column know that since the passage of the McCarran-Ferguson Act, the Department of Justice Antitrust Division and Federal Trade Commission (FTC) have not spent a great deal of time and effort considering HHI concentration in the insurance sector. To the extent that state laws regulate “the business of insurance,” federal antitrust oversight is stayed except in grievous situations.
When negotiating legislation that became the McCarran-Ferguson Act, Senator Joseph O’Mahoney, the Roosevelt Administration, the NAIC, non-cartel insurance companies and independent agents recognized that insurance was not like other business sectors. Competition does not necessarily improve insurance products.
Insurers needed to pool data and policy designs, which govern pricing and coverage. Furthermore, the business of insurance—commercial trade in risk—was, and is, unique for its complexity, which precludes the informed consumer choice that economists consider necessary for market competition. So, the negotiators approved Congress’s call for state regulatory action, rather than competition, to govern the business of insurance.
Congress lent to the several states its constitutional authority over interstate commerce in insurance to act on behalf of insurance consumers. That loan remains contingent upon state regulatory action. In an occurrence where a jurisdiction deregulates insurance, McCarran-Ferguson provides for the automatic application of federal antitrust law and FTC oversight to the business of insurance like other sectors governed by competition.
There is no provision of the act that contemplates a State of Nature no matter how many companies and subsidiaries write insurance business. The federal law governing insurance does not pre-suppose competitive markets. On the contrary, Congress found that competition in the business of insurance did not serve the interest of insurers or the public.
There are limits to the authority that Congress lent to the states. In the late Sixties, Arizona insurance regulators took an action aimed at protecting “stockholders” and the U.S. Supreme Court stopped the regulators in their tracks.
In 1969, the Supreme Court issued a ruling in SEC v. National Securities, Inc., 393 U.S. 453 (1969), which defined the breadth, and limits, of regulatory activity expected of the states under The McCarran-Ferguson Act: “The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of the ‘business of insurance.’”
Readers will notice that the Court made no mention of measuring market competition. The law requires significant state intervention, or jurisdiction returns to federal antitrust enforcement. If one reads President Franklin Roosevelt’s signing statement attached to the McCarran-Ferguson Act, he expressed his assumption that after a moratorium provided for in the legislation, federal oversight will apply to insurance.
One final note concerning the Banking Committee hearing, Senator JD Vance (R-Ohio) listened to the testimony and observed that insurance is about making projections about the future, and there was too much talk about the past.
This commentator suggests that Senator Vance pick up a copy of Against the Gods, The Remarkable Story of Risk, by historian, economist, and conservative “gold bug,” Peter L. Bernstein. Bernstein argues that modernity began when Blaise Pascal developed the Probability Theory to project the future using data points from the past:
The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events.
On November 1, 2023, committee members Senator Sheldon Whitehouse (D-R.I.) and Senator Ron Wyden (D-Ore.) sent letters to 40 top insurers asking for data related to their companies’ and “subsidiaries’ plans to address increased underwriting losses from climate-related extreme weather events and other disasters such as tropical cyclones, intense precipitation events, droughts, heatwaves, sea level rise, and wildfires.”
The senators, using their extensive oversight authority, want to gather information requested by the Biden Administration through the Federal Insurance Office, which carriers and the NAIC have resisted gathering and sharing.
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 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 NAIC as a consumer advocate.