Public Policy Analysis & Opinion

Living in interesting times

The industry faces a potpourri of challenges from many sectors

By Kevin P. Hennosy

Robert F. Kennedy popularized a phrase that may or may not have been drawn from a Chinese curse: “May you live in interesting times.” Scholars now debate the validity of the phrase’s history; however, one could be forgiven for noticing that interesting times have fallen upon the insurance sector like a load of un-transferable risk.

The news is full of unsettling tales for those involved in the business of insurance.

As my deadline neared for this edition of Rough Notes, a business story out of China caught my eye. The news did not directly involve an insurance company, but it could very well portend evil things to come.

The story concerned the toy maker Mattel, which seems to have offered up an executive with an important sounding title for torment and humiliation by Chinese officials. In a scene reminiscent of Communist show trials of the 1930s-1960s, the executive read a submissive admission of wrongdoing before a panel of officials in a hall populated by Chinese bureaucrats. Following the corporate confession, the panel of officials read a scathing condemnation of the company while the executive quietly “took it.”

Of course the admission of guilt read by the Mattel executive was total poppycock. The confession said that the company’s toy designs led to the dangerous situations that led to massive recalls in 2007. Those recalls were for safety reasons and followed a rash of pet poisonings traced to Chinese-processed materials that ended up in the food. The mortal combination of putting at risk both American children and pets was leading many people to equate the phrase “Made in China” with Mr. Yuk.

It appears that Chinese officials decided that the best way to deal with this public relations problem was through a big lie. And that to make the lie oh-so-convincing, it should be delivered by Mattel rather than some stone-faced Party spokesperson.

Never mind that in the case of the dangerous toys, the lead paint selected and used by a Chinese factory was to blame for the safety recall of the toys.

As I am writing this column there has not been enough time for reporters or American officials to find out why Mattel agreed to offer up a company official to tell the Big Lie and suffer public humiliation at the hands of Chinese authorities. One could imagine any number of draconian storylines to explain the toymaker’s actions. At the very least the company could have been threatened with expulsion from China, one of the world’s cheapest labor markets.

Yet something tells me that would not be enough. Mattel might have already been looking to break its ties to China, and let’s face it—there are other countries with little or nothing in the way of worker protections or environmental regulations that make manufacturing cheap and profitable.

The Chinese government might have done much more than threaten to throw Mattel out of the country. What if the Chinese threatened to imprison foreign nationals or shoot Chinese Mattel employees? This is a government that shot a high government official after a similar show trial where he was accused of bribery following a similar scandal. What is sure with regard to this affair is that something very odd happened here for the company to claim responsibility for something it clearly did not do, based on independent assessment of the toy recall situation.

I am writing about this incident because American insurance companies have a growing interest in China, both as underwriters and investors. There is a lot of money being made in the new “China Trade,” just as Mattel made a lot of money there until recently.

We can all feel good and watch the dividend checks roll in, funded in part by China profits, but the American insurance sector is foolish if executives ignore the risk involved.

Bad history

As I have noted in this column before, American insurers have a history of running afoul with foreign countries in connection with international business operations. One hundred years ago, insurers made huge profits in Asia, Russia and South America only to harvest the grapes of wrath. Insurance history is peppered with stories of overseas managers being imprisoned and investment holdings lost, sometimes for good reason but sometimes for chauvinistic retribution.

With regard to China, insurers should keep in mind another scary thought. The most recent opening to China was not an initiative of career diplomats at the United States State Department. No, the insurance trade in China is shaped by a Memorandum of Understanding (MOU) with the National Association of Insurance Commissioners (NAIC), not some highly vetted trade agreement or treaty.

The NAIC/Chinese MOU was something thrown together to benefit a handful of insurance companies, while offering a small number of NAIC officials the chance to see the Great Wall at someone else’s expense.

In my opinion, the NAIC delegation that negotiated the MOU shared more traits with the Beverly Hillbillies than the Council on Foreign Relations. If I were an executive of an insurance company with Chinese holdings, I would not be very comfortable putting my commercial interest, or personal safety, in the trust of a framework negotiated under the auspices the NAIC.

Now, when the NAIC is not negotiating international trade frameworks, it is trying to provide some political cover to Gulf Coast insurance commissioners who have faced public ire in the wake of catastrophic hurricane losses.

The effort comes a bit late for the Dean of American Insurance Commissioners, George Dale, who was defeated in the Mississippi Democratic Party Primary in August after 32 years in that office. Commissioner Dale was a stalwart of Mississippi politics who never let regulatory activities get in the way of being insurance commissioner. After suffering the losses and claims payment problems that followed the 2005 hurricane season, primary voters rejected Commissioner Dale’s “go along to get along” style.

The NAIC provided a platform for commissioners from Louisiana and Alabama to act like they were actually doing something about public concerns when, in late September, they sponsored a public hearing to address insurance issues in coastal zones.

“There are pressing needs in the Gulf states. Rates are rising and consumers are having their policies cancelled or non-renewed,” Alabama Commissioner Walter Bell said in a statement circulated by the NAIC. “Our goals are to seek input on the steps that we, as insurance regulators, will take to help ensure the affordability and availability of insurance for America’s consumers—as well as bring stability to the coastal insurance market.”

The NAIC news release explained, “In addition to increasing deductibles and introducing other coverage limitations, insurers have been withdrawing from coastal markets by cancelling or non-renewing policies. Further, the cost of the insurance products in the Gulf Coast area is rapidly rising.”

Just in case any insurers feared that Bell might really take the consumer’s side against the carriers when it comes to charges of unjust behavior following the hurricanes, the NAIC public relations department included the following calming quote: “The intent of the hearing is not to cast blame or disparage insurers for past actions.” Bell added, “State insurance regulators want to work together with the industry and interested parties to achieve stability in the marketplace. We face common problems that call for a collective solution.”

The NAIC continues to receive poor marks from industry trade groups and the National Conference of Insurance Legislators (NCOIL) with regard to conducting secret meetings. The NAIC faces criticism for conducting behind closed doors many sessions where regulators actually develop policy recommendations. With the actual work cloaked in secrecy, industry representatives are charged $550 for the pleasure of watching NAIC committees, subcommittees, task forces and working groups do their best impression of the Old Soviet Politburo—The measure passes unanimously comrades!

Self-inflicted migraines

The NAIC buys some of its own headaches by hiring part-time employees to monitor doors to meetings at its quarterly conventions. Several times over the past 20 years, door monitors have denied state legislators access to a session at an NAIC meeting that the legislators should have been able to attend. Such denials tend to raise the hackles of state legislators, who tend to have over-inflated egos to begin with, so they raise a fuss.

These little altercations tend to gain the attention of NCOIL, which has suffered from “conference envy” for 40 years when it compares itself to NAIC. NCOIL has a long history of adding controversial issues concerning NAIC to its own agenda as a means to drive up its own meeting attendance.

That said, the most recent complaints about NAIC and aired by NCOIL follow a much more reasonable standard than those of the past. NCOIL has simply insisted that NAIC members follow sunshine laws when they conduct NAIC business. This is not such an obnoxious suggestion to be followed by an association of state officials.

I was reminded of the political downfall of George Dale when I watched a little skirmish in local Kansas City politics last week. A rhetorical war raged on a local blog concerning a race for state representative that will not be decided until the Democratic primary of August 2008.

The blogger is a supporter of a candidate named Jason Kander, who is a 26-year-old attorney with his eyes on the White House. One of the planks of Mr. Kander’s campaign platform is to make it easier for physicians to sue commercial insurance companies. The blogger decided the best way to promote Mr. Kander was to attack his opponent, Amy Coffman, a former lobbyist for AARP in Missouri.

The candidates are competing for the seat representing the 44th Missouri State House District where a popular state representative is being forced out of office by term limits. This is a Democratic district on Kansas City’s south side, which is generally considered a “safe seat,” so a spirited Democratic primary likely will select the next state representative.

By “spirited” I mean there will be several candidates with a chance to win this race who will send supporters into neighborhoods knocking on doors and handing out leaflets at festivals. There will be some dueling press releases, but at the end of the campaign—a year from now—there will be a new state representative who will drop in the political sea known as the Missouri State Legislature, which is nothing more than a minor wave in the ocean of American politics.

Still, while presidential candidates are railing about grand policy proposals, many state legislative races are shaping up that will produce officeholders who are far more likely to have a direct impact on the business of insurance. The 44th District race in Missouri is one such race.

When the Kander-aligned blogger set his rhetorical sights on Ms. Coffman he wrote: “After at least two months of preparation for her campaign kick-off, she’s kicking it off with a fundraiser sponsored by … a lobbyist for a health insurance company famous for denying coverage to dying cancer patients. Hmmm.”

The damning representation of “the lobbyist,” who is well known and well liked in both Democratic and nonprofit circles in Kansas City, led to a two- or three-day series of vitriolic blog postings that I imagine Mr. Kander and his supporters had never initiated. Nevertheless, it is clear that Mr. Kander’s campaign thought that taking a shot at someone connected to the insurance industry was an easy way to score political points.

In Kansas City and throughout most of America, the political campaign season has arrived. And just as in the old song about the demise of a ship named after an insurance executive, “The Wreck of the Edmund Fitzgerald,” bad things seem to happen when “the winds of November come early.” In the case of the November 2008 election, the winds are wailing more than a year early.

As those winds whip through the thousands American precincts, even the most tenuous connection to the insurance industry seems to be a magnet for rhetorical objects flying at high speed.

We live in interesting times. *

The author
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 Cos. and then served as public affairs manager for the NAIC. He has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States and is an adjunct professor of political science at Avila University.