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Public Policy Analysis & Opinion This time it's serious Industry’s response to hurricane losses By Kevin P. Hennosy Forty years after the Summer of Love, insurance trade associations were out looking for political affection as they made the rounds at various convocations of state legislative officials. The courting under the summer moon paid off. As the kids headed back to school, the insurance sector tallied the yield of two resolutions expressing support for the McCarran-Ferguson Act, one from the National Conferences of State Legislatures (NCSL), the other from the National Conference of Insurance Legislators (NCOIL). The McCarran-Ferguson Act, Public Law 15 of 1945, subtitled an “an act to regulate the business of insurance,” empowers the states to regulate and tax the interstate commerce, contingent upon the states acting to use that authority. Federal regulation (in the form of antitrust law, Federal Trade Commission enforcement and any other act Congress specifically directed at insurance) is applicable to the business of insurance “to the extent that such business is not regulated by State Law.” The act also denies the contingency of state regulation to “any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.” The NCSL resolution asserts that The Insurance Industry Competition Act of 2007 (S. 681/H.R. 1081) will establish a “bifurcated regulatory scheme”; and that this “scheme as envisioned by S.681/H.R. 1081 would not make the insurance industry more competitive or more responsive to consumer concerns and would likely lead to higher premiums for policyholders and confusion for consumers.” The NCOIL Resolution expresses opposition to repealing legislation “on the grounds that it misinterprets the role of states in enforcing antitrust protections and would jeopardize insurer practices that promote available and affordable coverage; expose insurance markets to uncertainty and litigation; and create an environment that inadvertently disadvantages consumers most in need.” A broad spectrum of the insurance sector trade groups that represent agent, broker and carrier interests welcomed these expressions of support from the legislators’ associations: • The National Association of Professional Insurance Agents wrote both groups to say, “The federal oversight espoused by The Insurance Industry Competition Act would create confusing legal questions as to who really regulates the insurance industry. The bill would stifle open competition by insurers and exclude small to mid-size insurers from the market by creating an information barrier to entry, which would inevitably result in fewer choices for consumers.” • Independent Insurance Agents & Brokers of America (IIABA) CEO Robert A. Rusbuldt restated the association’s traditional support for the McCarran-Ferguson framework: “We believe the qualified application of federal antitrust law to this sector has served both the market and consumers well. Where marketplace anomalies exist, it is not due to the McCarran Act. In fact, without the Act, the situation would likely be exacerbated for consumers.” • National Association of Mutual Insurance Companies (NAMIC) Vice President for State and Regulatory Affairs Neil Alldredge congratulated NCOIL: “Such a proactive effort is an example of reasonable thinking rather than a knee-jerk reaction by those who seek to punish the insurance industry. NCOIL correctly understands the grave, unintended consequences that would befall insurance consumers as well as the insurance industry by this misguided legislation.” Now summer loves are great, but once school starts, eyes begin to wander, and in the realm of politics the same is true as election years approach. It is difficult to say who will stay true. Now the states can pretty much be trusted because their affection is bought and paid for—No, Hennosy is not saying that bribes were paid—but he recognizes the power of tax revenue. From June 5, 1945, the day that the Supreme Court ruled that insurance was interstate commerce and, therefore, constitutionally under federal jurisdiction, competent state officials have worried about losing the ability to tax insurance premiums. Without McCarran-Ferguson, there is nothing that assures the states’ ability to rake in that cash. The premium tax is free money for the states. Most of the revenue goes directly into state general funds where it can be spooned out by powerful legislators to favorite agencies and interests. Constituents do not understand that they are even paying a tax—how great is that? In addition, premium tax revenue is a spoonful of sugar that helps approving rate increases go down with state officials. As premiums increase, state tax revenues increase. You say you’re projecting a shortfall in the general revenue fund, but you ran on a no tax increase platform, Governor? No problem, just tell the insurance department to ink up the Rate Approved stamp. Magic happens. Elected state officials also benefit from another cash inflow generated by McCarran-Ferguson, measured by campaign contributions. If there were no McCarran-Ferguson Act assuring state jurisdiction over insurance, an entire cottage industry of government relations professionals would disappear from backwater towns known as state capitals. They would take their checkbooks with them, checkbooks that make contributions and buy oh-so-many drinks during legislative sessions. No, the insurance lobby is not alone in contributing and in convivial behavior, but without McCarran-Ferguson, campaign treasurers would whimper, and some bartenders would lose their homes and turn to a life of crime. All of this revenue coming to the states generally binds the bonds of loyalty. If there is a reason to fear disloyalty in the bonds of loyalty expressed in this summer’s resolutions, it is that the insurance sector has a reputation for a roaming eye. Of course, trade groups like the IIABA, PIA National and NAMIC are stalwarts of the state-based system. Groups, like the Property Casualty Insurance Association of America (PCI), flirt with federal regulation but generally stay at home with state officials, as long as the states do not regulate much. It is interesting to note that the PCI did not issue any love letters this summer when the NCOIL and NCSL resolutions passed. Then there are The Rogues. Groups like the American Insurance Association (AIA) and the Council of Insurance Agents and Brokers (CIAB) that maintain a flirtation with state regulators, but everyone knows that their true allegiance rests in Washington. Going back to the Civil War, the AIA’s predecessor organizations fought for federal charters and regulation by private cartel. Yet, the kind of federal oversight offered in The Insurance Industry Competition Act of 2007 is not the kind of oversight that the federal charter crowd would call a dream date. The bill would treat the insurance sector just like any other business, fostering competition through antitrust and fair trade oversight. In the Senate, Judiciary Committee Chairman Patrick Leahy (D-Vt.) has lined up a group of bi-partisan co-sponsors for the bill, most of whom have chips on their shoulders, including Senators Trent Lott (R-Miss.) and Mary Landreau (D-La.), who suffered property losses in Hurricane Katrina. The companion bill in the house is also sponsored by representatives whose districts continue to suffer due to storm losses and carriers’ claims and pricing policies. The House bill co-sponsors include: Gene Taylor (D-Miss.), Bobby Jindal (R-La.), Charlie Melancon (D-La.), Rodney Alexander (R-La.), Peter Defazio (D-Ore.), and Walter Jones (R-N.C.). Senator Leahy explained his reasoning behind proposing the bill in a statement released to journalists in February: “Federal oversight would provide confidence that the industry is not engaging in the most egregious forms of anticompetitive conduct—price fixing, agreements not to pay, and market allocations,” said Leahy. “Insurers may object to being subject to the same antitrust laws as everyone else, but if they are operating in an honest and appropriate way, they should have nothing to fear. American consumers and American businesses rely on insurance—it is a vital part of our economy—and they have the right to be confident that the cost of their insurance, and the decisions by their insurance carriers about which claims will be paid, reflect competitive market conditions, not collusive behavior. “It is my hope that this legislation will bring the benefits of competition to the insurance industry and to consumers. Too many consumers are paying too much for insurance due to the collusive atmosphere that exists in the insurance industry. This has become a particular problem along the Gulf Coast, where insurers have shared hurricane loss projections, which may result in double-digit premium increases for Gulf Coast homeowners,” stated Leahy. “I strongly urge members who are concerned about industry exemption from the antitrust laws and collusive insurance industry practices to support this important piece of legislation.” Senator Lott, who not only lost a home to the storm but has watched Mississippi Insurance Commissioner George Dale lose to a primary challenger after three decades in office, blasted the concept of an antitrust exemption for insurers: “One thing I learned coming out of Katrina is that the insurance industry is not subject to antitrust laws,” Senator Lott said. “I’ve looked at the history, and there’s no explanation for why that is—for why antitrust and price fixing in this industry are not covered by the federal government. Our legislation corrects this exception and applies antitrust restrictions to the insurance industry just as it is applied to most other corporations.” No matter what the carriers’ marketing and public relations departments want us to believe, insurers have done a great deal of damage to their public image through their response to the 2005 Gulf hurricanes. This decline in public image has morphed into a serious political problem on Capitol Hill. Among the factions of the industry that remain most strongly loyal to the state-based system, there exists a problem that could undermine their defense of McCarran-Ferguson: I do not think anyone has read the act in about 50 years. The act was written to allow insurers to engage in certain anticompetitive behaviors that were deemed to be in the public interest by Congress, as long as the states REGULATED that activity. One cannot defend the McCarran-Ferguson Act in a clear and convincing manner unless one defends BOTH the anticompetitive behaviors and regulation. Too often, the industry issues defenses that stress the competitive nature of McCarran and suggest that somehow it allows for deregulation. If insurance flourishes in a competitive market, then it should be subject to the same federal oversight as any other sector of interstate commerce. However, a strong case can be made that insurance is different and the public benefits from consistency in forms and validity of prices that are possible only through cooperative activity that should be regulated. Yes, there are problems and inefficiencies in insurance regulation that should be addressed. However, the calls for deregulation that have dominated debate over the past decade have undermined the credibility of insurance regulation and McCarran-Ferguson. Since 1945, and after years of debate and hearings, Congress trusted the states with regulatory authority over insurance. Congress made a limited and contingent loan of authority to the states. Press releases and testimony that tout “states’ rights” and “state prerogatives” are historically inaccurate and politically harmful. The same kind of documents that advocate for unregulated open competition shielded from antitrust law are either willfully misleading or woefully uninformed. Defend McCarran-Ferguson for what it is, or start retaining antitrust attorneys before the rush. * The author |
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