Public Policy Analysis & Opinion
Once more into the breach
The Treasury Department receives comments on insurance regulation
By Kevin P. Hennosy
The traditional defenders of the state-based insurance regulatory system remain poised at the legislative barricades but their fervor seems to be lacking. Two recent letters submitted to U.S. Treasury officials by insurance trade groups try to defend state regulation, while advocating deregulation.
In a November 16, 2007, letter to the Department of the Treasury, the Independent Insurance Agents & Brokers of America (IIABA) acknowledged the need for “a vital but limited federal role” in insurance regulation.
No significant alteration of that system has passed Congress without the constructive participation of the IIABA in the last century. The IIABA restated its historical support for state-based insurance regulation but discussed where federal action could make regulation more uniform and efficient. The letter appears to offer a new opening with the Democratic Congress to discuss a restructur-ing of the state regulatory system. Yet, the Big “I” did not take a further step and outline what a “uniform and efficient” system might look like. Instead, the letter describes what it should not look like.
The IIABA’s use of the term “vital but limited federal role” is troubling. The term demonstrates either an essential misunderstanding of American government or a willful spinning of yarns for political purposes. If the IIABA intends to play its traditional constructive role, it will need to adopt a more accurate outlook or transparent approach.
From a constitutional perspective, insurance is a federal concern. In 1944, the U.S. Supreme Court ruled that insurance is interstate commerce. The Constitution delegates jurisdiction over interstate commerce to the Congress, which delegated the authority to regulate insurance to the states subject to state action and congressional oversight. That said, it is more accurate to say that the states hold a “vital but limited” role in the regulation of insurance.
Congress delegated jurisdiction to the states for the purpose of regulating insurance. Regulation was the sole reason that Congress did not simply remain silent following the 1944 Supreme Court decision in U.S. v. South-Eastern Underwriters Association, which when applied would have treated insurance like any other sector of interstate commerce. Congress, working with the Roosevelt Administration, drafted The McCarran-Ferguson Act of 1945 in order to treat insurance in a different way than other sectors. The act, which carries the subtitle “an act to regulate the business of insurance,” stayed the application of federal antitrust law and FTC oversight “to the extent that the business of insurance is regulated by state law.”
The IIABA letter acknowledges that “the current state system of insurance regulation does have significant strengths—particularly in the area of consumer protection—and is a system worth streamlining and making more efficient and effective for consumers and the industry.” The IIABA letter outlines the following strengths in the state-based regulatory framework:
One of the primary goals of insurance regulation is consumer protection. When an insured event occurs, consumers often find themselves in a crisis that requires a quick and efficient resolution. In addition, the purchaser of an insurance policy enters into a complex contractual relationship with a contingent promise of future performance. Unlike banking and securities, insurance policies are inextricably bound to the separate legal systems of each state, and the policies themselves are contracts written and interpreted under the laws of each state, establishing the rights and responsibilities of insurers, agents, policyholders, and claimants. State officials are uniquely positioned to respond to and resolve issues and problems that may arise under the applicable state laws and regulations.
Congress passed The McCarran-Ferguson Act with the aim of fostering proactive regulation and consumer protections, rather than forcing consumers or federal agencies to seek corrective remedies in the courts.
This is not to say that insurance regulation is not inefficient or in need of improvement; however, let’s consider the nature and history of the regulatory framework. If an interstate commercial interest seeks to extend a “contingent promise of future performance” across separate jurisdictions via contracts written and interpreted under state law and involving multiple actors, one should pretty much kiss the concept of efficiency goodbye. In addition, if most of the actors involved in that transaction retain lobbyists charged with seeking a competitive edge for one interest or another, and give those lobbyists 60 years to work their magic, then efficiency will suffer further.
As result of these competing, well-represented interests, most state insurance codes and regulatory registries have become a compellation of favors and special treatment. The insurance sectors’ own lobbying prowess is often the cause of compliance headaches.
Uniformity in insurance regulation is greatest in the area of solvency regulation. As the IIABA letter explains:
State regulators protect policyholders’ interests by requiring insurers to meet certain financial standards and to act prudently in managing their affairs in order to mitigate the risk of insurer insolvency. States have developed an effective accreditation system for financial regulation that is built on the concept of domiciliary deference (the state where the insurer is domiciled takes the lead role). When insolvencies occur, the state guaranty fund system is employed as a safety net—further protecting consumers. As a result, state insurance regulation gets high marks for the financial regulation of insurance underwriters.
What the letter does not say is how congressional action brought about that uniformity. The National Association of Insurance Commissioners (NAIC) Financial Regulation Standards and Accreditation Program gained national prominence in direct response to contentious hearings conducted by Representative John Dingell nearly 20 years ago. The state guaranty fund system came about in response to pressure by Senator Proxmire in the 1960s and Representative Dingell in the early 1990s.
Under a discussion of problems with the state-based system of insurance regulation, the IIABA recognizes that Congress could play an affirmative and effective role:
There is a desperate need for a common-sense solution and states may not be able to resolve these problems on their own. As a result, we believe limited federal legislative action is necessary to help reform the insurance regulatory system.
The reference to domiciliary deference is an interesting one. From a layman’s viewpoint, the concept of domiciliary deference runs counter to the Supreme Court decision in FTC v. Travelers Health, where the Court opined that one state could not regulate on behalf of another. While this reference sneaks through in the discussion of uniformity in solvency oversight, it should be noted that the IIABA does acknowledge that “single state regulation” in the area of reinsurance would require Congressional action. Some trade groups and insurance regulators have argued that this end could be achieved through the NAIC, which does not seem practical after an historical review of case law.
The IIABA letter raises several instances where Congress might act to improve state-based systems:
For life products, federal legislation could build upon the National Association of Insurance Commissioner’s interstate compact for approval of life, disability, and long-term care products. For property/casualty products, targeted legislation could facilitate a coordinated electronic system for nationwide single point of filing, establish common filing nomenclature to reduce unnecessary forms filings and deviations, eliminate all unpublished desk-drawer rules, and expedite review of forms through established and enforceable time deadlines.
This suggestion by the IIABA is long overdue. Congress should have been involved in the creation of the compact from the very beginning. Congress should launch an examina-tion of the NAIC-sponsored interstate compact commission now that it is acting in a regulatory role. Once again, the Supreme Court opined in the FTC v. Travelers Health case that no jurisdiction provided to the states by the McCarran-Ferguson Act be transferred to any private entity.
The compact commission that is conducting regulatory activities on behalf of member states is organized as a corporation under Delaware laws. As such, it has been argued that the commission is not subject to public record or open meeting laws of any individual jurisdiction. Even the argument that the commission is an instrumentality of the states falls flat when one sees that in the McCarran-Ferguson Act the transfer of authority is specifically limited to states and territories.
The letter submitted to the Treasury Department by the National Association of Mutual Insurance Companies (NAMIC) adopted a more strident voice in calling for radical change to insurance regulation, or more precisely deregulation.
The mutual insurers have chafed under the private regulation of regional fire insurance cartels that existed prior to the SEUA case, and they chafe under state regulation of prices and products today. The mutuals’ ability to ignore market driven rates of return demanded by investors, and the sector’s general reliance on low-commission captive agents keeps the sector’s costs lower than stock companies. Mutual companies have historically enjoyed an advantage in price competition.
Charles M. Chamness, NAMIC’s president and CEO, wrote: “Current inefficiencies in the insurance market-place are driven by excessive rate and form regulation, which hamper competitive pricing, inhibit product and service innovation, and delay product delivery. Consistency, while desirable and cost effective, will not in and of itself lessen the marketplace inefficiencies resulting from regulatory models that do not uphold competitive economic principles.”
Of course, under competitive market principles, a deregulated property/casualty sector should fully expect to comply with antitrust law. Certainly that should be the case if McCarran-Ferguson is not amended or repealed. Yet it has never been clear to me whether those advocates of deregulation really want to comply with antitrust law. I have always gotten the feeling that the big mutual companies want to have their cake and eat it too.
Certainly, over the last decade there has been an active lobbying effort carried on in most if not all state legislatures to deregulate rates and forms without concern for the potential application of antitrust law. Three generations after The McCarran-Ferguson Act became the law of the land, a legend and lore has grown up around insurance trade associations that deregulation is possible—while still remaining exempt from federal antitrust law and Federal Trade Commission (FTC) oversight. The act actually provides for the direct application of antitrust law and FTC enforcement in deregulated areas. To pretend otherwise is simply unrealistic and invites the mother of all class action lawsuits.
Both the IIABA and NAMIC letters express support for the concepts of “Federal Tools” legislation. This approach calls for the application of federal statutory leverage to bring about more uniformity in the states—but there is little consensus on what that regulatory standard should be. Some insurance interests simply want to force the states to delete wide swaths or rules from the books. Let the buyer beware.
It is highly unlikely that the IIABA would ever accept that kind of market framework—or what professional wrestling might call a cage match. The IIABA has a long history of advocating to preserve market regulation, including efforts to rein in the Treasury Department’s Office of Comptroller of the Currency in its efforts to preempt state fair trade laws and regulations on behalf of national banks. These state laws and regulations protect both consumers and the local agent’s ability to compete for business with national financial interests.
The IIABA letter also expresses opposition to proposed legislation to create an Optional Federal Charter (OFC) for insurers. Once again, the gist of the IIABA argument focuses on the ability of local producers to compete and the need to preserve state laws and regulation that govern fair trade practices. Most observers believe that the OFC insurers would operate in a much less regulated market than state regulated companies, which at the very least would cause confusion in the marketplace.
Especially troublesome to IIABA is the fact that a federal insurance charter would not be at all optional for agents. Agents representing clients with policies regulated at the federal and state level would be forced to understand both regulatory systems and deal with the federal government, even if an agent wanted to remain licensed only in a single state.
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 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. 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.