Public Policy Analysis & Opinion

Remain calm—all is well

NAIC’s public statements re-write history in the wake of Weatherford’s departure

By Kevin P. Hennosy

Pseudo-intellectuals will doubtlessly agree that American culture can be divided into two eras: Before-Animal House and After-Animal House. Whether one loves or hates the 1978 comedy, which was snubbed by the Academy of Motion Picture Arts and Sciences, the breadth of the cultural impact of the movie is hard to ignore. In words and visual manifestations, the movie contains countless cultural touchstones that people use to convey universal familiarity for the purpose of explaining odd or complex content or behavior. (“It’s like that scene in Animal House where…”)

So cast your mind back, or load up the DVD, and consider the scene near the end of Animal House where ROTC Cadet Chip Dillard, played by Kevin Bacon, tries to face down a thundering herd of frightened people responding to a chaotic attack on a homecoming parade charging down a sidewalk. Armed only with a not-so-convincing smile, Dillard says: “Remain calm. All is well!”

That scene came to mind when the NAIC lauded recent testimony delivered by New Jersey Banking and Insurance Commissioner Steven M. Goldman before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. The Garden State commissioner must have drawn the short straw.

The NAIC testimony was reminiscent of statements emanating from the old Soviet Politburo immediately following a change in the premiership. Intelligence officers and content analysis specialists never expected to learn much about reality from Politburo statements, but they could tell what version of reality was ascendant in the new leadership and therefore better understand who was actually in control of the nontransparent bureaucratic structure. These are important tools necessary to understand the NAIC as well.

According to the testimony, the NAIC has returned to a purist political theory where the states can do no wrong and the Feds can do nothing right. Those who do not agree with this purist view will be purged, and any facts that do not support the Party line will be ignored. The leaders in control of the NAIC, whoever those people or institutions actually are, want the world to know that people should remain calm; all is well.

Never mind that the cost of health insurance is rising by double-digits. Never mind that life insurers’ investment portfolios may be infected with real estate-backed instruments that are carried at par value for the purpose of regulatory reporting, but hold no market value. Never mind that even if there are 7,000 individual companies, they still march in lockstep to a handful of reinsurance companies that decide what will and will not be covered and have a controlling influence on product pricing.

Remain calm. All is well. Spin us another yarn.

Because Commissioner Goldman was delivering the testimony on the NAIC’s behalf, he should not be blamed for the poor quality of its content. NAIC testimony rarely reflects the thoughts or opinions of the commissioner selected by staff to deliver it. In this case, the NAIC testimony was devoid of familiarity with the historical record of insurance regulation. Instead of facts and critical analysis, the NAIC relied on fairy tales and catch phrases. For example:

“Having served as the front line of U.S. insurance regulation for over 150 years, State insurance officials have a record of consumer protection and industry oversight that is second to none. We take seriously our responsibility to ensure that the safety net of insurance is there when people need it most. We are a powerful advocate for insurance consumers and an objective regulator of the largest insurance market in the world, leveraging the strengths of local, accountable oversight with technology and collaboration to streamline regulatory efficiency.”

A history lesson for the NAIC

To the contrary, the history of state regulation tells of a story of cartel behavior designed to support the price of insurance against the weight of competition. Prior to the Supreme Court decision in U.S. v. South-Eastern Underwriters Association (1944), a formal system of private cartels governed the fire insurance sector, while an iron-clad system of interlocking boards and equity investments governed life insurance. When that court opinion applied Federal antitrust oversight to the insurance sector, the McCarran-Ferguson Act was passed in order to shield anticompetitive behaviors to the extent that the states used regulation to protect consumers from the most egregious damages of an anticompetitive market. States were supposed to review insurers’ products, prices and sales practices because the Congress considered it to be in the public interest to act in concert to create products, prices and limit who could sell insurance.

Since the passage of that act in 1945, the historical record demonstrates that state officials were far from advocates for consumer protection. A series of powerful congressional leaders with names like O’Mahoney, Proxmire, Hart, Metzenbaum, Brooks and Dingell had to bully state officials to live up to their regulatory charge under the McCarran-Ferguson Act.

And yet, in the absence of the discipline provided by historical fact, the NAIC testimony continued with what amounted to a rhetorical offering of magic beans:

“In addition to successfully protecting consumers, state insurance officials have proven to be adept stewards of a vibrant, competitive insurance marketplace,” according to the NAIC.

Of course, if you are a family or a small business trying to secure health insurance, the “market” may not look so vibrant or competitive. You may not feel too “protected” if you had a claim for property loss or business interruption in New Orleans and you were faced with the “choice” of settling for pennies on the dollar or rolling the proverbial dice on multi-year litigation. Providing consumer choice of that kind can really boost the bottom line and is the very kind of abuse that the drafters of McCarran-Ferguson wanted the states to regulate against.

In addition, even a layperson with a cursory understanding of the dismal science of Economics knows that the true consumer benefit of market competition is the delivery of goods and services at lower cost. Yet, Commissioner Goldman describes a very different circumstance in his testimony:

“The 7,000-plus companies in the United States have seen record profits, while still handling record claims in recent years, and we think the current state-based system has helped foster that competitive environment.”

And the NAIC provides further documentation in its 21st Edition of the Insurance Department Resources Report that competitive pressures may not be coming to bear on the insurance sector when premiums increased 11.5% between 2006 and 2007. Would not one expect competition to temper double-digit price increases?

This is not to say that competition is not fierce at the point of sale. Insurance producers face competitive pressures head on from each other and from alternative distribution methods that bear a strong resemblance to boiler-room sales tactics that are outlawed in the securities industry. Yet those pressures do not seem to weigh upon the corporate leadership.

If there really was material competition in the insurance sector, one would fully expect the price of insurance to be falling. In addition, it would be reasonable to expect that the number of competitors would be falling as competition attracted loyalty and fostered efficiency. In a competitive market, insurers would not fear the application of antitrust and fair trade enforcement to their sector.

However, none of these expectations associated with competitive markets can be observed in the insurance sector. According to the NAIC, the price of insurance is increasing and profits are increasing. The number of insurance companies licensed to do business has remained steady at roughly 7,000, although the NAIC is misrepresenting the facts when it infers that these “companies” are all competitors. A large number of the 7,000 firms belong to a much smaller number of holding companies and are created based on rating categories rather than to compete for business. Furthermore, the opposition of the vast number of insurers to application of federal OR state antitrust laws to the insurance sector seems to telegraph the existence of anticompetitive frameworks, particularly in commercial lines that are deregulated in the majority of states. The real growth in competing entities has come from the unregulated alternative markets, which once again seems to have little or no impact on the price of insurance offered by traditional licensed companies.

What was most notable about Commissioner Goldman’s testimony was its much softer endorsement of a proposed Office of Insurance Information within the Treasury Department. Earlier this year, the NAIC delivered testimony that strongly endorsed the creation of a central repository for insurance information at the federal level, and some observers have pointed to that testimony as the reason behind the departure of former NAIC Executive Vice President Cathy Weatherford.

The missing exec

In mid-August as this column is being written, senior trade association executives were still inquiring as to “the real reason” for Weatherford’s departure. Senior members of the NAIC believe that this search for the real reason is merely a canard designed to hide the fact that a small number of trade association executives pushed Weatherford out of her job after she had basically worked for the benefit of the insurance trades for a dozen years.

Other observers speculate that Weatherford’s departure could portend a financial scandal. The longer the NAIC remains quiet on the matter, the greater grows the groundswell of speculation over what caused Weatherford to leave.

In early August, a former insurance commissioner who remains close to the NAIC leadership but is not lobbying on behalf of any regulated entity (yes, it is possible to do that) spoke to Rough Notes on condition of anonymity. The former commissioner reported that there were ongoing “negotiations” with Weatherford that would facilitate her appearance at the NAIC convention scheduled for September.

According to that former commissioner, Weatherford was pushed from her post at the NAIC and was surprised when a delegation of commissioners informed her that her “services would no longer be needed.” This former commissioner believed that the negotiations would result in an agreement where Weatherford would appear at the meeting in return for a large severance payment while agreeing to keep quiet regarding her dismissal. The attempt to bring her to the convention to receive some kind of recognition of her service would be designed to remove some of the malodorous environment left in the wake of her departure.

In other words, the NAIC wants everyone to keep one thing in mind: Remain calm. All is well!

The author
Kevin P. Hennosy 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.