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Public Policy Analysis & Opinion
Bear flag republic versus the
Islamic republic of Iran
California commissioner defers to capitalism over national security issues
By Kevin P. Hennosy
Under the United States Constitution, jurisdiction over interstate commerce and foreign affairs rests with the federal government—with the notable exception of when either activity concerns insurance. This anomaly in the application of the basic tenets of American federalism, where the peoples’ national interests rest with the national government, results in some unusual situations. Take for example, the current conflict being (lethargically) waged by the California insurance commissioner against the Islamic Republic of Iran.
Let us first remember that the federalist framers of the Constitution reserved regulation of interstate commerce and foreign policy to the national government. The framers acted on the experience of the Articles of Confederation, which did not restrict the several states’ parochial desires to seek advantages in commerce and foreign policy. The Articles of Confederation failed and the Constitutional Convention rejected the concept of compact federalism among sovereign states.
Aliens and trail mix
This inconsistency in the application of the Constitution makes for some interesting manifestations from time to time. For example, there is the quaint tradition practiced among insurance regulators to refer to insurers domiciled in other state jurisdictions as “foreign.” This unconventional word usage presents regulators with a problem: How does one refer to companies domiciled in “foreign” countries? The answer rests in another unconventional usage. Regulators refer to insurers from overseas as “alien,” as if they were from another planet.
In the 1980s and 1990s, at the National Association of Insurance Commissioners (NAIC), the application of the term “alien” to certain convention attendees resulted in the formation of an unofficial society. A group of attendees who hailed from Great Britain and Burmuda congregated to discuss and debate issues of the day—and often consume adult beverages.
Most of these “aliens” were nominally journalists for the purpose of qualifying for a fee waiver; however, it was not uncommon to see them negotiating reinsurance treaties when they were not “filing stories.” The group usually convened at whatever drinking establishment was nearest to the NAIC convention and boisterously called itself “The Alien Bar Association.”
Of course, as noted in previous editions of this column, state insurance regulation’s odd responsibility for foreign affairs results in unique international travel opportunities for second-layer state officials. Senior NAIC staff have used the promise of international travel for insurance regulators to encourage the officials to follow the wishes of association management.
In addition, long before South Carolina Governor Mark Sanford created the euphemistic meaning of “hiking the Appalachian Trail” to describe clandestine, overseas travel for immoral purposes, a former South Carolina insurance commissioner was “travelling on NAIC business” when, on at least one occasion, his overseas travel was unethically funded by laundering insurer funds through NAIC accounts.
For all the opportunities for drinking and “trail hiking” that international activities afford insurance regulators, there are times when regulators engage in serious levels of international activity. For example, when the Martin Frankel scandal broke, Missouri insurance regulators filed suit against a sovereign entity commonly referred to as “The Vatican,” because of the Vatican Bank’s involvment in Frankel’s finances.
Revolutionary
A real issue of international importance is on the agenda of both the federal government and the California Insurance Department. It concerns the Islamic Republic of Iran and its nuclear ambitions.
During a trip to Saudi Arabia in February, U.S. Secretary of State Hillary Clinton expressed hope that Iran’s mainstream leaders can recapture authority from the country’s Islamic Revolutionary Guards Corps that she said threatens to take the country toward a military dictatorship.
On February 10, the U.S. Treasury Department intensified sanctions first levied in 2007 against the Revolutionary Guard’s engineering arm. Treasury officials extended sanctions to cover four subsidiaries of Khatam al-Anbiya Construction: Fater Engineering Institute, Imensazen Consultant Engineers Institute, Makin Institute and Rahab Institute.
“As the [Iran Revolutionary Guard Corps] consolidates control over broad swaths of the Iranian economy, displacing ordinary Iranian businessmen in favor of a select group of insiders, it is hiding behind companies like Khatam al-Anbiya and its affiliates to maintain vital ties to the outside world,” Under Secretary for Terrorism and Financial Intelligence Stuart Levey said when the new sanctions were announced, according to a published report in The Hill newspaper.
The United States and several international organizations continue to seek ways to deny funding to the Iranian nuclear program. A major concern centers on the use of financial and commercial intermediaries that provide indirect support to the Iranian program, which undermine sanction regimes.
Tough talk
In late June 2009, the California Insurance Department launched an investigation into insurer investments in “state sponsors of terrorism.” A California law prohibits insurers who operate in the Golden State from investing in countries, like Iran, that the U.S. State Department has identified as state sponsors of terrorism.
Enforcement of this law should augment the efforts of the United States, the European Union and the majority of the international community to deny funding to the Iranians’ clandestine efforts to undermine nuclear nonproliferation agreements.
On June 29, 2009, Commissioner Steve Poizner, who is also a candidate for the Republican gubernatorial nomination, announced:
“State law prohibits California insurance companies from investing in countries designated as state sponsors of terrorism. I have directed California insurers to divest of Iranian government holdings and ordered a survey of these insurance companies to ensure compliance with the law. Additionally, I am requiring all insurance companies that do business in California to disclose what, if any, indirect investments they have in Iran.”
Furthermore, the commissioner said, “Specifically, I will require each insurer to report all investments they have with companies that do business with the defense, nuclear, petroleum, natural gas, or banking sectors of the Iranian economy as of March 31, 2009.”
The timing of the announcement reeked of political considerations. News reports were carrying horror stories related to a brutal government crackdown on political liberties in Iran following a tainted national election. Furthermore, there is an active and well-organized Iranian-American voting bloc in California.
In December 2009, the California Insurance Department announced that the insurance sector had cooperated with the department’s investigation by providing necessary data.
At that time, the Department said it was unaware of any insurer operating in California that held direct investments in Iran; however, it reported that insurers held “billions of dollars” in indirect investments in Iranian “oil, natural gas, nuclear and defense sectors.”
What is even more disturbing is that the insurance sector’s investments in the sanctioned sectors actually grew in 2008 and the first quarter of 2009. According to the California Insurance Department, insurers acquired $1.8 billion in Iran-related investments in 2008 and $2.4 billion during the first quarter of 2009.
Submissive soft peddle
On February 10, 2010, the California commissioner announced a far different approach to enforcement than he forshadowed in his June 29, 2009, announcement. Rather than ordering California companies to comply with the law that in the commissioner’s words “prohibits California insurance companies from investing in countries designated as state sponsors of terrorism,” he would ask insurers not to invest in 50 companies that do business in Iranian oil, gas, nuclear or defense sectors.
In addition, the commissioner soft peddled his previous position on forcing companies to divest their holdings. If an insurer decided to retain its indirect investment in Iran through investments in one or more of the 50 blacklisted companies, Poisner would simply negotiate with the noncompliant insurer and the investments will no longer be recognized on its financial statements in California.
In other words, insurers that do business in California and seek to profit from the research, development and construction of weapons of mass destruction by a rogue state led by a man of questionable mental stability may continue to do so—they just cannot claim the investment on their annual financial statement in California.
Rather than lift the Certificates of Authority of those insurers that seek to profit as Merchants of Death in Iran, Commissioner Poisner weakened his stance and adopted a see-no-evil policy on Iranian investments. Furthermore, Poisner’s policy allows insurers to keep the investments where the Iranian Revolutionary Guard can get the most use out of the money, if the insurers so choose.
At this point in the story, it becomes very unclear how the Iranians or war profiteering insurance companies may suffer harm through this regulatory action.
Rather than try to dry up the flow of insurer investment dollars heading to the Iran defense program, the California Insurance Department seems to want to downplay the power of this revenue stream. The Department’s analysis of insurers’ investment portfolios found approximately $6 billion invested in 50 companies. Assuming that the 50 companies are the only investment vessels carrying cash to the Iranian bomb makers, the insurance department stresses that $6 billion is a relatively small amount of money: “Iran-related investments accounts for only 0.15% of the total estimated $4 trillion in investments by insurance companies licensed to do business in California.”
Yet, as a citizen of the world who conceivably could face incineration by an Iranian nuclear device, one might look at the $6 billion from another perspective: How much Iranian research, development, and construction of weapons of mass destruction can $6 billion buy?
Changing the subject
In his February 10 statement, Commissioner Poisner acted as if the only public policy concern behind the investment prohibition was “protecting California policyholders from risky Iran-related investments.” Like the Wizard of Oz, the commissioner seems to say, “Pay no attention to the $6 billion behind the curtain being readied for transfer to a state sponsor of terrorism.”
“The deteriorating situation in Iran only underscores the need to take action to ensure that insurance company portfolios are not at risk from Iran-related holdings,” said Commissioner Poizner. “After careful research and consultation, we have compiled a list of 50 companies that are doing business with the Iranian oil and natural gas, nuclear, and defense sectors. Those investments are subject to increased financial risk and insurers should avoid future investments in these 50 Iran-related companies.”
Contrary to the focus of the commissioner’s statement, the California legislature passed the law in order to deny state sponsors of terrorism the benefit of insurer investment funds. Protection of the insurers’ investment portfolios from political or economic risk of loss was at best an afterthought concocted in the insurance department.
Please don’t fund WMDs
What is clear is that the commissioner did not have the intestinal fortitude to get tough with insurers that are even indirectly funding the Iranian arms program.
The commissioner even described his submissive approach in the face of companies that appear to be clearly in defiance of the statutory prohibition against investments in state sponsors of terrorism. The insurance department issued a statement that says: “Two insurance companies—one a major health insurer, the other a major personal lines carrier—have stepped forward and agreed to divest Iran-related investments. These companies have asked the department not to reveal their identities. Negotiations continue with several other companies that have initiated discussions with the department on voluntary divestment.”
In other words, rather than publicly lifting the Certificate of Authority from insurance companies that seek to profit from Iran’s rogue nuclear program, Commissioner Poisner will secretly ask insurers not to fund efforts that result in the creation of weapons of mass destruction that could be used against the United States, our armed forces, or our allies.
Protect reputations
The commissioner’s February statement suggests that it is important to protect the reputations and stock prices of corporations that at one time would have earned the name “War Profiteers.”
The statement quotes a consultant, whose role in this sordid drama is not clearly defined but who seems to be aligned with the insurance department:
“Investments in companies with certain ties to Iran encounter special reputational risks that can have an impact on share value, often in a manner that is asymmetric to the actual business activity in that country,” said Roger Robinson, CEO of RWR Advisory Group, a Washington D.C.-based research and consulting firm that specializes in the assessment and management of global security risk.
Whose side are they on?
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.
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