Public Policy Analysis & Opinion

Federal intrusion?

Dodd-Frank Act leaves McCarran-Ferguson framework intact and might actually implement it

By Kevin P. Hennosy

(At press time, the bill still had not been adopted into law, but was expected to receive approval.)

In the summer of 2010, Congress and the insur­ance sector locked eyes, and Congress blinked—or was that a wink? Or a wince? We will not really know until the regulatory agencies write the rules.

While most insurance trade groups issued grudging statements acknowledging the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the new regulatory framework does relatively little to address what Congress traditionally calls “the business of insurance.”

It’s not as if the cops raided the party. Congress took away one of the largest punch bowls, and the key to mom and dad’s liquor cabinet now is hidden in a new place. Just give them time—there will be another party.

According to a statement released by the House Financial Services Committee, the law addresses insurance in the following areas:

• Federal Insurance Office: The law creates the first-ever office in the federal government focused on insurance. The Office, as established in the Treasury, will gather information about the insurance industry, including access to affordable insurance products by minorities, low- and moderate-income persons and underserved communities. The Office will also monitor the insurance industry for systemic risk purposes.

• International Presence: The Office will serve as a uniform, national voice on insurance matters for the United States on the international stage.

• Surplus Lines and Reinsurance: The law streamlines regulation of surplus lines insurance and reinsurance through state-based reforms.

Just as it did when Congress passed McCarran-­Ferguson, the Independent Insurance Agents and Brokers of America (IIABA) appear to have played an important role in negotiating the tenets that shaped the insurance provisions of the Dodd-Frank Act.

On June 23, 2010, the IIABA released a statement from Charles Symington, Big “I” senior vice president of government affairs, wherein he commends the lead conference negotiators:

“The Big ‘I’ would like to commend Chairmen Barney Frank (D-Mass.) and Chris Dodd (D-Conn.), Ranking Members Spencer Bachus (R-Ala.) and Richard Shelby (R-Ala.), and the other members of the conference committee for agreeing to make two additional changes to Title V of the ‘Restoring American Financial Stability Act’ which would establish an insurance information office at the federal level with no regulatory authority. By properly defining those international insurance agreements covered by the act and providing for de novo review of preemp­tion decisions by the new Federal Insurance Office, the conferees have gone a long way to guard against the inappro­priate preemption of state insurance laws that have served to protect insurance consumers during the recent financial crisis. The conference commit­tee has made great strides in improving Title V so that it recognizes the impor­tance and effectiveness of state insurance regulation and we thank them for their hard work.”

While some consumer advocates have criticized the adoption of the House language, they really would not have been happy with the Senate version. The latter proposal was designed merely to preempt state laws, without necessarily replacing the state framework with a federal system. In short, the Senate proposal would have created an entity similar to the Office of Comptroller of the Currency, which runs political interference for national banks but does not seek to replace the state regulatory frameworks that it preempts.

In addition, and possibly more important, the law creates a new entity that could result in affirm­ative federal regulatory oversight of insurance.

The Financial Stability Oversight Council will consist of a group of federal financial supervisors, which holds the charge of monitoring and regulating financial institutions that present systemic risk to the financial sector. State banking and securities regulators will hold non-voting seats on the council.

It is interesting to note that while the statute assumes the participation in meetings by the non-voting members of the Council, the Council may exclude nonvoting members from its business in cases when “necessary to safeguard and promote the free exchange of confidential supervisory information.” Considering the many and sundry conflicts of interest brought to the table by the National Association of Insurance Commissioners (NAIC), the association’s representatives might need to leave a folding chair in the hallway outside the council’s meeting room.

Again, according to the House Financial Services Committee Statement, the Council will “have the ability to require nonbank financial companies that pose a risk to the financial stability of the United States to submit to supervision by the Federal Reserve.” Such an action requires a two-thirds vote of the serving members of the council, and the council chair.

Firewalls

Eleven years ago, groups like the American Insurance Association (AIA) and the American Council of Life Insurers (ACLI) encouraged and welcomed the repeal of the Glass-Steagall Act with rhetoric that stressed the integration of financial services. Now, as the Dodd-Frank Act seeks to re-apply a regulatory framework to America’s financial sector, both trade groups issued statements that stressed that insurance is different from other financial activities.

“Given the importance of these reforms, AIA will remain active to ensure that the unique nature of insurance is preserved through the bill’s final passage and into its implementation, said Leigh Ann Pusey, president and CEO of AIA.

Frank Keating of the ACLI goes even further:

“Throughout the legislation’s development, ACLI worked vigorously to explain our industry—and how it differs from banks and investment firms—to members of Congress and the administration. Many of our initial concerns were addressed. We appreciate the willingness of policymakers on Capitol Hill and in Treasury to listen to us and learn about the vital role life insurers play in the nation’s economy and in the financial protection of tens of millions of Americans.

“Still, the final legislation reflects a bank-centered approach to regulation that does not always mesh well with the life insurance industry, our existing regulatory structure and the way we address consumer needs.”

Anyone who sat through the many long hours of NAIC meetings has seen lobbyists and member companies drawn from the ranks of these two trade associations argue again and again that separating financial service sectors through statutory firewalls is both out of date and contrary to the public interest. Now that federal officials appear poised to re-regulate financials services, the AIA and the ACLI seem more than pleased to duck for cover behind any firewall they can find.

The NAIC

The NAIC chose not to weigh in on the Dodd-Frank Act at the time the negotiators agreed to the conference committee report. One can only speculate why the association of insurance regulators would remain quiet. Perhaps the state regulators were busy watching paint dry, or watching grass grow?

It appears that the NAIC declared victory in early June 2010, when, hiding behind the lobbying prowess of the IIABA, the NAIC was not legislated out of existence.

In a June 3 letter, NAIC cheered the fact that Congress would not press to establish a strong regulatory body in the form of an Office of Insurance ordained with regulatory authority:

“As you know, state regula­tion of insurance has worked extremely well for consumers during the current financial crisis, protecting policyholders from contagion risk and prohibiting insurance com­panies from engaging in the kinds of risks that crippled other parts of the financial sector. While insurance may not pose systemic risk, insurance companies may be affiliated with entities that do. Consequently, state law already provides broad authority to insurance commissioners to ‘wall off’ insurance subsidi­aries from the rest of a holding company. This authority is what protected AIG’s insurance policyholders from the insta­bility of the AIG holding company, and must not be altered or impeded by federal reform legislation. Indeed, it is this rationale—isolating stable and secure products from risk and speculation—that has motivated much of the financial reform debate.”

The NAIC’s arguments are ludicrous. First, the history of state insurance regulation is punctuated by one scandal after another. As recently as 1991, NAIC officers skinned their knees crawling into a meeting with the New York Federal Reserve Bank asking for a contingency plan to bail out the life insurance sector because life insurers were falling into insolvency like lemmings into the sea.

In addition, the NAIC appears to willfully mislead Congress and the public when it asserts that the recent financial crisis did not concern the life insurance sector. If any member of Congress wants to see a very uncomfortable insurance regulator, put an NAIC panel under oath and ask them how many life insurers would have been statutorily insolvent had insurance accounting required life insurers to carry bonds at market value rather than par value.

Furthermore, when the NAIC pretends that American International Group (AIG) was not primarily engaged in the business of insurance, the regulators’ association is telling tall tales.

Even if state regulators did not have primary regulatory responsi­bility for every affiliate of the AIG group, state officials had a well-defined responsibility under the Holding Company Systems Act to know what those affiliates were doing and to regulate in the public interest. No one, whether they work in a state or federal office can claim the moral high ground when it comes to AIG. The company was too big to regulate before it was too big to fail.

In even the most diplomatic terms, the state and federal government shared in the failure of AIG. Under the Holding Company Systems Act, state regulators hold the responsibility to know what all aspects of an insurance holding company’s activities are. If state regulators did not know what AIG was doing, then they were not doing their jobs. If they knew but did not call attention to the problem, they were part of the problem.

Contrary to the canards told by the NAIC, in reality, had the Federal Reserve not infused the shell of what used to be AIG with $123 billion in public money, that state-regulated entity would not exist—no matter how many times the NAIC chooses to repeat “the big lie.”

Consumer protection

The 800-pound gorilla in the room that no one seems to want to acknowl­edge when discussing the Dodd-Frank Act comes in the form of a new federal consumer protection agency. Most insurance lobbying groups are making declarative statements that assert that the Financial Consumer Protection Bureau will not have jurisdiction over insurance; however, the Dodd-Frank Act does not contain language to that end.

There is also reason to believe that the bureau will be very much involved in insurance oversight. The statement from the House Financial Services Committee says the bureau is able “to autonomously write rules for consumer protections governing all financial institutions—banks and non-banks—offering consumer financial services or products.”

At the very least, this new federal agency will receive complaints from the public concerning insurance issues. Even if the agency does not have specific authority over insur­ance, complaint data could be compiled and reported to state insurance departments or congressional committees.

A complaint submitted to state insurance departments from a federal agency will be more difficult to ignore or deflect than is so often the case for complaints received today from individual consumers.

Furthermore, with the complaints compiled and reported to congressional oversight committees, both the insur­ance sector and the state regulatory system could for the first time since the passage of McCarran-Ferguson receive the affirmative oversight that Congress intended.

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.