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March 28
14:34 2019

Public Policy Analysis & Opinion

By Kevin P. Hennosy


CFA advocates for regulatory reforms … but

“American drivers would see their annual premiums drop by $60 billion annually,” with the adoption of well-tested regulatory reforms, according to a report by the Consumer Federation of America (CFA). The complete report may be downloaded from the CFA website.

No, Virginia, you should not plan on spending your cut of the windfall. Nor should advocates for laissez-faire economic policy start to get nervous. No matter how one views American insurance regulation, neither school of thought should schedule victory parties nor brace for impact.

The CFA report provides real-world data that argues for auto insurance reform but, in the tradition, fails to provide a legal or political roadmap for adoption.

The CFA report provides real-world data that argues for auto insurance reform but, in the tradition, fails to provide a legal or political roadmap for adoption. Even those of us who welcome the CFA research findings—and many will not—may be disappointed in the group’s lack of understanding of how they could use the current system to force reform.


Whenever I hear of a CFA insurance-related proposal, I think of the Mugwumps. In 1884, a group of reform-oriented Republicans left their party to support the Democrat Grover Cleveland for president. Cleveland favored proposed federal civil service reform and conservative monetary policy.

For the balance of the 19th century, Mugwumps associated themselves through producing or sponsoring calls for government reform. Many of the most prominent Mugwumps lived on the proceeds of trust funds built with the booty of some ancestor’s piracy. Perhaps for that reason, the Mugwumps never gave up on the Theory of Wealth Supremacy.

Most of all, the Mugwumps generally proved unwilling to answer the question posed in the hallowed organizing hymn: “Which side are you on?”

The 19th century Mugwumps produced many reports, which often presented well-researched issues and policy proposals. Sometimes the reports led to debate or campaigns. Only rarely did they result in law, regulation, or public policy without the help of political organizations.

Still, the Mugwumps shunned “politics.” The haughty reformers claimed to stand above any partisan scrum and stayed above the fray of political organizing. They confused the concept of high-mindedness with the ability to walk with one’s nose high in the air. Mugwumps only asked for love, gratitude, and unshakable obedience to Wealth Supremacy.

Even if Mugwump candidates won an office, those officeholders proved ineffectual because they were unwilling to engage in the affirmative use of power through political horse-trading. Mugwumps put judges on the bench who would not do too much.


On February 11, 2019, CFA advocates J. Robert Hunter and Douglas Heller published the report and presented its findings at a press conference. The advocates explained how both consumers and auto insurance markets would benefit from affirmative and transparent regulation and pricing based on the risk of financial loss.

The CFA advocates call for reforms to auto insurance regulation based on the California model approved by voters in 1988. The consumer advocates point to the state’s record of low price inflation, carrier competition, and product quality as evidence that the California reforms worked. Furthermore, insurers doing business under the California regulatory framework outperform the national average in terms of profitability.

Before the 1988 initiative passed at the ballot box, California maintained an “open competition” system that eschewed regulation of insurance products and prices. The unregulated “market” produced outlandish price inflation and low product quality. This condition provided the political impetus that drove a call for renewed insurance regulation through the initiative process.

That Proposition 103 initiative passed after the political equivalent of a professional wrestling cage match featuring ghastly political campaign maneuvers that teachers never mention in a Problems of Democracy class. Opponents funded contrived consumer groups to oppose it. Both opponents and supporters of “Prop 103” worked to see additional “insurance reform” proposals added to the ballot to split voting blocs or cause tactical confusion. In short, the CFA-touted reforms went through the type of political snake pit where Mugwumps fear to tread.

The California model requires prior regulatory approval of auto insurance rates and prohibits carriers from using rates to recoup from consumers non-risk-related expenditures. In addition to the de jure California regulatory framework, the CFA advocates touted the “consumer protection ethic,” or corporate culture, resident in the Golden State’s insurance department.

The CFA bases its findings on a report that presents a comparative analysis of auto insurance pricing and insurance carrier profits under the most prominent regulatory models. The report recommends a regulatory framework that includes the following elements:

  • a “prior approval” approach to rate setting
  • incentivizing safe driving and loss reduction by requiring that premiums rely primarily on driving-related factors such as driving record and miles driven annually
  • preventing the pass-through to consumers of inefficient company costs, such as bloated executive salaries, fines and penalties, and lobbying expenses
  • support for consumer involvement in the rate-setting process
  • full transparency in the ratemaking process

Furthermore, the report recommends application of state antitrust laws to the business of insurance. California applies the state antitrust laws to insurance, and the state’s auto insurance market is the second least concentrated in the United States.


Now at this point in the column, many readers who work in the insurance sector have started to show signs of stress. In insurance circles, the term Prop 103 is still shorthand for a Hell-broth of disaster. In a quote borrowed from Ghostbusters, Prop 103 invites “human sacrifice, dogs and cats living together—mass hysteria!”

Oh, gentle readers from the business of insurance, fear not! The CFA insurance report will go nowhere that can do the status quo any damage. Like so many CFA insurance reports that came before it, this one is Dead on Arrival.

Yes, this assessment reflects a deeply cynical view concerning the use of science in the development of public policy. In addition, the evaluation recognizes that a powerful lobby would organize against any state not currently named California that tried to adopt the reforms recommended by CFA.

But, my friends, there is more! State governments hold a financial interest in the maintenance and expansion of high insurance prices. As the price of insurance increases, so does the state premium tax revenue.

Even if the majority of state officials were not fellow travelers at meetings of one or more of the insurance sector lobbying groups, the CFA proposed reforms would reduce revenue—unearmarked general revenue—in every state. Governors and legislative chairs will never admit to this, but every one of them enjoys the availability of insurance premium tax revenue.

State officials may express concern over the rising cost of auto insurance at “town hall meetings,” but at budget hearings at the State Capitol, a material reduction in the price of insurance will be greeted in a very different way.

Think about the premium tax revenue produced by the sale of insurance.

The premium tax rate averages just under 2% on a national basis, so a reduction in auto insurance premiums of $60 billion would result in a reduction in national state tax revenue of $120 million. Again, premium tax revenue is booked as legislators’ favorite category of income: general revenue—the pixie dust that makes legislators powerful.

So, even without considering the math behind the CFA findings, proposals that might reduce insurance premiums are received by state legislators as proposals to reduce premium tax revenue. What state official would reduce his or her access to this politically empowering pixie dust?


If this data proved useful in forcing a change to the system of auto insurance regulation in the United States, it would be litigated in the federal courts. And, thanks to the conservative shift in the federal courts, even that avenue for reform may be closing fast.

Several times during the press conference that introduced the report, J. Robert Hunter blustered about removing the “insurance industry’s federal antitrust exemption.” Et tu, Bobby?

It seems that J. Robert “Snipe” Hunter, the dean of insurance consumer advocates, producer of volumes of testimony before Congress and lesser venues (reportedly dating back to the Jackson Administration), might not have taken the time to read the McCarran-Ferguson Act (PL 15 of 1945). Either that or Mr. Hunter has some secret allegiance that compels him to parrot insurance carriers’ mischaracterized descriptions of the law and undermine the cause of affirmative regulation.

If Congress repealed the statute that purportedly establishes a “federal antitrust exemption,” then California’s Prop 103 becomes null and void. Without the limited and contingent delegation of authority over the business of insurance afforded by the McCarran-Ferguson Act, California has no jurisdictional claim over insurance regulation.

The reforms touted in the CFA report depend on McCarran-Ferguson. It is a limited transfer of regulatory authority because certain egregiously anticompetitive activities remain forbidden and subject to immediate federal enforcement action. The transfer is contingent because the statute makes clear that if any state fails to regulate any aspect of the business of insurance, then authority over those unregulated activities reverts to federal jurisdiction.

If Congress and the Roosevelt White House wanted to pass an insurance antitrust exemption, those officials had several bills from which to choose. Those exemption bills were rejected by the White House, which worked with independent agents, state regulators and a select band of insurance executives to draft what became Public Law 15 of 1945—over the objections of Senators Pat McCarran and Homer Ferguson.

If Congress repealed McCarran-Ferguson, federal antitrust law enforcement by the antitrust division of the Department of Justice and the Federal Trade Commission would follow, but that would not replace the California framework trumpeted by  the CFA report. Hope that works out for you, Bob.

Use PL 15

If consumer advocates want to improve insurance regulation, they will be more successful by understanding the McCarran-Ferguson Act as a regulatory statute. Yes, the law’s implementation is corrupted, but just echoing the corrupted definitions does not help matters.

Since the 1970s, consumer groups have allowed insurer trade groups to define McCarran-Ferguson and then attacked that misrepresentation. That form of Mugwump snipe hunting failed long ago.

As regular readers of this column know, the McCarran-Ferguson Act framework provides a limited and contingent transfer of Congressional authority over the business of insurance to the several states—and only to the extent that the states use that authority. Congress retains direct jurisdiction over any aspect of the business of insurance that is not regulated by state law; the bill drafters clearly believed that states lose any claim over unregulated aspects of insurance.

What if advocates for CFA weaponized its library of reports in support of aggressive lawyers bringing federal antitrust actions in state jurisdictions that deregulated insurance in the past 40 years? Let the briefs reflect the data contained in the CFA reports, legislative history, the presidential signing statement, and other archival sources. Use the provisions of McCarran-Ferguson to challenge those claims of jurisdiction based on federal statute and not just repeat tired applause lines.

Yes, a lot can go wrong in federal court. In addition, over the past 40 years groups like the Orwellian-named “Federalist Society” have populated the court with defenders of oligarchy. And shadowy political groups like The Fellowship, with which Mr. Hunter is more than a little familiar, use the cloak of religious practice to politically organize for senators, who give consent to those Federalist Society judges—judges who might not read statues or briefs before ruling in a case. Mistakes can be made.

Nevertheless, if a federal court ruled that the business of insurance was not “regulated by state law” in even one line of business in one state, it would get the attention of state officials across the country. All of a sudden, state legislators, governors, and insurance commissioners might want to talk about what affirmative insurance regulation looks like. At that point, CFA will have a few more reports to bring to the table.

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.

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