Main Street insurance agents hope it is a good omen that the unveiling of the National Insurance Consumer Protection Act (H.R. 1880) by Reps. Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) occurred on the day after April Fools' Day 2009. Perhaps the tiresome annual ritual of pushing for insurance deregulation won't be taken seriously in Congress, especially because greater deregulation is the opposite of current sentiment in the face of the financial meltdown. Unfortunately, this bill is not a joke. Similar to last year, House Financial Services Committee Chairman Barney Frank (D-Mass.) announced a series of hearings to examine whether an optional federal charter for insurance companies is needed. Rep. Frank already has stated that his yet-to-be-introduced bill to create a systemic risk regulator to monitor all risk in the U.S. financial system will have a mandate to cover large insurance companies. Still undetermined is how this would be addressed, specifically as it relates to the state insurance regulatory system. We hope that having hearings on the Royce-Bean proposal simply represents a desire to give it an airing and will not detract from concentrating reforms where they are really needed: in banking, securities and capital markets. The 2009 version of the "let's deregulate insurance" bill goes beyond simply enabling a so-called "optional" federal charter. The preamble of the National Insurance Consumer Protection Act makes clear that this latest version is more ambitious: "To establish a system of regulation and supervision for insurers, insurance agencies, and insurance producers chartered, or licensed under Federal law that ensures the stability and financial integrity of those insurers, agencies, and producers and that protects policyholders and other consumers served by such insurers, agencies, or producers." H.R. 1880 is more expansive than previous unsuccessful OFC bills. While under terms of this new bill, states maintain responsibility for regulating state-licensed insurers, agencies and producers, and an entire new class of "national" insurers, agencies and producers would be established. These come under a national federal regulatory structure that would exist separately from state-chartered and licensed entities and producers, and presumably apart from established state insurance law. The bill provides for the appointment of a National Insurance Commissioner overseeing a National Insurance Office. It would mandate that a physical National Insurance Office be opened in all 50 states. It would empower the National Insurance Commissioner to set up self-regulatory organizations and empower these organizations to carry out the functions of the Act. It would grant immunity to any "national insurer, national insurance agency, or national insurance producer" from "any form of licensing, examination, reporting, regulation, or supervision by a State." The new measure also would create a National Insurance Guaranty Corp. Insurers that opt for federal oversight would pay into it, as well as into the guaranty fund of any state in which it does business. A reading of the bill clearly reveals its intent: to drive a stake through the heart of the state-based insurance regulatory system. In its place, it would set up a national system of self-regulation exempt from the existing state system of insurance regulation. In short, H.R. 1880 is a federal insurance deregulation bill. Built on a faulty premise
That insurance deregulation advocates are again attempting to advance their agenda even as the general sentiment has switched to more, rather than less regulation, should come as no surprise. Billions of dollars are at stake. Those who stand to benefit from such a change hope to piggy-back their agenda onto calls for a financial systemic regulator. But their strategy depends upon positioning H.R. 1880 as a reform measure that would strengthen insurance oversight when in reality, it is a deregulation bill that would weaken insurance oversight. Making that connection is a bridge spanning way too far. It is built on the twin premise that federal regulation is superior to state regulation and that state regulation failed while federal regulation succeeded, exactly the opposite of what happened. It requires convincing people that the AIG bailout was about AIG's insurance operations, when it was not. It requires that a federal deregulation bill be sold as one that strengthens insurance regulation, when in reality it would greatly weaken it. Fortunately, there appears to be sufficient opposition to H.R. 1880 to make its passage unlikely. While the American Insurance Assn., the American Council of Life Insurers and the Financial Services Roundtable are on board as supporters, opponents are newly galvanized and their message is getting out to a greater degree than in previous years, when opponents were successful. Effective opposition to H.R. 1880
The Property Casualty Insurers of America (PCI) has been critical of H.R. 1880--especially in expressing apprehension that under such a federal system, the insurance industry's reserves could end up being used to pay for losses in the banking and securities sectors. The National Assn. of Insurance Commissioners (NAIC), having recovered from its institutional laryngitis of recent years with the arrival of new CEO Terri Vaughan, is now mounting a very effective campaign against the bill, as is the National Assn. of Mutual Insurance Cos. Of course, Main Street agents never wavered in their opposition. The NAIC's efforts are particularly effective. Along with Vaughan, individual commissioners have been testifying before Congress, giving speeches and writing opinion articles. Acccording to NAIC President Roger Sevigny, H.R. 1880 is "aimed at stripping the states of insurance oversight authority and denying consumers of the time-tested protections that regulatory power provides. Akin to letting the fox guard the henhouse, this bill would essentially dismantle existing state-based consumer protections." Another message that is finally getting out: AIG is not an insurance company. It is a global financial conglomerate that experienced massive losses due to bets on naked credit default swaps by one unit--AIG Financial Products--which was supervised by the federal Office of Thrift Supervision (and not supervised well, according to an admission by the OTS itself). The 71 insurance units of AIG remain solvent and strong because they were regulated by the states. This battle for public perception has led to countless articles in influential publications, including a recent column in the business section of the New York Times, which accurately assessed the situation, put AIG in the proper context and concluded that Congress should not "hand sweeping authority to discredited federal regulators" and that "state insurance oversight may not be ideal, but for now it appears preferable to the alternative."
That insurance deregulation advocates are again attempting to advance their agenda even as the general sentiment has switched to more, rather than less regulation, should come as no surprise. Billions of dollars are at stake. Those who stand to benefit from such a change hope to piggy-back their agenda onto calls for a financial systemic regulator. But their strategy depends upon positioning H.R. 1880 as a reform measure that would strengthen insurance oversight when in reality, it is a deregulation bill that would weaken insurance oversight. Making that connection is a bridge spanning way too far. It is built on the twin premise that federal regulation is superior to state regulation and that state regulation failed while federal regulation succeeded, exactly the opposite of what happened. It requires convincing people that the AIG bailout was about AIG's insurance operations, when it was not. It requires that a federal deregulation bill be sold as one that strengthens insurance regulation, when in reality it would greatly weaken it. Fortunately, there appears to be sufficient opposition to H.R. 1880 to make its passage unlikely. While the American Insurance Assn., the American Council of Life Insurers and the Financial Services Roundtable are on board as supporters, opponents are newly galvanized and their message is getting out to a greater degree than in previous years, when opponents were successful. Effective opposition to H.R. 1880
The Property Casualty Insurers of America (PCI) has been critical of H.R. 1880--especially in expressing apprehension that under such a federal system, the insurance industry's reserves could end up being used to pay for losses in the banking and securities sectors. The National Assn. of Insurance Commissioners (NAIC), having recovered from its institutional laryngitis of recent years with the arrival of new CEO Terri Vaughan, is now mounting a very effective campaign against the bill, as is the National Assn. of Mutual Insurance Cos. Of course, Main Street agents never wavered in their opposition. The NAIC's efforts are particularly effective. Along with Vaughan, individual commissioners have been testifying before Congress, giving speeches and writing opinion articles. Acccording to NAIC President Roger Sevigny, H.R. 1880 is "aimed at stripping the states of insurance oversight authority and denying consumers of the time-tested protections that regulatory power provides. Akin to letting the fox guard the henhouse, this bill would essentially dismantle existing state-based consumer protections." Another message that is finally getting out: AIG is not an insurance company. It is a global financial conglomerate that experienced massive losses due to bets on naked credit default swaps by one unit--AIG Financial Products--which was supervised by the federal Office of Thrift Supervision (and not supervised well, according to an admission by the OTS itself). The 71 insurance units of AIG remain solvent and strong because they were regulated by the states. This battle for public perception has led to countless articles in influential publications, including a recent column in the business section of the New York Times, which accurately assessed the situation, put AIG in the proper context and concluded that Congress should not "hand sweeping authority to discredited federal regulators" and that "state insurance oversight may not be ideal, but for now it appears preferable to the alternative."
A dangerous sideshow
In the end, another debate on an insurance deregulation bill such as the one put forth by Reps. Royce and Bean is a sideshow--a dangerous one, but a sideshow nonetheless--to the main event. Give H.R. 1880 a perfunctory hearing, have a debate on it, then put it aside and move on to the serious business of dealing with systemic risk. And make sure that state regulators, who succeeded where federal regulators failed, continue to have full responsibility for the insurance sector under any proposal that addresses systemic risk.
What we are seeing with H.R. 1880 is the last stand of the true believers in the total deregulation of insurance. But their time has come and gone. The regulatory pendulum that had been swinging toward a complete laissez-faire policy since 1981 is now headed back in the other direction. However, that hasn't stopped the "big boys" of financial services from making one last, desperate attempt to create for themselves the unregulated paradise of total market domination of which they have dreamt for many decades. But because that dream turned into a nightmare for so many due to the financial meltdown, it is a dream that will not be realized.
