Filed Under:Agent Broker, Coverage Issues

Defund FIO study

Congress' study of insurance regulations lacks objectivity

Imagine for a moment that Congress decides to create a brand-new federal office. Then at the same time, Congress decides it needs to conduct a study about whether it would be a good idea to vastly expand the scope of the new office that it just created.

Common sense would dictate that Congress would turn to a skilled, nonpartisan body to conduct such a study. The problem is, we’re talking about Congress here. As all of us know, common sense often takes a back seat on Capitol Hill.

Related: Read Ted Besesparis' previous column, "Old issues, new Congress."

Last year when Congress created the Federal Insurance Office (FIO), it ordered a broad study of insurance regulation in the United States—but it assigned the task of conducting that study to the FIO that it had just created.

On the face of it, this might seem to make sense. But a closer examination reveals this creates an ideological conflict of interest. The very last people Congress should ask for an objective assessment of the advisability—or lack thereof—of expanded federal insurance regulation are federal regulators themselves. When Congress wants a truly objective, unbiased assessment, it usually turns to the decidedly non-partisan Government Accountability Office (GAO). Of course, if there is an unspoken political agenda at work, such objectivity can get in the way.

"Federal bureaucrats should not be conducting a study on whether or not their own powers should be expanded, and then making recommendations to Congress based on a study that they alone conducted," said Leonard C. Brevik, PIA national executive vice president and CEO, who calls on Congress to defund the FIO study.

"Having the FIO report on, as the law currently states, ‘the costs and benefits of potential federal regulation of insurance across various lines’ creates an inherent conflict of interest," Brevik said. "It assures a biased result because it asks federal regulators if they believe in federal regulation. Of course, their answer will be ‘yes.’ Congress needs to defund this Trojan horse for federal expansion and encroachment."

Information, not regulation

The FIO is meant to serve as an information resource for policymakers and to coordinate international insurance agreements. FIO’s scope of authority is strictly limited by the law creating it which clearly states, "Nothing…shall be construed to establish or provide the office or the Dept. of the Treasury with general supervisory or regulatory authority over the business of insurance." That authority remains where it belongs—with the states, despite the attempt by the Obama administration to expand the FIO into an insurance policy-setting body, exceeding its mandate.

Neal Wolin, Treasury deputy secretary, put forward an interpretation that would expand the office’s activities beyond Congressional intent. Speaking to stockbrokers in London last November, Wolin said the Obama administration believes the new Dodd-Frank financial services reform law gives it the power to monitor the insurance sector and coordinate and develop federal policy on major domestic and international insurance issues. He added that through the FIO, "the federal government will work toward modernizing and improving our system of insurance regulation."

Of course, this is exactly what Congress did not want the federal government to do when it prohibited the FIO from becoming involved in insurance regulation. The Obama administration seems intent on claiming an overly broad mandate for the FIO by turning it into a policy-setting agency with purview over a broad swath of insurance issues, including "domestic" insurance issues. This would appear to be in conflict with the law and the intent of Congress.

Federal agencies and departments often seek to expand the scope of their authority—their power—by adopting the broadest possible interpretation of legislation passed by Congress. Sometimes this bureaucratic stretch goes way beyond the breaking point. That this can be disingenuous is often dismissed as just Washington gamesmanship. But it doesn’t make it right.

Industry warnings against "mission creep" on the part of this newly minted federal agency were sounded in January 2011 at the Property/Casualty Joint Industry Forum in New York.

Jack Salzwedel, president and chief operating officer of American Family Insurance, said during the forum, "When you talk about FIO, and you talk about one of their mandates being to really look at whether state regulation is pertinent and is effective, you can certainly get that camel’s nose under the tent very quickly there."

New York Insurance Commissioner James Wrynn said engagement is key.

"Our national system of state-based regulation has worked well over the last 160 years, and I think with a director in the Federal Insurance Office that is engaged, that is working collaboratively with us, a lot can be done," he said.

Not so benign

How the Federal Insurance Office came into being is instructive. Its strongest advocates in the House were Reps. Melissa Bean (D-Ill.), Ed Royce (R-Calif.) and Paul Kanjorski (D-Pa.). All but Royce lost their re-election bids in the 2010 elections.

For several years, Bean and Royce also have been prime sponsors of bills to create an optional federal charter for insurers and producers, a controversial idea that has never gotten off the ground. An OFC would be a first step toward full federal insurance regulation, something its supporters have occasionally admitted.

When what became the Federal Insurance Office was first proposed, its role was limited. In fact, it was initially called the "Office of Insurance Information." It was presented as a library of insurance information for federal policymakers. One could easily imagine a small office staffed by kindly, helpful librarians. But what some of its sponsors really had in mind was not nearly as benign.

Aided by Kanjorski and the Obama administration, the draft legislation was quickly changed so that it would have granted broad powers to the office and increased the likelihood that it could become a de facto federal regulator. At that point, agents, some carrier groups and the National Assn. of Insurance Commissioners (NAIC) stepped up their involvement and succeeded in beating back the effort to greatly expand the office.

In the end, specific language was added, stating that the bill does not establish a supervisory or regulatory authority over the business of insurance and barring the FIO from pre-empting state insurance laws governing rates, premiums, coverage requirements, antitrust laws, underwriting or sales practices. The bill also was amended to clarify that the definition of "insurer" under a mandatory data collection provision does not include insurance agents and agencies.

New political environment

The troubling provision that remained unchanged was the one requiring the newly minted FIO to conduct a study of insurance regulation and report to Congress with recommendations in 18 months.

The study and recommendations to Congress will essentially come from the Treasury Dept. which is in charge of the FIO. Treasury Secretary Timothy Geithner appoints the director of the FIO.

As a result, what we may see when the FIO announces its "findings" is a rehash of former Treasury Secretary Henry Paulsen’s 2008 "Blueprint for a Modernized Financial Regulatory Structure," which still seems to be highly regarded by staffers at Treasury, despite the change in administrations. Its section on the future of insurance envisioned the insurance industry being "prepared" for assimilation into a federally regulated, global financial services industry.

Of course, the failure of federal regulation of financial services led directly to the financial meltdown. That’s why it is fortunate that the insurance industry is regulated more prudently by our national system of state-based insurance regulation. As a result, our industry escaped the damage caused by failed federal oversight.

Chances are good that the FIO will recommend an expansion of its own authority, a bigger budget for itself and an expanded federal role in insurance regulation. But such proposals will have less resonance on Capitol Hill following the changes ushered in by the 2010 elections. The Tea Party, in particular, will not be amused.

Prospects for the growth and expansion of federal power and federal expenditures diminished considerably with the start of the 112th Congress. That change may sound the death knell for federal insurance regulation for many years to come.

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