Filed Under:Markets, Regulation/Legislation

Potential Frankenstein

FIO study of insurance regulation could be flawed

When Congress created the Federal Insurance Office (FIO) in the Treasury Department, it placed restrictions designed to prevent "mission creep," in which the office might seek to expand its own mandate.

Congress inserted language stating that "Nothing...shall be construed to establish or provide the office or the Department of the Treasury with general supervisory or regulatory authority over the business of insurance."

That’s why it was heartening to hear FIO Director Michael McRaith affirm to Congress that the states are the functional regulators of the business of insurance, the FIO "is not a regulator" and the office must seek information from state regulators or another source before demanding any data from insurance companies.

After McGraith made this remark during his testimony to Congress on Oct. 25, the press treated it like news. But why? A federal entity complying with the law is not supposed to be news.

Related: Read the article "Insurer Exec, Consumer Advocate Debate Dodd-Frank Provisions Before Congress" by Arthur D. Postal.

It is noteworthy when you consider the suspicion that the FIO—this lowly office with the highly restrictive mandate—could attempt to break out of its chains like some Frankenstein monster. Would such a monster lay waste to our state-based insurance system? Try to capture every state’s insurance premium tax, only to dump it down some federal rathole? Use insurance guaranty funds to shore up risky global investment firms? Crush the thousands of small and midsized insurance companies and independent agents who provide competition for the "big boys"—all in the name of bigger profits for a handful of well-connected mega-firms?

While McRaith’s assurances establish an important firewall, another provision in this law causes some concern. FIO was mandated to conduct a study of our nation’s system of insurance regulation and make a report to Congress with recommendations on how it might be improved. PIA strenuously opposed this provision of the law from the outset, stating that the FIO is not positioned to conduct an objective, unbiased study on this topic.

Unfortunately, the enabling legislation did not limit the study to areas where the FIO’s authority is limited. It laid out leading questions that seem designed to foster negative perceptions of state insurance regulation. The questions contain a bias.

FIO is soliciting comments on such things as "the costs and benefits of federal regulation of insurance across various lines of insurance" and "the feasibility of regulating only certain lines of insurance at the Federal level, while leaving other lines of insurance to be regulated at the State level." But there are no balancing questions asking about the proven successes and efficiencies of state regulation.

Institutional Bias

PIA National will file detailed comments in response. But in its view, the FIO could be conflicted when it comes to making recommendations to Congress, because a recommendation for a greater federal role in regulating the business of insurance would benefit the FIO by expanding the power of the FIO itself—which Congress is on record opposing.

In the Oct. 25 congressional hearing before the House Financial Services Committee’s Subcommittee on Insurance, Housing and Community Opportunity, Chairman Judy Biggert (R-Ill.) asked McRaith to repeat his prepared remarks that the FIO is not a regulator, and he did. But later, during an exchange about the activities of the FIO, he stated that "the range and depth of our portfolio is still being defined." PIA’s position holds that the portfolio already has been defined in the Dodd-Frank bill, which established clear parameters on the FIO’s activities.

Rep. Steve Stivers (R-Ohio) asked McRaith if he could assure that the FIO study will not be biased in a way that leads it to recommend greater federal regulation of insurance. McRaith did not answer directly. Instead, he pointed to the provision of the Dodd-Frank law that mandated the study and said, "the bias is framed by the statute."

Related: Read Arhur D. Postal's article "Advisory Committee to FIO Includes Regulators; Excludes Legislators."

Asked by Rep. Brad Sherman (D-Calif.) if the study by the FIO will be a rehash of previous Treasury Department studies, McRaith said it "will not be a recycling of previous studies; having said that, there may be principles [from] a previous report, we may echo some of those principles." Pressed if that meant the FIO report will be 100 percent new, McRaith declined to say it would, but indicated it would not be a rehash of previous Treasury reports.

Objective, unbiased assessments of public policy options are best left to the kind of non-partisan entities to which Congress routinely turns for such purposes. The Government Accountability Office (GAO) could conduct such an assessment free of the institutional bias that the Federal Insurance Office may bring to this task.

This is just another chapter in the decades-long debate between those who support state regulation of insurance and those who want federal regulation. Through the years, multiple efforts to enact federal insurance regulation have been turned back. To this day, support for federal regulation is lacking in Congress, as evidenced by the restrictions placed on the FIO.

The Ghost of Paulsen

The current system of state-based insurance regulation has been a resounding success—for consumers, for our industry and for our nation’s economy. During the economic collapse of 2008, the insurance industry and the policyholders it serves were protected, largely due to prudent supervision by state insurance regulators that ensured financial stability, safety and soundness. At the same time, failed federal regulation in the banking and securities sectors contributed greatly to the collapse.

But there is a nexus of thought at the U.S. Dept. of the Treasury, where the FIO is housed, that insurance should be treated as if it were just another banking product, a commodity. This thinking is bipartisan; it has adherents in the current administration, but its biggest champion was former Treasury Secretary Henry Paulsen. It was Paulsen who, as part of his much-ballyhooed 2008 "Blueprint for a Modernized Financial Regulatory Structure," laid out his vision for our industry.

Paulsen said it was necessary to "prepare" the insurance industry for assimilation and absorption into a unified federal system that regulates a single, integrated financial services industry, to include insurance offerings. In other words, we all end up working for the banks. Under such a scenario, instead of having a host of insurance companies of all sizes, meeting the needs of consumers in all areas of the country, we’d have a handful of mega-carriers, similar to how there are only a handful of big banks. Of course, this would undermine competition, with consumers and the economy being the losers.

Related: Read Neil Alldredge's article "Time for No-Fault Reform."

Rather than recognizing the great success of our national state-based system of insurance regulation in protecting policyholders, the insurance industry and America’s economy, the Paulsen report argued that this system should be scrapped and absorbed by the federal system that had just failed so spectacularly.

That’s exactly backward. Instead of trying to absorb insurance regulation into the federal system that failed, policymakers should study how the state system of insurance regulation worked so well, then apply the lessons learned to the banking and securities sectors.

Congress needs to cast aside old, discredited ideas such as Paulsen’s, even if the FIO attempts to revive them by applying new lipstick to the pig. When Congress receives recommendations from the FIO on how to modernize our nation’s system of insurance regulation, it would do well to be skeptical and consider the source.

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