Insurance commissioners are charged with protecting consumers in two ways.
They oversee insurers’ financial health to ensure they will be able to pay consumers’ claims in the future, and they monitor market behavior to make sure that regulated entities treat consumers fairly.
Arguably, every activity and initiative that an insurance regulator engages in and pursues should fall under one of those functions. There have been instances, however, in which regulators appear to be using the power of their offices to promote causes that are outside their scope. These instances raise serious questions about the proper exercise of state insurance regulatory authority.
The first foray by a commissioner beyond the bounds of traditional regulatory roles was likely when California Insurance Commissioner Steve Poizner pressured insurers to divest themselves of any investments in businesses related to the defense, nuclear, petroleum, natural gas or banking sectors of the Iranian economy. The initiative started as a directive in 2009 tied to a state law prohibiting state entities from investing in countries that sponsor terrorism.
Now, however, information on the department’s website indicates that the reason for the divestment is to ensure that insurers are not exposed to the “asymmetric risk” associated with business connected to Iranian businesses. And because of a settlement between the department and insurers, the initiative changed from a directive to a program through which the department would collect and publicize information about insurers’ Iran-related investments “to encourage insurers to divest from these risky investments,” according to the department. By the department’s account, the initiative has been successful, resulting in more than 1,000 companies divesting.
California's coal divestment
Perhaps it was that success that prompted California to engage in another insurer divestment initiative, this one focused on thermal coal.
In contrast with the Iran divestment initiative, this one was cast as a “request” from the start. However, it came with a mandate that insurance companies doing business in California annually disclose their “carbon-based investments.” And in a news release, Commissioner Dave Jones declared, “We will make this new information public so that investors, policyholders, regulators and the general public can know the extent to which insurance companies are invested in the carbon economy.”
California has also been a prominent player in another initiative with tenuous ties to the regulation of insurance — a survey, the results of which are publicized, asking insurers to disclose various ways in which they are responding to climate change. The survey was developed by the National Association of Insurance Commissioners with plans for all states to administer it, but it was dropped after many regulators had second thoughts, only to be picked up again by a few states a few years later.
While there could be valid inquiries for regulators to pose to insurers regarding their thoughts on climate change, the survey's questions are vague and depart from areas of traditional insurance regulation, by inquiring about financial risk posed by current underwriting practices, for instance. Instead, they open broad areas of inquiry that might be posed by an advocacy organization rather than a state insurance regulator.
For sure, investment and climate risk, however defined, can arguably be tied to the financial health of an insurance company, which could arguably place these initiatives within the scope of traditional insurance regulation functions.
But there are reasons to be suspicious of mere political motivations.
For one, there are fulsome and sophisticated methods by which the insurance regulatory system monitors and assesses insurers’ risks, but these initiatives are taking place outside that framework. Insurers are generally required to hold conservative investments, for instance, but that does not mean that entire categories of certain sectors should be taken off the table in one fell swoop.
Additionally, the way in which these initiatives are touted by their proponents in news releases and reports is a reason to raise a circumspect eyebrow about their motivations. Financial regulation of insurance companies is more often than not a low-key endeavor.
The latest venture by state insurance regulators into questionable territory is not about climate or risk at all. There is not even the most tenuous connection to insurance financial strength or market conduct.
The initiative is known as the Multistate Insurance Diversity Survey, a project undertaken by six jurisdictions, including California, joined by Washington, D.C.; Minnesota; New York; Oregon; and Washington state that asks insurers to report information on the diversity of their governing boards and vendors regarding such matters as race, gender, ethnicity and sexual orientation.
The information is expected to be collected and published in report form on the website of the California Department of Insurance, which has been conducting a similar survey for the past few years.
One commonality to note is that none of these initiatives involve regulators explicitly ordering companies to do something. Rather, they are all about collecting information from insurers and making that information public. But the obvious and sometime stated intent is to cajole insurers into doing something that is beyond the regulators’ ability to order them to do. It is worth asking if this is a valid and appropriate exercise of regulatory authority.
A related issue is the amount of resources devoted to these initiatives by both insurance departments and insurance companies. It takes time, which equals money, for an insurance company to compile information in response to these information-collection expeditions.
Likewise, there is a financial cost for insurance departments to collect, analyze and report this information that has little to no regulatory value. It is reasonable to ask how much more consumers are paying, in insurance premiums or taxes or both, to fund these projects. It is also reasonable to expect insurance regulators to think long and hard about asking insurers to incur costs in providing information that is not related to insurance regulation.
No less of an authority on insurance regulation than the NAIC itself has recognized that insurance regulation is properly limited to two functions. An NAIC white paper, available on the organization’s website, titled “State Insurance Regulation,” states the following: “The public wants two things from insurance regulators. They want solvent insurers who are financially able to make good on the promises they have made and they want insurers to treat policyholders and claimants fairly. All regulatory functions will fall under either solvency regulation or market regulation to meet these two objectives.”
It would be interesting to see how the regulators involved in these initiatives explain how their efforts fall under solvency or market regulation. The question is not whether the issues of diversity, climate change or international investments are worthy of debate and discussion, it is whether it is an appropriate use of insurance regulators’ authority under state law to engage in activities unrelated to the two prongs of insurance regulation to pressure insurers into taking action they might see as desirable.
Paul Tetrault is state and policy affairs counsel for the National Association of Mutual Insurance Companies. Opinions expressed in this article are his own.