Insurance commissioners are charged withprotecting consumers in two ways.

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They oversee insurers' financial health to ensure they will beable to pay consumers' claims in the future, and they monitormarket behavior to make sure that regulated entities treatconsumers fairly.

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Arguably, every activity and initiative that an insuranceregulator engages in and pursues should fall under one of thosefunctions. There have been instances, however, in which regulatorsappear to be using the power of their offices to promote causesthat are outside their scope. These instances raise seriousquestions about the proper exercise of state insurance regulatoryauthority.

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The first foray by a commissioner beyond the bounds oftraditional regulatory roles was likely when California InsuranceCommissioner Steve Poizner pressured insurers to divest themselvesof 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 lawprohibiting state entities from investing in countries that sponsorterrorism.

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Now, however, information on the department's website indicatesthat the reason for the divestment is to ensure that insurers arenot exposed to the "asymmetric risk" associated with businessconnected to Iranian businesses. And because of a settlementbetween the department and insurers, the initiative changed from adirective to a program through which the department would collectand 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, theinitiative has been successful, resulting in more than 1,000companies divesting.

California's coal divestment

Perhaps it was that success that prompted California to engagein another insurer divestment initiative, this one focused onthermal coal.

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In contrast with the Iran divestment initiative, this one wascast as a "request" from the start. However, it came with a mandatethat insurance companies doing business in California annuallydisclose their "carbon-based investments." And in a newsrelease, Commissioner Dave Jones declared, "We will make this newinformation public so that investors, policyholders, regulators andthe general public can know the extent to which insurance companiesare invested in the carbon economy."

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California has also been a prominent player in anotherinitiative with tenuous ties to the regulation of insurance — asurvey, the results of which are publicized, asking insurers todisclose various ways in which they are responding to climatechange. The survey was developed by the National Association ofInsurance Commissioners with plans for all states to administerit, but it was dropped after many regulators had second thoughts,only to be picked up again by a few states a few years later.

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Related: How will the elections impact the workers' compmarket?

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While there could be valid inquiries for regulators to pose toinsurers regarding their thoughts on climate change, the survey'squestions are vague and depart from areas of traditional insuranceregulation, by inquiring about financial risk posed by currentunderwriting practices, for instance. Instead, they open broadareas of inquiry that might be posed by an advocacy organizationrather than a state insurance regulator.

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For sure, investment and climate risk, however defined, canarguably be tied to the financial health of an insurance company,which could arguably place these initiatives within the scope oftraditional insurance regulation functions.

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But there are reasons to be suspicious of mere politicalmotivations.

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Continue reading…

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For one, there are fulsome and sophisticated methods by whichthe insurance regulatory system monitors and assesses insurers'risks, but these initiatives are taking place outside thatframework. Insurers are generally required to hold conservativeinvestments, for instance, but that does not mean that entirecategories of certain sectors should be taken off the table in onefell swoop.

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Additionally, the way in which these initiatives are touted bytheir proponents in news releases and reports is a reason to raisea circumspect eyebrow about their motivations. Financial regulationof insurance companies is more often than not a low-keyendeavor.

Questionable territory

The latest venture by state insurance regulators intoquestionable territory is not about climate or risk at all. Thereis not even the most tenuous connection to insurance financialstrength or market conduct.

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The initiative is known as the Multistate Insurance Diversity Survey, a projectundertaken by six jurisdictions, including California, joined byWashington, D.C.; Minnesota; New York; Oregon; and Washington statethat asks insurers to report information on the diversity of theirgoverning boards and vendors regarding such matters as race,gender, ethnicity and sexual orientation.

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The information is expected to be collected and published inreport form on the website of the California Department ofInsurance, which has been conducting a similar survey for the pastfew years.

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One commonality to note is that none of these initiativesinvolve regulators explicitly ordering companies to do something.Rather, they are all about collecting information from insurers andmaking that information public. But the obvious and sometime statedintent is to cajole insurers into doing something that is beyondthe regulators' ability to order them to do. It is worthasking if this is a valid and appropriate exercise of regulatoryauthority.

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A related issue is the amount of resources devoted to theseinitiatives by both insurance departments and insurance companies.It takes time, which equals money, for an insurance company tocompile information in response to these information-collectionexpeditions.

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Likewise, there is a financial cost for insurance departments tocollect, analyze and report this information that has little to noregulatory value. It is reasonable to ask how much moreconsumers are paying, in insurance premiums or taxes or both, tofund these projects. It is also reasonable to expect insuranceregulators to think long and hard about asking insurers to incurcosts in providing information that is not related to insuranceregulation.

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No less of an authority on insurance regulation than the NAICitself has recognized that insurance regulation is properly limitedto two functions. An NAIC white paper, available on theorganization's website, titled "State Insurance Regulation," states thefollowing: "The public wants two things from insurance regulators.They want solvent insurers who are financially able to make good onthe promises they have made and they want insurers to treatpolicyholders and claimants fairly. All regulatory functions willfall under either solvency regulation or market regulation to meetthese two objectives."

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It would be interesting to see how the regulators involved inthese initiatives explain how their efforts fall under solvency ormarket regulation. The question is not whether the issues ofdiversity, climate change or international investments are worthyof debate and discussion, it is whether it is an appropriate use ofinsurance regulators' authority under state law to engage inactivities unrelated to the two prongs of insurance regulation topressure insurers into taking action they might see asdesirable.

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Paul Tetrault is state and policy affairs counsel for theNationalAssociation of Mutual Insurance Companies. Opinions expressedin this article are his own.

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Related: Insurance issues on the campaigntrail

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