Will Uncle Sam Protect Insurance Buyers?

Two recent news stories–dealing with banking and the airlines–make me wonder more than ever about the wisdom of letting Uncle Sam regulate the insurance industry outright. State oversight has its faults, but I fear consumers could be worse off if states are stripped entirely of their authority to hold insurers accountable for poor market conduct.

On Dec. 4, the U.S. 2nd Circuit Court of Appeals in Manhattan upheld a lower court ruling that the Comptroller of the Currency has exclusive authority over federally-chartered banks.

Washington initiated the legal challenge when then New York Attorney General (now governor) Eliot Spitzer launched a probe into the lending practices of three national banks, and indicated he had evidence they had violated state civil rights laws. The probe revolved around whether the banks were charging higher interest rates on mortgages to minorities.

Sorry, Uncle Sam's courts said, but states do not have the right to prosecute national banks that might be cheating their customers. I have not heard whether the new AG, Andrew Cuomo, will appeal. But even it he does, I believe it would prove futile.

Similarly, the Air Transport Association, representing major airlines, is seeking an injunction from a federal district court in Albany to prevent New York from enforcing its mandate that airlines operating in the Empire State provide water, snacks and working toilets for passengers delayed on planes for over three hours.

The rules, signed into law by Gov. Spitzer and due to take effect Jan. 1, were passed after last winter's debacle in which passengers were stranded on frozen runways for hours during weather-related delays, without being provided with the most basic amenities.

The rules certainly sound reasonable enough, but the airlines are appealing on the grounds that states lack any legal authority to regulate them.

What disturbs me most is that neither the national banks nor the airlines offer any defense of their alleged misconduct. Even if the banks are discriminating against minorities, or the airlines are holding their passengers hostage, the ISSUE here, they argue, is that they are immune from state oversight, not the merits of their behavior.

I understand the legal and jurisdictional concepts here. And I certainly appreciate the problems dealing with 50 state regulators and a National Association of Insurance Commissioners that operates at a glacial pace.

But I also don't entirely trust the federal government in Washington to protect me against local threats.

Some would say the best compromise would be the approach advocated by the Independent Insurance Agents and Brokers of America, which backs the establishment of federal standards for state regulators to follow.

That way, you would maintain the uniformity required to oversee the industry economically, without sacrificing the attention a local regulator would pay to market conduct issues in their own state.

But the flaw there is that federal standards would still not give states the authority to act unilaterally to protect consumers.

Is the status quo that egregious? Can Washington be relied upon to get the job done if insurers are suspected of redlining or illegal discrimination or bid-rigging?

What do you folks think?