Obama, McCain Campaigns Clash Over Health, Cat Insurance Reforms

Barack Obama and John McCain don't see eye to eye on many areas, and insurance is no exception. Indeed, on at least two issues of critical importance to the industry and its policyholders–health care reform and catastrophe coverage–each would take the country in very different directions if elected president on Nov. 4.

While industry officials also worry about the positions an Obama or McCain administration might take on federal regulation of insurance and tax treatment of offshore carriers, the most visible clashes between the two have come over disaster coverage and health insurance reform.

Regarding national catastrophe policy, the Illinois Democrat and Arizona Republican have stark policy differences, mirroring the divide within the insurance industry itself.

Sen. Obama has voiced support for a national catastrophe backstop as envisioned by the Homeowners Defense Act, HR 3355, as proposed by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla. The bill would create a national risk pool to combat high homeowners insurance costs in hurricane-prone areas

Sen. McCain does not support the Klein-Mahoney bill–and was able to win the Florida Republican presidential primary despite that fact. While the Republican platform does “recognize the need for a natural disaster insurance policy,” he is believed to prefer a more market-based solution, including formation of regional pools, according to industry officials.

Joel Wood, senior vice president of the Council of Insurance Agents and Brokers, said the Klein-Mahoney plan to provide a federal reinsurance backstop for state catastrophe plans has some support within the industry, but also many critics.

However, “short of a major catastrophic event, I find it difficult to envision a political environment in which this legislation is going to pass,” he said.

“The contingent liabilities of the federal government have been radically expanded during the financial meltdown, and if anything, I expect there will be pressure to scale those liabilities back, not expand them,” he observed. “That said, if Sen. Obama wins and Democrats capture more than 60 seats in the Senate, anything is possible.”

The Reinsurance Association of America also believes a free market approach to natural catastrophe insurance, which Senator McCain supports, will benefit consumers, taxpayers and the nation, according to the group's vice president for state relations, Dennis Burke.

“While Sen. Obama apparently supports a federal catastrophe backstop–a position the RAA opposes–we believe the bipartisan Senate rejection of similar proposals this past summer reflects a more thoughtful analysis of the role of government and disaster financing,” Mr. Burke said.

He added that Sen. Chris Dodd, D-Conn., chair of the Senate Banking Committee, and Rep. Bennie Thompson, D-Miss., have proposed solutions focused on consumers, not insurers. “We believe that is the better solution.”

On the other side of the debate is Allstate, along with the advocacy group it and other insurers support–ProtectingAmerica.org. This faction wants a comprehensive catastrophe insurance system, involving state funds with a federal backstop, among other disaster preparedness and mitigation measures. This is similar to the approach voiced by Sen. Obama.

Jimi Grande, vice president of federal affairs for the National Association of Mutual Insurance Companies, opposes the Allstate/Obama approach. “NAMIC believes the private market is best equipped to handle all but the most extreme natural disasters,” he said.

The Homeowners Defense Act “would provide federal support for risky state-sponsored insurance programs, such as Florida's,” added Mr. Grande. “NAMIC opposes this legislation, as we believe it is another government incentive program to create dangerous state-run pools that are underfunded, and would leave consumers and taxpayers at risk.”

When it comes to health care, while both candidates propose big changes to make coverage available and affordable for the 47 million or so without insurance, their plans diverge significantly on the way a reformed system should operate.

Sen. McCain's proposal would treat the premiums employers pay for their workers' health insurance as taxable income, while offering tax credits of $2,500 for individuals and $5,000 for families to shop for their own coverage. However, a provision allowing employers to deduct the expense of employee health insurance would remain intact, according to Jessica Waltman, vice president of policy for the National Association of Health Underwriters.

Sen. McCain would also loosen rules governing the sale of insurance by allowing people to buy policies across state lines.

Sen. Obama would maintain the tax exemption for workers on premiums paid by their employers and offer a tax credit to encourage small businesses to buy group coverage. He would also create a new insurance “exchange”–with consumer protections, choice of public and private health plans, and income-based premium subsidies, while outlawing rejection of applicants due to preexisting conditions.

He would also levy an additional tax on large employers that do not provide health insurance, to help pay for coverage of uninsured workers.

CIAB's Mr. Wood is concerned with the health care proposals of both candidates, calling them “troubling.” He said Sen. McCain's “'consumer-driven approach would throw the baby out with the bathwater, by eliminating tax incentives for corporations to provide health insurance to tens of millions of employees.”

Brokers negotiate the best possible deals on health insurance on the basis of economies of scale, according to Mr. Wood, adding that “if everyone has to fend for themselves, the ranks of the uninsured and underinsured will surely grow.”

He concluded that “it should be a top priority of lawmakers to enhance the employer-provided group health insurance marketplace, not dismantle it.”

Regarding Sen. Obama's plan, the CIAB has “different concerns,” according to Mr. Wood. “Like Hillary Clinton's plan,” he said, “it would create a government insurance program that could rapidly escalate in size if employers opted to drop coverage and pay into the government-run system rather than provide their own workers with health coverage.”

While proponents of the McCain plan argue that the proposal would only negatively affect those with benefit-rich “Cadillac plans,” NAHU's Ms. Waltman noted that some workers, such as union members, may suffer the consequences of suddenly having their union-negotiated health coverage taxed as income.

Neither candidate has directly addressed calls by some in the industry for an optional federal charter, according to Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, who said that “every issue has been swallowed up in the economic meltdown.”

However, he added, you could see “some hints in their response” to the meltdown–noting, for example, that “neither has advocated a hands-off approach” when it comes to federal regulation.

While an OFC “hasn't been a focus of the campaign,” he said that “looking at their records, it isn't clear to me that you'd see more or less regulation under one or the other.” Indeed, he added, “what emerges could be very far from what anyone recognizes as an OFC,” including the possibility of a dual state-federal system.

He said a report mandated to be delivered to Congress early next year “could give Treasury the opportunity to revisit its recommendations about the future shape of the financial systems.”

One industry observer who declined to be identified disagrees. He believes the financial problems of American International Group–which prompted a pair of federal bailout loans topping $120 billion–”gives added momentum to an OFC” to streamline state-by-state oversight of holding companies with subsidiaries operating in many states.

The only other insurance area the candidates have commented on are calls during the campaign by Sen. Obama for higher taxes on offshore insurers–another issue that divides the industry.

Jon Harkavy, vice president of Risk Services Companies in Arlington, Va., a longtime player in the captive market, said that while Sen. Obama has spoken in generic terms about this issue, “it appears he is taking the position similar” to those promoted by Chubb and The Hartford, in calling for an end to perceived tax advantages for offshore firms.

He added he is afraid that the debate will “hit more fertile territory” next year, regarding limiting or restricting the premiums collected by an onshore entity and ceded to an offshore affiliate.

Companies like ACE, XL and others domiciled offshore, but with an onshore affiliate, “would face a significantly higher tax burden if such a plan went through,” according to Mr. Harkavy. He warned that “when you talk about 'leveling the playing field,' you're really talking, to some extent, about protectionism.”

He said one would assume that a higher tax burden on offshore insurers would force them to raise prices, which could allow the domestic carriers to do so as well.

Taxing offshore insurers “might be a plus for domestic captive formation,” he added, but a lot would depend on the details, and it could just lead to “structural changes” in the insurance transaction itself. As an example, he said a large multinational company might just try to restructure its insurance policy to take the entire transaction offshore.

“Insurance is a very international industry,” in terms of providing capacity and capital, he said. “Any moves to potentially add a protectionist element to it could be problematic.”