Foreshadowing Federal Insurance Rate Regulation

These pronouncements from Treasury reinforced the belief among optional federal charter supporters that OFC would ensure that market competition, rather than regulation, would determine the premiums charged by federally-chartered insurers.

But this was never a sure thing. None of the OFC legislative proposals–including the National Insurance Consumer Protection Act now before Congress–explicitly precluded rate regulation for federally-chartered insurers. NICPA merely prevents the proposed Office of National Insurance from imposing "any particular rate, rating element or price." Strictly speaking, this only guarantees that ONI would not set uniform rates for particular coverages.

Fresh doubts about Washington's supposed aversion to insurance price controls have been raised by the ongoing effort to implement the Patient Protection and Affordable Care Act. The new health reform law essentially ignores the problem of soaring medical costs and focuses entirely on expanding coverage and reducing premiums in the individual market.

Given this emphasis, it is not surprising an early version of the bill authorized federal regulators to review and possibly deny rate hikes by private health insurers. That provision was eventually scrapped to expedite the bill's passage, but the idea of regulating rates was never abandoned.

On March 4–almost three weeks before President Obama signed the health care bill–identical bills were introduced in the House and Senate to establish health insurance rate oversight within the federal government.

The "Health Insurance Rate Authority Act of 2010″ directs the Health and Human Services secretary to "establish a uniform process for the review, beginning with the 2011 plan year, of potentially unreasonable increases in rates for health insurance coverage, which shall include premiums." Health insurers would have to provide "a justification for a potentially unreasonable rate increase prior to the implementation of the increase."

The bill cleverly avoids conflict with state regulators and the National Association of Insurance Commissioners by enlisting them as partners in what amounts to a nationwide prior approval rate regulation regime. HHS would establish an electronic reporting system through which health insurers would notify it and state insurance commissioners of their intention to institute a "potentially unreasonable" increase.

In the 25 or so states with prior approval rating laws for health insurance, state regulators would decide if an increase is "unreasonable" and take corrective action such as denying or modifying the increase and "ordering rebates to consumers."

Meanwhile, the rates charged by insurers doing business in states without prior approval laws would be subject to review and corrective action by HHS.

All states would be eligible for HHS grants of up to $5 million per year. States with prior approval laws would get money to help fund enforcement at the state level. States without prior approval laws could receive grants for "providing information" that would allow HHS to identify instances of "potentially unreasonable" rate increases and pursue the alleged perpetrators.

The reaction of state regulators and the NAIC to the federal rate authority initiative is instructive. Those who favor prior approval for health insurers, but whose legislatures have refused to give them that authority, apparently think it's a swell idea.

In April, Illinois Insurance Director Michael McRaith endorsed the rate authority bill in testimony before the U.S. Senate Health, Labor and Pensions Committee, declaring that "consumers in Illinois would benefit from health insurance rate regulation." Last March, Pennsylvania Insurance Commissioner Joel Ario told a reporter he welcomed the federal rate authority bill. Frustrated by his legislature's failure to pass a prior approval bill he supported, Commissioner Ario regards the federal bill not as an intrusion on state regulation but as a "federal backstop" and "the best state-federal partnership."

The NAIC also endorsed the federal rate authority bill, announcing in a February news release that "we support this concept of a federal-state partnership," noting it was "working closely with the congressional drafters and the administration."

Sure enough, the bill that was introduced several weeks later directs HHS to contract with NAIC to operate "a uniform data collection system for new and increased rate information." NAIC is also tasked with issuing a report to HHS that would include "a recommended definition of 'unreasonable rate increase.'"

Following the Senate health committee hearing in April, Chair Tom Harkin, D-Iowa, lauded the rate authority bill as "an important check on unjustified premiums."

Sen. Diane Feinstein, D-Calif., the Senate bill's lead sponsor, likened health insurance to a public utility, declaring: "Water and power are essential for life, so they are heavily regulated, and rate increases must be approved. Health insurance is also vital for life. It, too, should be strictly regulated so that people can afford this basic need."

If health insurance is a basic need, what about auto and homeowners insurance? Drivers are required by law to buy auto insurance, and one cannot obtain a mortgage without homeowners insurance. Therefore, the argument goes, government must step in to ensure coverage is "affordable"–a hopelessly subjective term for which there is no economic definition.

Numerous social commentators have called attention to the entitlement mentality that seems to pervade much of contemporary American society. This mentality fits well with the notion that affordable insurance, for one's property as well as one's health, is a basic right that must be protected through government intervention.

The movement to establish a federal rate authority for property and casualty insurance could begin with a provision in the financial regulatory reform bill before the Senate. That provision directs a newly created ONI to report on "consumer protection for insurance products and practices, including gaps in state regulation."

It would hardly be surprising if ONI decided one such "gap" is the absence in some states of prior approval rate regulation for auto and homeowners insurance. Nor would it be surprising if ONI recommended the gap be filled by a federal-state price control partnership to "backstop" states that lack prior approval laws.

Property and casualty industry leaders must be alert to ways in which populist politics and a new culture of entitlement–evidenced in the health insurance reform movement–could shape federal involvement in p&c insurance regulation. If we are not vigilant, a new dual regulatory structure featuring federally mandated price controls for auto and homeowners insurance could become reality.

Of immediate concern is the prospect of an ONI with a statutory mandate to investigate whether reasons exist to expand the scope of its own authority. To ensure some measure of objectivity, the National Association of Mutual Insurance Companies has proposed the inquiry be conducted by the Government Accountability Office instead of the ONI.

Meanwhile, NAMIC continues to promote rate modernization in the states, which means working with state legislatures, where authority over insurance regulation properly resides. Progress has been made–in fact, in the last five years, 22 states have enacted some form of rate modernization, and Louisiana may join their ranks this year.

It would be a shame if Washington were to unilaterally reverse this progress. The application of federal rate regulation would surely be one type of federal uniformity harmful to consumers and opposed by the entire industry. Let's not create an environment where it is more likely to become a reality.

Chuck Chamness is president and CEO of the National Association of Mutual Insurance Companies in Indianapolis. He may be reached at cchamness@namic.org.