Insurers, regulators and other interested parties have a road trip planned this summer. A restructured insurance regulatory framework is supposed to be the destination.
PUBLIC POLICY ANALYSIS & OPINION
By Kevin P. Hennosy
House Financial Services chair charts course
for regulatory restructuring
Insurers, regulators and other interested parties have a road trip planned this summer. A restructured insurance regulatory framework is supposed to be the destination.
The Financial Services Committee of the U.S. House of Representatives, chaired by Rep. Michael Oxley (R-Ohio), has placed insurance regulatory restructuring on a proverbial fast track. However, I would remind those who are about to embark on this journey that speed is a relative concept. They may arrive at the end of the journey only to realize "what a long, strange trip it's been."
The highway to legislative success is a toll road, a thoroughfare notable for many twists and turns. The possibilities for nasty side trips abound. Some roadside attractions offer less than promised. Progress is made more difficult by more than a few backseat drivers. Those who ignore the rules of the road are likely to become lost along the way.
Vehicles
The careful selection of a vehicle is an important part of any road trip. Proponents of insurance regulatory restructuring are divided on the choice of vehicles.
Today, lobbyists for the nation's largest insurers, banks and insurance brokers advocate for this unfinished pioneering trip. These sectors support "optional federal charter" (OFC) legislation that would exempt the bearer from state laws and regulations.
The OFC is something of a hybrid vehicle, but not in the fuel economy sense. Proponents describe the OFC in terms of a Hummer that could qualify for NASCAR. The OFC resembles a war wagon that runs better when unencumbered by safety or environmental standards.
Instead of regulators and traffic cops, the OFC team prefers a scout. The scout they have in mind is modeled after the Office of Comptroller of the Currency (OCC), created by the National Banking Act of 1864. Scouts look for trouble and, when they find it, they have the authority to deal with it.
Other insurance sectors are not so ambitious. Local insurance agents and regional companies still feel connected to the 60-year old family station wagon built by the McCarran-Ferguson Act. They know its every idiosyncrasy.
Roadmap
In March of this year, Chairman Oxley began circulating a proposal he calls a "roadmap" for restructuring insurance regulation. The term roadmap is a misnomer. The proposal is a travel brochure designed to draw attention and support from both sectors of the insurance industry as well as state officials. To successfully craft legislation, Oxley must find a level of consensus that extends across a broad cross-section of insurance interests and state officials. This will not be easy.
According to an analysis of the proposal circulated by The National Conference of Insurance Legislators (NCOIL), Oxley's proposal "would mandate regulatory standards for key areas of insurance regulation, including product approval, rate regulation, market conduct surveillance and company and agent licensing."
These standards will lower the regulatory bar in most jurisdictions. For that reason, Oxley's proposal forces deregulation rather than the total preemption associated with the OFC proposal. This may attract support from some insurers and company trade associations. It is not yet clear what would happen to a state jurisdiction that refused to comply with the federal standards.
The Oxley roadmap also offers a federal presence to insurers in an effort to attract support from the OFC proposal. The proposal envisions an evenly divided federal-state insurance coordination council, devoid of regulatory authority, that could help to resolve conflicts between state and federal policy and that, further, could advise the president and Congress on insurance tax policy. According to the NCOIL analysis, "A presidentially appointed position would be created, also without regulatory or licensing authority, for the sole purpose of approving or disapproving the council's recommendations."
The presidential advisory board is an attempt to mimic the arrangement that national banks enjoy through the OCC. The establishment of an administrative body initiates what political scientists call "the iron triangle of policy formation": an executive branch office that demands congressional oversight that introduces the interests of the industry to the legislative process. Supporters of the OFC proposal often point to the lack of a "federal presence" as a prime shortcoming of the state-based system.
Long haul
Groups from the insurance industry and other interested parties have issued statements to the news media announcing imminent regulatory reform. It is not. Public relations pablum aside, restructuring the insurance regulatory framework will not happen in the near future.
Even under the rosiest of rosy scenarios, the House of Representatives could not pass insurance legislation in the truncated election year schedule. Of course after House passage, there is a group called the Senate that has to act. Since the Senate and the House rarely see eye-to-eye, there are things called conference committees where legislation is rewritten and agreed to, only to be returned to both houses for approval. If all this legislative wrangling is not complete by the end of the year, then it all must start over next year in the new Congress.
What is likely to happen is that a bill will receive committee consideration in 2004 and not much else. Some observers believe that the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, chaired by Rep. Richard H. Baker (R-La.), will send a bill to the committee in a relatively short time frame. If the committee receives a bill this summer, it is conceivable that Chairman Oxley would secure its approval before the fall.
Toll road
What will all this legislative activity amount to? It will result in the contribution of several million dollars in campaign coffers for sure. The House legislation is a classic "fetcher bill"--a bill thrown in the hopper that affects well-organized and funded constituencies for the purpose of "fetching" campaign contributions.
The introduction of legislation can attract attention to legislators, including attention measured by campaign contributions. According to data compiled by the Center for Responsive Politics, Chairman Oxley received $591,505 from the Finance, Insurance and Real Estate (FIRE) Sector thus far in the 2004 election cycle. So far, Senator Charles Schumer (D-N.Y.), the champion of the OFC last year, received $1,931,620 from the FIRE sector in the 2004 election cycle.
Speed traps
While Chairman Oxley and his copilot Rep. Baker promise that their roadmap will take the industry where it wants to go, there are those who may impede the tour. Depending on your perspective, troopers (or bandits) lurk along the road.
During a March 31 hearing of Rep. Baker's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Democrats made comments that the majority Republicans might consider backseat driving.
Representative Paul E. Kanjorsky (D-Pa.), the ranking minority member of the subcommittee, cautioned that Chairman Oxley's roadmap may not go far enough. He reminded the subcommittee that the calls for an OFC were growing louder and more numerous. Supporters of an OFC question whether the nonregulatory federal advisory group promised in Chairman Oxley's roadmap will provide what they want.
The subcommittee also heard comments from Rep. Barney Frank (D-Mass.), who is the ranking minority member of the Financial Services Committee. Rep. Frank informed the subcommittee that he would not allow legislation to move forward that undermined democratic processes of the states.
The Bay State congressman's concerns dovetail into Democrats' criticism of the OCC's preemption of state laws. These concerns harmonize with complaints lodged against the OCC by the IIABA before Congress, the administration, and federal courts.
Under Rep. Frank's leadership, Financial Services Committee Democrats have issued reports on the overreaching effect of the OCC's preemption actions. When the OCC declares federal preemption of state laws governing banking and bank sales of insurance, the appointed agency overrules elected state officials.
More often than not, the OCC has recommended the preemption of state laws that provide consumer protections and support competitive markets. These laws receive overwhelming support from producer trade associations and consumer groups.
Many observers believe that the OCC's actions violate the Riegle-Neal Interstate Banking and Branching Efficiency Act, The Gramm-Leach Bliley Act, and the Supreme Court's ruling in the Barnett Bank case. Using the OCC as a model for OFC or an advisory group could invite the same problems: National insurers, producers, and consumers could use the federal entity to gain another competitive edge against local insurance markets. *
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. He is currently writing a history of insurance and its regulation in the United States. Hennosy publishes a quarterly briefing paper on the activities of the NAIC, which is available at www.spreadtherisk.org.
The highway to legislative success is a toll road, a thoroughfare notable for many twists and turns.