Public Policy Analysis & Opinion
Regulate me, please! (sort of)
Allstate CEO stirs up the insurance regulatory mix
By Kevin P. Hennosy
After decades of safari in the exotic world of insurance regulation, I feel a little jaded. I have seen receptions that featured caviar, Fabergé eggs, and vodka fountains—courtesy of former Delaware Insurance Commissioner David Levinson (and the domestic insurers he “convinced” to pay for the bash). I have heard tales of women dancing on tables and knocking over ice sculptures during a lull in the action of a National Association of Insurance Commissioners (NAIC) meeting in Miami. Once I even saw a committee of actuaries agree, after three years of debate, on priorities for future discussion.
Then, something truly odd happened. On April 16, 2009, Allstate Insurance CEO Tom Wilson penned an Op-Ed column for The New York Times titled: “Regulate Me, Please!”
The opinion piece made for an interesting read. Dirty little secrets were told. Contrary to congressional testimony offered by the NAIC, Wilson maintained that AIG is an insurance company! Furthermore, he postulated, a credit default swap is an insurance mechanism! “The credit default swaps written by American International Group are clearly insurance since they are a contractual obligation by AIG to pay should there be a default on a security. It should be no surprise that a big insurer like AIG would be a major issuer of credit default swaps,” wrote Wilson.
Yes, Virginia, maybe state insurance regulators are not blameless in the financial crises.
Wilson went further. “Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks.”
Wilson called for Congress to establish federal insurance regulation for “national insurance companies.” According to Wilson, “Such a sophisticated federal insurance regulator would oversee the financial stability of large companies.”
But there’s the rub. All wrapped up in a bow of populist rhetoric, I fear that Mr. Wilson’s meaning could be summed up in one undefined phrase: “oversee the financial stability.”
The states hold jurisdiction over insurance because of a 1945 law known as the McCarran-Ferguson Act, which is subtitled, a bill to regulate the business of insurance. “Regulate the business of insurance” is the operative phrase. Insurance is to be affirmatively regulated, not overseen.
The act, under the present (neglected) statutory framework, charges the states with much more than overseeing “financial stability.” Actually the act makes no mention of financial stability, but it does mention federal antitrust law and Federal Trade Commission (FTC) oversight. The current framework charges the states with enacting laws that stand in the place of federal antitrust law and FTC oversight. If the states are found in noncompliance with these provisions by a federal judge, federal antitrust law and FTC oversight applies to insurance.
In short, if Congress just passed a bill that created a federal charter for insurers that relied only on the financial status of the insurer, and applied no regulation on market activities, such a bill would be deregulation under a deceptive name. We got in this mess through deregulation urged on by large financial interests, and more of the same will not help get us back on a firm financial footing.
If my fears are unfounded, I hope Mr. Wilson will clarify the record. I hope he will clearly endorse provisions of some federal regulatory proposals that include the application of FTC oversight and antitrust enforcement to the business of insurance. I would also be pleased to learn that a “sophisticated federal regulator” would have the personnel and resources necessary to verify the validity of the rates charged by insurers.
Something tells me that this is not the type of sophisticated federal regulation that the Allstate CEO has in mind. Through most of American history, calls for federal regulation were based on a model that was not too observant, too taxing or too smart.
Some commentators do not believe that Wilson is being completely transparent in describing his aims. A nonprofit group that calls itself “Consumer Watchdog” issued a statement, which speculates on Wilson’s motives and preference for federal oversight.
“Allstate was ordered to lower rates by $500 million for its California homeowners and auto insurance customers last year under strong state insurance regulations that prohibit excessive rates. Similarly, in Florida, Allstate has drawn aggressive regulatory oversight in response to the company’s anti-consumer practices.”
“The Allstate CEO’s call for federal regulation of insurance is not an enlightened decision to change paths, but a cynical ploy to deregulate oversight of his company and industry,” said Carmen Balber of Consumer Watchdog. “Insurance companies and their customers have been protected from the ravages of weak federal regulation exactly because of a state-based regulatory structure that puts insurers under more and stronger oversight. That is what Allstate wants to evade by calling for a single federal regulator.”
Consumer Watchdog’s statement lauded an April 2008 Consumer Federation of America (CFA) report on state-by-state study of auto insurance regulation that found that California’s law limiting the rates that insurers can charge has saved motorists $62 billion since Proposition 103’s passage.
The CFA report named California both one of the most competitive and one of the most profitable markets in the country, with the slowest-growing automobile insurance premiums in the nation.
The federal bill under discussion is known as The Consumer Protection and Regulatory Modernization Act or the Royce-Bean Bill. Representatives Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) are the authors of the bill. According to a publication distributed by the bill’s sponsors it would establish a “parallel, national system of regulation and supervision for insurers, insurance agencies and insurance producers, similar to the dual banking system.”
The legislation has attracted criticism from many quarters.
“Congress and the Administration cannot afford to take their collective eyes off the ball with a bill like this. Their focus must remain on correcting the failures in the federal regulatory system that led to our current financial crisis. Deregulating insurance does not accomplish this task,” said PIA National President Kenneth R. Auerbach, Esq.
He further charged that the Royce-Bean Bill is being presented as a proposal that strengthens insurance oversight when, in reality, it would significantly weaken insurance oversight.
The born-again regulators at the National Association of Insurance Commissioners (NAIC) blasted the bill on April 2, 2009. New Hampshire Insurance Commissioner Roger Sevigny, who is also NAIC president, observed:
“If passed, this bill would allow nearly any function of the so-called national insurance regulator to be carried out by self-regulatory industry groups, effectively handing the keys of supervision over to those being supervised. Akin to letting the fox guard the henhouse, this bill would essentially dismantle existing state-based consumer protections.”
In addition to the consumer group response, the Allstate statement drew a response from New York Insurance Superintendent Eric Dinallo. “In The New York Times column, the Allstate CEO wrote, ‘we played only a small role in unregulated insurance markets…’ He also wrote, ‘The insurance companies that wrote credit default swaps were happy not to be regulated.’
“In New York and in other states, it is illegal for an insurance company to write a credit default swap unless approved by the state insurance regulator under limited conditions. If Allstate broke the law or is aware of any other insurance company that broke the law, Allstate should immediately report that conduct to the appropriate state insurance regulator. I have asked Allstate’s New York companies to report immediately any inappropriate or unregulated use by them,” said Dinallo.
The Empire State Superintendent of Insurance continued, “I have said for more than a year that credit default swaps should be regulated and that those who write them should be required to hold adequate reserves. But one thing should be clear. While the credit default swap market is not regulated, insurance company use of credit default swaps is. In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval.”
One statement contained in the Wilson Op-Ed article that has not received much attention deals with the matter of responsibility. “We must all accept responsibility for our current situation and work together to broaden the scope of federal regulation to protect both consumers and financial markets.”
Perhaps Mr. Wilson could take the first step. He could issue a report documenting the lobbying activities executed or paid for by Allstate which pushed for insurance deregulation. I would hope the report would not forget the company’s activities in refusing to pay financial filing fees to the NAIC. It would also be good for the company to accept its part of the responsibility for The Nick’s Fish Market Agreement, where NAIC officers agreed to limit regulatory practices in return for an end to the filing fee boycott, as reported in The Wall Street Journal on February 5, 1998. One reason state insurance regulation has proved inefficient and ineffective is that insurance carriers have spent a great deal of time and money constructing an inefficient and ineffective system.
The NAIC should accept responsibility for and renounce its activities in support of previous deregulation legislation. For all the tough talk about consumer protection, the NAIC’s recent history is tarred with a model law that urges deregulation of commercial lines, and another model law that assumes that investment officers will act as a “prudent person.” Furthermore, when the NAIC re-wrote its mission statement, it removed a reference to consumer protection.
I wish Commissioner Sevigny the best of luck with his term, but he is swimming against the historical tide. Many of your supporters support you only as long as state officials behave in a docile way. In other words, “Take your premium tax revenue and be quiet.”
The drafters of the McCarran-Ferguson Act tried to avoid this “captive regulator syndrome” by lending the day-to-day responsibility for insurance regulation to the states while retaining oversight authority with the Congress and the courts. The system worked relatively well until, in the late 1990s, former-U.S. Representative Mike Oxley began to use his oversight authority to pressure the states to deregulate, without regard for the statutory provisions of McCarran-Ferguson. It should be noted that only a handful of state officials even grumbled about the pressure they received from Oxley, and no one from the regulatory ranks stood up to him.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. His career includes working in the regulatory compliance office of Nationwide Insurance Cos. and as public affairs manager for the National Association of Insurance Commissioners (NAIC). He is currently writing a history of insurance and its regulation in the United States and is an adjunct professor of political science at Avila University.