Public Policy Analysis & Opinion

Carriers foresee active legislative year

But fears of potential gridlock remain

By Kevin P. Hennosy

With the return of Republican majorities in the U.S. House of Representatives and in many state legislative chambers, insurance carriers believe they can make real progress on their legislative priorities this year.

The states

In most states, February marks the beginning of legislative work in earnest. The legislative sessions begin in January, but those early convocations focus on procedures and posturing. New legislators still need to come up to speed on traditions and "where the bathrooms are." By February, work is underway.

The Property Casualty Insurance Association of America (PCI) entered 2011 feeling good about the proverbial "lay of the land."

"While 2010 was both an incredibly challenging and productive year for home, auto and business insurers, the New Year will present both new threats and opportunities to our sector," said Ben McKay, PCI senior vice president for government relations. "PCI remains strong and well equipped to lead the industry. We will present continued thought leadership, multifaceted strategy and compelling advocacy on important issues across the country to promote the viability of a competitive private insurance marketplace for the benefit of consumers and our members."

As is often the case, the issue of aftermarket automotive parts will receive a great deal of attention from PCI and other groups at both the state and federal levels.

At the state level, PCI continues to work with the National Conference of Insurance Legislators (NCOIL). In November 2010, PCI pressured The NCOIL Property-Casualty Insurance Committee to table a proposed Model Act Regarding Insurer Auto-Body Steering and proposed amendments to the Model Act Regarding Motor Vehicle Crash Parts and Repair.

"The actions taken by the Property-Casualty Committee on the steering model is supportive of insurers' continued ability to offer consumers information about auto body repair options," said Bob Passmore, PCI's senior director, personal lines. "PCI testified against the steering model and was pleased that the committee effectively killed it by tabling the model indefinitely. We opposed the steering model on the grounds that it would have violated insurers' constitutional right to provide consumers information regarding their vehicle repair options, as well as programs or benefits available to them from their insurer. Additionally, most states already have laws on the books protecting the consumers' right to choose a repair shop without denying them information or abridging insurers['] constitutional rights."

The committee also rejected a proposed amendment to its Model Act Regarding Motor Vehicle Crash Parts and Repair. The amendment would have required insurers to ensure that any aftermarket part specified on an insurer estimate would have a warranty that "equals or exceeds" the car company replacement part as well as provide that any part certified by an organization approved by the American National Standards Institutes be deemed equivalent to the car company part.

PCI testified in opposition to the model and the amendment, citing problems with a costly but virtually useless policy notice requirement and compliance issues with the warranty equivalence language. While the committee voted against the amendment, action on the model was deferred to the next meeting.

In other action, the NCOIL committee reauthorized "Anti-Runners Fraud" and "Flex Rating" models, and deferred consideration of Claims History Databases, Domestic Violence and Natural Catastrophe Funds models until the next meeting, March 4-6, in Washington, D.C.

In 2011, the NCOIL leadership team includes State Representative George Keiser (R-N.D.) as president, State Senator Carroll Leavell (R-N.M.) as president-elect, State Senator Vi Simpson (D-Ind.) as vice president, State Representative Charles Curtiss (D-Tenn.) as secretary, and State Representative Greg Wren (R-Ala.) as treasurer. State Representative Chuck Kleckley (R-La.) will chair the Property-Casualty Insurance Committee.

Congress will also consider the aftermarket parts issue.

PCI is an active member of the Quality Parts Coalition—working to preserve consumer choice and competition in the automotive aftermarket—and a major supporter of the "Access to Repair Parts Act" legislation sponsored by Representative Zoe Lofgren (D-Calif). "We are pleased that the House Judiciary Committee heard this bill in 2010 and will work with leaders on both sides to place this legislation on the 2011 agenda," said the PCI's McKay.

Dodd-Frank implementation

At the federal level, the divided Congress could lead to even greater gridlock in 2011, according to the PCI. Furthermore, PCI believes that "Senator Chris Dodd's retirement and the Republican takeover of the House have both led to major changes in committee leadership that will directly impact the agenda for the financial services sectors in the 112th Congress."

PCI remains focused on regulatory implementation and rule making, including deliberations over the creation of the Federal Insurance Office and the Financial Stability Oversight Council's methodology for determining systemically important companies. A primary goal for the PCI is to stave off application of new rules governing speculation in derivatives and other risky financial instruments to the personal lines property/casualty sector.

"We want to preserve the legislative intent of the Dodd-Frank Act, as it appropriately distinguishes insurance as very different from other financial sectors and recognizes the strong consumer protections provided by the state regulatory system," said McKay. "Our goal is to keep home, auto and business insurers from being negatively impacted by new systemic risk or derivatives rules.

"PCI will be both at the front lines on Capitol Hill acting on priority legislation for insurers and at the table with regulators to implement the Dodd-Frank Act," said McKay.

National Flood Insurance Program (NFIP)

In 2011, as Americans face an anemic economic recovery, PCI will advocate for greater certainty and stability for the NFIP, including a long-term extension and what the trade group calls "balanced reforms."

"While we are pleased that Congress passed a one-year extension for the NFIP, PCI will be working with lawmakers throughout the year to prevent another expiration," said McKay. The NFIP expired four times in 2010 before being extended on September 30, creating widespread confusion and anxiety for consumers, insurers and the real estate marketplace.

McCarran-Ferguson

In 2011, PCI will remain vigilant and prepared for additional legislative threats to the McCarran-Ferguson Act. The trade association takes pride in its 2010 work related to the federal act, which makes a limited and contingent delegation of authority to the several states to regulate insurance.

According to a PCI news release: "At the beginning of 2010, our sector achieved a major victory by blocking several legislative proposals to repeal the limited federal antitrust delegation under the McCarran-Ferguson Act." PCI also secured a colloquy on the House Floor to reinforce that medical professional liability insurers were not included in the health care proposals."

One problem that policymakers face when discussing McCarran-Ferguson is a perpetual lack of understanding of what the law actually does.

The legislation that became the McCarran-Ferguson Act carried an informative heading: A bill to regulate the business of insurance. Too often, policy discussions center upon secondary aspects of the bill—a federal antitrust exemption and state jurisdiction.

The purpose of the bill was to regulate the business of insurance, either through state regulation or through federal antitrust law. The transfer of Congress's constitutional jurisdiction over interstate commerce in insurance is contingent upon state regulatory action. If the states do not regulate, then the federal antitrust exemption evaporates. Congress preferred that states regulate insurance, but in the case that the states did not take that action Congress provided for automatic application of the federal antitrust laws to the business of insurance.

The language of the law itself is short and clear, and yet even supposedly learned observers operate under twisted interpretations of the McCarran-Ferguson Act.

For example, consider the views of Federal District Judge Henry Hudson, who ruled that the provision of the Patient Protection and Affordable Care Act that requires individuals to purchase health insurance is unconstitutional.

In that opinion, the Judge described the McCarran-Ferguson Act as follows: "The act expressly declared that the regulation and taxation of the business of insurance, and all those who engage in it, should be subject to the laws of the several states unless Congress specifically states the contrary."

Actually the bill enables the states to write laws to regulate and tax insurance, and limits that jurisdiction in the case of egregious anti-competitive behavior or in cases when the Congress specifically recalls its jurisdiction. If the states do not act to regulate through law, the jurisdiction returns to the federal government.

I am not making an example of Judge Hudson because I disagree with his decision. Personally I have doubted the constitutionality of an individual mandate since the health insurance sector introduced it through Senators Hatch and Bond back in the 1990s. I believe the individual mandate is a legislative poison pill of dubious policy and constitutional merit.

The point is that few people, even experienced people who have worked around insurance regulation, really study the legal and political history of the system in general. This lack of understanding leads to bad law, bad rulings and bad policy.

On December 15, 2010, National Public Radio's "Morning Edition" carried a segment that drew upon the expertise of two former Solicitors General, one Republican and one Democrat. One expert observed that the government would need to establish for the courts' approval why the government could not require the purchase of any commercial product, if it has the power to require the purchase of health insurance.

The most informative approach to insurance public policy is found in a Supreme Court decision that predates McCarran-Ferguson by 31 years. The decision is not even dependent on the commerce clause.

In the case of German Alliance Insurance v. Lewis (Kansas Insurance Commissioner) 233 U.S. 389 (1914), the court ruled that insurance is not like other private enterprise. Insurance carries a public interest; therefore, it is proper to regulate it in the public interest.

The German Alliance case arises from the property/casualty sector, not the life and health. The company brought suit in federal court to stop the state of Kansas from regulating fire insurance rates.

The first state regulator to seek a role in establishing rates for fire insurance was Kansas Superintendent of Insurance William H. McBride in 1892. McBride was a Republican whose political base rested with the progressive wing of the Kansas Republican Party, which was personified by Emporia newspaper editor William Allen White. McBride's conservative governor, Lyman U. Humphrey, opposed the proposal and it died.

In 1909, a crusading newspaper editor from Osage City, Charles Barnes, was appointed Kansas Insurance Superintendent. Barnes, also a progressive Republican, successfully revived the proposal and saw it made law with the support of fire insurance agents. Historian H. Roger Grant wrote that support for the proposal was particularly strong among those fire insurance agents who wrote business for more than one company.

The German Alliance Insurance Company challenged the Kansas state-rate law in federal court. The company argued that, unlike railroads and telegraph companies, the insurance business was not "impressed with the public interest"; therefore, rate regulation was inappropriate.

The argument failed to impress the federal judiciary, and the U.S. Supreme Court ruled for the State of Kansas in 1914.

The Kansas model was carried across the state line to Missouri even before the Supreme Court made its historic ruling. The bill introduced in Missouri differed slightly from the Kansas statute because in addition to establishing state-made insurance rates, it specifically exempted fire insurance sold under that framework from antitrust law.

That policy framework—exempting regulated insurance business from application of antitrust oversight only to the extent that regulation is applied—remains at the foundation of the McCarran-Ferguson Act.

International issues

In 2011, PCI intends to continue to lead the important debate on international insurance issues and represent the industry at key international forums.

"As we witness the ever-increasing globalization of the capital and insurance markets, the pressures of international developments in financial regulation on U.S. insurers and regulators have never been greater," said McKay. "The international and U.S. industry will watch with great interest as European Union regulators make the final changes in Solvency II, the EU's new insurance financial regulatory system."

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.