Push For Federal Regulation is Call For No Regulation
Editor’s Note: The following letter was sent to the president of American Insurance Association Gov. Marc Racicot.
I read with interest your letter and news release calling for state insurance regulators to reconsider their opposition to an optional federal charter (OFC). Some of your comments raise questions that should be discussed and clarified.
As president of the American Insurance Association (AIA), one of the largest property/casualty trade groups, you know firsthand how important insurance-related issues are to our nation’s consumers. Property/casualty insurance is a local product, with local issues that require a responsive, local regulator to help resolve consumers’ complaints and address their concerns.
There are presently more than 11,000 individuals working in state insurance departments across this country who help to protect insurance consumers. It takes quite an imagination to assume the Treasury Department could assume even a partial role in regulating insurance without creating a huge bureaucracy. The plain and simple truth is optional federal chartering would create a new federal bureaucracy from scratch and allow insurance companies to “opt out” of comprehensive consumer protections and state oversight. Current proposals would gut consumer protection, while outsourcing most critical regulatory functions to an industry-run self-regulatory organization.
In addition, allowing insurers to pick their regulator threatens a regulatory “race-to-the-bottom.” This scheme would be especially dangerous in property/casualty insurance, where families and businesses faced with a storm, fire, illness or injury often rely on a hands-on regulator to make insurers keep their promises and to help rebuild quickly after an unforeseen disaster. The push for an OFC is, in reality, nothing more than a call for little or no regulation.
I’m sure you understand how important premium tax dollars are to the livelihood of every state in our union. In 2006, the states collected more than $16.7 billion in revenues from insurance sources. Of that amount, $1.2 billion — roughly 7.2 percent — went to regulate the business of insurance. The remaining $15.5 billion went to the states’ general funds for other purposes. That begs the question: How would any new federal bureaucracy be funded, if not by state premium tax dollars?
Surely you are not proposing that the AIA’s member companies would be willing to pay an assessment to the federal government, in addition to the premium tax they would continue to pay to their domiciliary state. That would undoubtedly result in higher premiums for American consumers.
I would also like to clarify and correct some of your observations:
- While the current draft of the National Insurance Act preserves premium tax revenues for the states, we do not have to look very far back in history to find a national solution that funded premium taxes for a while and then reversed course. I refer you to the Federal Crop Insurance Program.
- Consumers do not generally choose their bank or their insurer based upon its regulatory framework. I am certain that most national bank customers do not know that the primary regulators of the bank are the Office of the Comptroller of the Currency and the Federal Reserve. In reality, consumers select a bank based on the products and services that the financial institution offers.
- The National Insurance Act does, indeed, create a new federal bureaucracy. While it is housed within the Treasury, it is an oversimplification to say that no new bureaucracy would be created. The Treasury does not currently have staff devoted to insurance regulation; it does not have the infrastructure needed to collect the financial and market regulatory information that is needed to monitor insurer financial position and market conduct activities; and it does not have the necessary in-house expertise available without making substantial expenditures to secure that talent.
- Consumers and insurers deserve a regulatory system that focuses on what is most important. They have that in the current state-based framework. It appears that the AIA’s motivation for supporting a federal regulator is to allow complete pricing freedom — and I believe that you are more likely to achieve that means to an end through a federal regulator. While you might receive pricing freedom initially, you will only need to have a medical malpractice crisis or rapidly escalating auto insurance rates before that option disappears.
The stakes are high. I would ask you to consider the failures of federal regulation, which caused the current problems in the financial markets, as another warning for restructuring the current insurance regulatory framework. Lax federal oversight caused the current disruption in the bond market. The Office of the Comptroller of the Currency allowed banks to offer unaffordable subprime loans to homeowners over the objection of state regulators, who sought to protect consumers from these unsafe products. The Federal Reserve allowed banks to hold risky derivative investments based on these subprime loans, which resulted in billions of dollars in write-downs. The Securities and Exchange Commission not only authorized these derivatives, it failed to supervise how credit agencies rated them. Everyone on the federal level who contributed the kindling, logs and matches that caused this fire should not now take away authority from state regulators who have been keeping the flames in check.
For more than 135 years, state-based insurance regulation has proven time and again that it can meet the challenges of our vibrant, dynamic industry. From bond insurance to long-term care insurance, state insurance regulators have remained steadfast in our commitment to protect insurance consumers — by ensuring the solvency and proper conduct of the companies we regulate and by providing information that helps every American be a smarter insurance consumer.