Why the ‘Insurance Consumer Protection and Solvency Act’ Seems Destined to Fail

The debate over double taxation usually takes place in connection with capital gains or dividend taxes. But Republicans have introduced a bill that seeks to amend the Dodd-Frank Wall Street Reform and Consumer Protection Act to eliminate the possibility of “double-taxation” of insurance companies by both state and federal insolvency funds. Unfortunately, the proposed legislation goes further than fixing that narrow problem, imperiling the bill’s chances.

Will a worthy idea again get buried by partisan politics?

Let’s take a step back. In 2010, Congress passed Dodd-Frank in response to the global financial crisis. The law dramatically altered the regulatory landscape, creating new oversight agencies and imposing regulations on financial institutions in an effort to end “too big to fail.” In particular, Title II, “Orderly Liquidation Authority,” expanded the Federal Deposit Insurance Co.’s liquidation power beyond banks to “Covered Financial Companies,” defined to include insurance companies and any other companies that are “predominantly engaged in activities that the Board of Governors has determined are financial in nature.”

But the expansion of the FDIC’s liquidation authority to non-banks created the problem of funding those liquidations. Banks already paid into the Deposit Insurance Fund, so an additional money source was needed to pay for the liquidation of non-bank financial companies. Dodd-Frank’s solution is the FDIC-managed Orderly Liquidation Fund, which is funded by fees assessed by the Financial Stability Oversight Council. The fees paid by a particular financial company depends on market conditions and that company’s assessed risk. In theory, larger or less stable companies should pay more than smaller or more financially sound companies.

Insurance companies, however, are regulated at the state level and are already required to pay into state guaranty funds. Paying into two guaranty funds, one state and one federal, seems tantamount to double taxation and imposes a burden on insurance companies that does not exist for other financial companies. Furthermore, insurance companies have long argued that they are fundamentally different from banks and should not be subject to the same types of regulations and fees. This is especially true on the property/casualty side, which does not carry the same inherent systemic threat as banks or investment companies. Yet Dodd-Frank makes no distinctions.

Representatives Bill Posey, R-Fla., and Judy Biggert, R-Ill., have introduced legislation aimed at ending the double-taxation, but their bill also stalks bigger game. The proposed legislation, H.R. 6423, “Insurance Consumer Protection and Solvency Act of 2012,” would alter the definition of a Covered Financial Company to specifically exclude insurance companies. In other words, the bill would reverse one of the signal provisions of Dodd-Frank. H.R. 6423 was introduced on Sept. 14, 2012, and is currently before the House Committee on Financial Services.

“The permanent Dodd-Frank bailout fund is a bad approach to banking and an even worse approach for insurance, which is already regulated effectively at the state level,” said Rep. Biggert, chair of the House subcommittee on insurance, housing and community opportunity. “Our legislation will simply ensure that the fog of regulatory uncertainty created by Dodd-Frank doesn’t force insurance consumers to pay into a new, federal bailout fund.”

Whatever one thinks of Dodd-Frank as a whole, that ship has sailed and, barring the unlikely event of one party controlling 60 seats in the Senate, the ship won’t be returning to port anytime soon. Extracting insurance companies from FDIC authority just two years after that authority was granted is a major legislative shift that Dodd-Frank’s supporters are highly unlikely to support.

By contrast, a narrowly-drafted bill aimed solely at fixing a limited and perhaps unforeseen consequence of Dodd-Frank might have passed. For example, the sponsors could have restricted the carve-out to property/casualty insurers or limited the assessments on insurers by the Financial Stability Oversight Council. A narrower amendment could have been presented as fine-tuning Dodd-Frank, rather than a direct attack. But by taking a broad partisan approach, H.R. 6423 seems destined for the legislative trash heap — taking a good idea along with it.