Insurers Are At Odds Over Paulson Plan
Saturday, April 19, 2008
Faced with a Bush administration proposal for new federal regulation, the insurance industry has formed into two warring camps, each side claiming it has the best interest of consumers at heart.
The split, in its simplest terms, is between big and small companies. Most of the large, national firms back the proposal, which calls for a single, central regulator instead of the current state-run system. Small, regional insurers are generally happy to continue to deal with their own nearby overseers and do not want the extra layer of oversight that a new federal regulator would bring.
Representatives of both points of view testified at a House subcommittee hearing this week, kicking off what is likely to be a serious and prolonged clash within the industry about the future of its oversight. The division could make it difficult for Congress to agree on a direction to take insurance oversight as lawmakers consider a deluge of suggestions about how to more effectively regulate financial companies and markets.
The Treasury Department's plan would give insurers the choice, for the first time, of being regulated by the states or by a new agency in Washington.
The American Insurance Association, which primarily represents large insurance companies, considers enactment of this optional federal charter, as it's called, a major goal. "It's a very important priority," said Marc Racicot, president of the association. The association says having a single regulator would cut costs industry-wide by billions of dollars a year -- savings that could be passed on to customers -- without reducing consumer protections.
The Property Casualty Insurers Association of America, whose members are mostly smaller firms, takes the opposite view. It says a mixture of federal and state regulation would confuse both insurers and their customers and could cost consumers more. "The farther away the regulator is from the consumer, the less responsive the regulator tends to be," said Ben McKay, the group's top lobbyist. "Also, the different regulators may suffer confusion as to whether they are responsible for particular issues."
Each side has its own lobbying coalition. On one side is the Optional Federal Charter Coalition, which favors the Bush administration's idea. On the other is the Coalition Opposed to a Federal Insurance Regulator.
The division between large and small companies is not hard and fast. Although major firms such as Allstate and State Farm prefer having the option of a federal insurance agency, others, including Aflac, oppose the idea. Life insurers tend to advocate a federalized system, but the primary lobby for insurance agents, the Independent Insurance Agents & Brokers of America, does not support the change.
States have regulated insurance with little direct federal involvement for almost 140 years. In 1869, the Supreme Court concluded that the issuance of an insurance policy was not interstate commerce and therefore was outside the scope of federal authority. Congress cemented that decision with the passage in 1945 of the McCarran-Ferguson Act, which exempted insurance from most federal laws.
But on March 31, Treasury Secretary Henry M. Paulson Jr. unveiled a plan that would give insurers the choice of being regulated at the national level or continuing to be regulated by the states -- a system similar to the regulatory structure that applies to banks. His proposal was part of a comprehensive plan that would consolidate oversight of financial institutions and markets with the intention of making them safer and their regulation more efficient.
"An OFC [optional federal charter] insurance regulatory structure should enhance competition among insurers in national and international markets, increase efficiency, promote more rapid technological change, encourage product innovation, reduce regulatory costs, and, importantly, provide high-quality consumer protection," Assistant Treasury Secretary David G. Nason testified in the House on Wednesday.
Alastair Shore, an insurance executive testifying on behalf of the American Insurance Association and the American Council of Life Insurers, backed the Treasury plan. He said state-run regulation makes it more expensive to get innovative products to the market, which hurts consumers. "Ultimately, the consumer pays for this inefficiency through higher costs, reduced product offerings and less consumer choice," he said.
But Tom Minkler, speaking for the insurance brokers and agents, said that the current system, while imperfect, does not need to be revamped significantly. "State insurance regulators have done an excellent job of ensuring that insurance consumers, both individuals and businesses, receive the insurance coverage they need and that any claims they may experience are paid," he said. "These and other aspects of the state system are working well."
Members of the Optional Federal Charter Coalition include the American Insurance Association, the American Council of Life Insurers, the American Bankers Insurance Association, the National Association of Independent Life Brokerage Agencies, the Reinsurance Association of America and the Financial Services Forum.
The Coalition Opposed to a Federal Insurance Regulator includes the Independent Insurance Agents & Brokers of America, the National Association of Mutual Insurance Companies, Jackson National Life Insurance, the Association of Financial Guaranty Insurers, Alfa Insurance and Aflac.