'Fixing' the unbroken

For more than 150 years, the states have protected consumers while maintaining vibrant and solvent insurance markets. Unfortunately, in the wake of the 2007-08 financial crisis the federal government believes it must assume these responsibilities.

Effective regulatory systems are in place in every state for insurance product filing, licensing and consumer assistance. State insurance departments also collect insurance taxes, monitor company solvency and investigate suspected fraud.  The regulatory regimes are robust and protect consumers while fostering marketplace competition.

Insurance commissioners are elected by the people in 11 states. Most others are appointed by their governors. These commissioners and directors serve in roles closer to the voters and more responsive to the public than federal bureaucrats.

Since 1871 the National Association of Insurance Commissioners has facilitated state regulators’ efforts to set appropriate benchmarks and pursue mutual goals. Working cooperatively, state insurance departments have modernized insurance regulation by developing common standards that facilitate business across state lines and guarantee effective regulation without unnecessary duplication of effort.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the federal government broad powers to usurp state regulation of insurance. A legislative byproduct of the financial collapse of 2007-08, in part Dodd-Frank created the Federal Insurance Office. This new agency within the U.S. Department of the Treasury is intended to provide additional oversight for an industry already among the nation’s best-regulated.

This might be understandable if insurers played any significant role in the financial meltdown that spawned Dodd-Frank, but they did not. Even in the case of taxpayer-rescued AIG, it was not the conglomerate’s insurance business that tanked. Periodic financial examinations and strong capital requirements by state regulators minimize such company failures.  Each state also maintains a guarantee fund protecting consumers in the event of a company’s insolvency and no state’s guarantee fund has ever failed to pay when a company went under.

It is ironic that the Federal Insurance Office was birthed because the feds failed so miserably at assessing systemic risk in the financial markets Washington did police. Washington’s track record on creating effective bureaucracy is poor, yet the Federal Insurance Office is invested with new powers over an industry already successfully regulated by the states.

Beyond the small-print stating “we promise to get it right this time” are practical concerns about bureaucratic redundancies escalating costs, clouding enforcement and stifling product innovation, and the prospect that this the first step in an ill-advised federal takeover of insurance regulation.

The Federal Insurance Office introduces yet another agency to which companies must report – one that among other tasks assesses systemic risk in the industry (though states already monitor solvency), gathers information on insurers’ business practices particularly in certain market segments (by subpoena if necessary), and has the power to “recommend” to the new Financial Stability Oversight Council that an insurer be designated a “nonbank financial company” supervised by the Federal Reserve.

Staffing for this dubious work will cost Americans in federal taxes while insurers’ compliance expenses will cost Americans on their premiums.

Proposals that would give insurers the choice of federal chartering rather than state licensing raise jurisdictional questions about insurance crime investigation and strip state commissioners of their ability to halt suspect insurers through prompt license revocation.

The Federal Insurance Office also will determine whether certain state insurance laws should be preempted. Such significant authority invested in a sub-division of a federal agency that never before held any jurisdiction over the insurance industry is ominous. So are linguistic red flags throughout the voluminous Dodd-Frank legislation.

Title V stipulates the legislation shall not be construed to establish or provide the Federal Insurance Office or Treasury with “general supervisory or regulatory authority” over the insurance industry, yet the law already grants specific and substantial authority, including these powers to preempt state law. In a truly open-ended passage, the Federal Insurance Office is empowered “to perform such other related duties and authorities as may be assigned” by the Secretary of the Treasury.

Finally, the director of the Federal Insurance Office shall submit to Congress a report on “how to modernize and improve the system of insurance regulation in the United States.” A 60-day period for public comments to be incorporated in this report recently began. In the report, the director is to identify “gaps in state regulation” and consider “regulation of insurance companies and affiliates on a consolidated basis.”

One needn’t be a states-rights alarmist to view this as the writing on the wall for state insurance departments. The Federal Insurance Office drives a wedge between all parties in traditional insurance transactions – insurers, policyholders and rightful regulators in each state capitol.

Sufficient laws governing insurance are on the books at the state level. While this forces insurers to tailor offerings for each market, it discourages one-size-fits-all policies and encourages innovation. Legislatures are far more nimble than Congress at reforming insurance laws, creating opportunity for companies to develop new products and for other states to adopt or adapt regulations that might work for their citizens. Ultimately consumers everywhere would lose if the federal government were left to investigate fraud reports or resolve claim disputes.

States have successfully regulated insurance since Oklahoma was Indian Territory. But preserving state regulation of the insurance industry isn’t a matter of territory or tradition. It is a matter of trust.