By Robert L. Redding, Jr.
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Congress is expanding its review of how the insurance industry is regulated. It's too early to predict how far reform proposals will go. Early indications were more tolerance for life insurance regulation at the federal level versus property and causalty. The insurance industry has had some division relative to the federal regulation of life insurance. Be prepared for a debate on the federal regulation of insurance during the next cycle of Congress.
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The U.S. Congress continues to expand its review of how the insurance industry is regulated. After exhaustive hearings in the 108th Congress by the U.S. House of Representatives Financial Services Committee and a hearing by the U.S. Senate Commerce Committee, the Senate Governmental Affairs Committee's Subcommittee on Financial Management, Budget and International Security held a hearing on insurance practices.
The central focus of the oversight hearing was brokerage practices such as contingent commissions that raise conflict of interest questions and whether these practices harm consumers. But the hearing quickly moved to state versus federal regulation of insurance with the opening statement of Sen. Peter Fitzgerald, R-Ill., chairman of the subcommittee.
Participants discussed a recent investigation conducted by Eliot Spitzer, New York state attorney general. Spitzer was far from being the sole witness. Joining him as presenters were Richard Blumenthal, Connecticut attorney general; Gregory Serio, New York superintendent of insurance; John Garamendi, California insurance commissioner; Albert Counselman, Council of Insurance Agents and Brokers; and Alex Soto, Independent Insurance Agents and Brokers of America. Other presenters included Ernie Csiszar, Property Casualty Insurers Association of America; Janice Ochenkowski, Risk and Insurance Management Association; and Robert Hunter, Consumer Federation of America.
Much has been discussed in the 108th Congress about the federal regulation of the insurance industry. The House Financial Services Committee - through the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, chaired by Rep. Richard Baker, R-La. - has been taking a specific look at life insurance. Baker will most likely return in the 109th Congress as chairman of the same subcommittee.
Spitzer reported to the committee his findings in an investigation into market practices of insurance brokers. Although his 18 pages of testimony were quite enlightening, the message - as he compared this New York investigation with that of conflicts of interest between the research and investment banking arms of large investment firms or the mutual fund industry - was that there were clear similarities.
New York's attorney general pointed out, "We have found that the lack of transparency, combined with inadequate disclosure and regulatory oversight, often leads to market fraud and collusion."
Spitzer added, "Many insurance lines, from employee benefits to property and casualty, essentially function as insiders' clubs, where those with market clout and power pay for preferential treatment. Similar to the small investor on Wall Street or in mutual funds, the ordinary purchaser of insurance has no idea that the broker he selects is receiving hidden payments from insurance companies, that the advice he receives from the broker may be compromised, or that the market bids he sees may be illusory. This has led to a crisis of accountability."
The last serious attempt at insurance reform was during the early years of the Clinton administration. At the urging of then U.S. House Judiciary Committee Chairman Jack Brooks, D-Texas, the House considered reform of the McCarran-Ferguson Act. The Senate did not address similar legislation.
In his last hearing as a member of the U.S. Senate, Fitzgerald revived a decade-old discussion:
"For nearly 60 years, since the enactment of the McCarran-Ferguson Act of 1945, regulation of the business of insurance has been delegated entirely to the states. The system of state regulation has worked well for many purposes. But state regulation purporting to govern global conduct may not always perfectly detect the abuses of daunting market power. I believe it is time for Congress to revisit the antitrust exemption of the McCarran-Ferguson Act, and to make clear that vigorous federal antitrust enforcement can and will reach the kind of anticompetitive conduct on the part of insurance brokers alleged in Attorney General Spitzer's lawsuit."
Note that U.S. Sen. John McCain, R-Ariz., will not chair the Senate Commerce Committee in the next Congress, but will be replaced by Sen. Ted Stevens, R-Alaska. Stevens has not indicated whether he will move on insurance reform legislation in the 109th Congress or not. The House Financial Services Committee will be more likely to address the issue first.
Although the House and Senate Judiciary committees were the committees of jurisdiction during the last McCarran-Ferguson reform attempts, the House Financial Services Committee and the Senate Commerce Committee are expected to take the lead in the next Congress.
How far will reform proposals go? It is too early to predict at this point. Early indications were more tolerance for life insurance regulation at the federal level versus property and casualty. The insurance industry has had some division relative to the federal regulation of life insurance.
ASA has asked industry leaders to be prepared for the federal regulation of insurance debate during the next two-year cycle of the Congress.
