Industry Says State Regulation of Insurance Is Sufficient; Consumer Advocate Disagrees
Cherilyn Zavatsky | Bloomberg Law
Insurance Oversight: Policy Implications for U.S. Consumers, Businesses and Jobs, Hearing Before the Subcommittee on Insurance, Housing and Community Opportunity of the Financial Services Committee, U.S. House of Representatives, 112th Cong. (July 28, 2011)
On July 28, 2011, the U.S. House of Representatives Subcommittee on Insurance, Housing and Community Opportunity held a hearing titled Insurance Oversight: Policy Implications for U.S. Consumers, Businesses and Jobs. Industry representatives defended the current structure of state insurance regulation while the sole consumer representative on the panel cited weaknesses and suggested actions states can take to boost insurers’ and regulators’ accountability to consumers.
Insurance Industry Supports State Regulation
Pursuant to the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, insurance is regulated by the states. While not fundamentally reorganizing the regulation of insurance in the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, included two important changes that open the door to federal insurance regulation. First, insurance companies that are identified as systemically important financial institutions (SIFIs) under Title I of the Dodd-Frank Act by the newly-created Financial Stability Oversight Council (FSOC) are subject to regulation by the Board of Governors of the Federal Reserve System. To date, FSOC has yet to exercise this authority. Second, the Dodd-Frank Act created the Federal Insurance Office (FIO). Under the Dodd-Frank Act, FIO has no regulatory or supervisory authority and is authorized to act in an advisory capacity by gathering market information, assessing the overall health of the insurance industry, and conducting studies on ways to improve insurance regulation. However, the creation of FIO itself could be viewed as a means of laying the groundwork for federal insurance regulation in the future.
The Subcommittee heard testimony from representatives from the National Association of Insurance Commissioners (NAIC), the National Association of Insurance Legislators (NCOIL), and other industry association members. The testimony of the industry representatives largely echoed the same sentiment—that the states are generally doing a fine job of regulating insurance and there are adequate mechanisms in place to protect consumers. In addition, many of the industry members testified that, unlike banks, insurance companies pose little or no systemic risk to the U.S. financial system and should not be designated as SIFIs. Industry representatives also criticized increasing regulatory burdens and noted that, as a result of the Dodd-Frank Act, many insurance companies are distancing themselves from their banking activities.
Consumer Advocate Calls for Reform
In contrast to the industry representatives, Birny Birnbaum, Executive Director of the Center for Economic Justice, criticized state insurance regulators for inadequately protecting consumers. Birnbaum asserted that this was caused, in part, by the relatively small presence of consumer advocacy groups in the insurance regulatory space compared to those in support of industry. Indeed, a number of insurer associations have resisted states’ attempts to create consumer insurance boards. However, despite this opposition, a number of consumer groups, such as the Texas Office of Public Insurance Counsel, have been created.
Nonetheless, Birnbaum proposed three reforms to improve the balance of regulatory influence. First, he called for limiting insurance lobbying, either by prohibiting insurers from using premiums to pay lobby costs or requiring prior consumer approval before allowing the use of premiums to pay for lobbying expenses. He also proposed that states fund independent advocates to represent consumer interests before regulators. Finally, Birnbaum expressed support for strengthening the regulation of the revolving door between regulators and the industry to avoid conflicts of interest.
Birnbaum also pushed for more and better data to improve market analysis. Birnbaum accused state regulators of missing many of the worst consumer abuses due to a lack of useful data. Provisions of Dodd-Frank aim to remedy this dearth of data. For example, Congress called for the creation of FIO to monitor underserved communities’ access to insurance. FIO was also given the authority to collect market data from insurers that is not already collected by state regulators.
Birnbaum suggested that state insurance regulators follow the lead of their lending and banking counterparts and adopt an insurance equivalent of the Home Mortgage Disclosure Act, 12 U.S.C. § 2801 et seq. (HMDA), to improve market data collection. However, HMDA may not translate effectively to insurance markets. To facilitate uniform reporting, a single set of HMDA regulations has been implemented by FRB and a single set of HMDA reporting guidance is maintained by an interagency council of federal regulators. It is unclear whether state insurance regulators could successfully implement this level of coordination to ensure uniformity across jurisdictions.
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