A move toward federal regulation of the insurance industry is being developed by an Orange County Republican and an Illinois Democrat, who hope to establish an Office of National Insurance. Ultimately, the proposed legislation could allow insurers to choose between state or federal regulation, experts say. A similar attempt was blocked earlier.
The plan, to be formally unveiled next month in the House, is being carefully watched in California, home of a $120 billion insurance industry – long one of the state Capitol’s most powerful interests – and an aggressive insurance regulator who plans to run for governor in 2010. A number of major insurers support the approach, and Federal Reserve Chairman Ben Bernanke is favorable to the idea.
Federal oversight is a thorny issue among insurers, who are sharply divided over the implications of federal-vs. -state regulation.
The proposal by Reps. Ed Royce, R-Orange, and Democrat Melissa Bean of Schaumburg, Ill., would set up the national insurance office, which would have the authority to gather financial data, recommend regulations and have enforcement authority over some insurance holding companies, among other duties.
Both lawmakers have received substantial campaign contributions from the insurance industry.
The legislation also would open the door to allow insurance companies to choose their regulator, whether state or federal, according to number of industry observers. Currently, insurance companies are regulated state-by-state, except for anti-trust issues. At a congressional hearing Wednesday, Bernanke said that "an optional federal charter would be a direction worth giving serious consideration."
The plan has drawn fire from the Santa Monica-based Consumer Watchdog, formerly the Foundation for Taxpayer and Consumer Rights, which believes the Royce-Bean plan would dramatically weaken regulation of California’s insurance industry. In particular, the group believes the proposal would gut Proposition 103, the 1988 California ballot initiative authored by the group's leader and backed by national consumer advocate Ralph Nader. The proposition created California’s first elected insurance commissioner, sought to outlaw unfair and discriminatory rates and beefed up the state’s regulatory landscape.
“The advantage to insurance companies is that this legislation gives them the ability to choose their regulator. In large part, it’s an attempt to sink oversight and get around California's Proposition 103, which is the Holy Grail of insurance regulation. They (insurers) don’t like regulation, and this is a way of getting rid of Proposition 103,” said Consumer Watchdog spokesman Doug Heller.
But many California insurers have long questioned the effectiveness of Proposition 103, contending its rules — in automobile insurance, for example — cut costs for drivers in high-risk, urban areas while driving up the costs in lower risk, rural communities to subsidize the reductions. They believe that Proposition 103's provisions governing rate-setting are arbitrary, don't reflect real-world risks and violate the measure's own provisions barring "unfair and discriminatory" rates, and that federal regulation may be one way of thwarting Prop. 103.
State Insurance Commissioner Steve Poizner, a Silicon Valley Republican and candidate for governor next year, is deeply skeptical of the Royce-Bean legislation, according to Capitol sources. He has not taken a position on the legislation, which is still in draft form.
“In general the commissioner is open to any plan that might improve insurance regulation,” said spokesman Darrell Ng. “But insurance regulated under the current regulatory system has held up very well. We would evaluate any change with that knowledge,” he added.
Royce and Bean earlier briefed members of the insurance-industry trade press and an account of the plan appeared in the National Underwriter, a trade publication, among others.
The legislation has exacerbated a long-standing division within the insurance industry. Among those that favor optional regulation is one of the largest insurance trade groups, the American Insurance Association, while groups representing smaller municipal companies and independent agents are opposed.
“Creating an optional federal charter for insurance would lead to dual regulation for the property-casualty insurance industry,” Jimi Grande, vice president of the National Association of Mutual Insurance Companies, told the Underwriter. “It appears the direction Rep. Royce and Rep. Bean are heading in will still create an unlevel playing field.”
Royce and Bean are on a subcommittee of the House Financial Services Committee that deals with insurance issues. The chairman of the committee is Rep. Barney Frank, D-Massachusetts. Frank is favorable to federal regulation of insurers, dubbed “systemic risk regulation” in Congress, although he has not taken a position on Royce-Bean.
Both Bean and Royce have received substantial donations from insurers. Royce took in more than $177,000 from insurers in the 2007-08 election cycle, while Bean received more than $250,000. In both cases, the insurance industry was their top source of campaign cash, according to federal financial disclosure statements. Consumer Watchdog, a nonprofit consumer advocacy group, is financed in part by charitable groups and individuals, the trial bar, and through fees it earns by intervening in consumer-protection regulatory cases, among other sources.
Thus far, the Royce-Bean proposal has flown under the radar of the general media.
But in California, where the political battles surrounding insurance regulation often make headlines, the possibility of weakening the clout of Proposition 103 is being watched carefully.
Currently, insurers are monitored by regulatory departments in the 50 states. Regulations differ from state to state, although similar rules in varying degrees regarding fraud, reserves, company solvency, fiscal management, rate setting and methodology, market conduct and numerous other factors are part of the regulatory mix in all the states. Except for anti-trust issues, regulation of the insurance industry was relegated to the states in federal legislation more than 70 years ago.
In 2007, legislation introduced by Rep. John Sununu, R-New Hampshire and Sen. Tim Johnson, D-South Dakota, and companion legislation introduced by Royce and Bean ultimately was defeated. Leading the opposition was newly elected Rep. Jackie Speier, D-California, who during her earlier role as head of a state Senate oversight committee opposed the insurance industry on a number of key issues. Her top political donations include nearly $100,000 from lawyers and law firms.
State Farm, an Illinois-based insurer and California’s largest auto carrier, is supportive of Royce-Bean.
“We think that any time you can create a more efficient and competition-based regulatory framework, consumers will benefit,” said State Farm spokesman Bill Sirola. “We think there is a lot to be gained by this and a lot to like about it. As it is, we have 50 different state regulatory standards, and each state has its own regulations. Trying to adapt to all of those to serve our policy holders is markedly inefficient and burdensome.”
The American Insurance Association, a national trade group that represents some 350 property-casualty insurers, supports giving companies the option of state or federal regulation. The group also believes a national insurance office is overdue.
“The legislation goe
s a long way to answering a lot of criticism that had been directed against the older bills. It basically enhances the consumer elements, it implements the NAIC (National Association of Insurance Commissioners) model for covering market conduct, puts an ombudsman in place, it enhances the systemic risk piece. The director of the Office of National Insurance would have the authority to monitor markets,” said AIA”s Blain Retheimer.
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