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 thinks it must assume those 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 fraud.
Insurance commissioners are elected by the people in 11 states. Most others are appointed by their governors. Unlike federal bureaucrats, these commissioners and directors serve in roles closer and more responsive to voters.
Since 1871, the National Association of Insurance Commissioners has facilitated state regulators' efforts to set benchmarks and pursue mutual goals. Working cooperatively, state insurance departments have modernized insurance regulation and developed standards that facilitate business across state lines.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the federal government broad powers to usurp state insurance regulation. A legislative byproduct, in part, of the financial collapse of 2007-08, Dodd-Frank created the Federal Insurance Office (FIO). This new agency within the U.S. Department of the Treasury provides 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, 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 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 has gone 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's track record on creating effective bureaucracy is poor, yet the FIO gives Washington new powers over an industry it has never before policed.
Beyond the small print stating that "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 is the first step in an ill-advised federal takeover of insurance regulation.
The FIO introduces another agency to which companies must report - one that assesses systemic risk in the industry (although states already monitor solvency), gathers information on insurers' business practices (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 FIO also will determine whether to pre-empt certain state insurance laws. Such significant authority invested in a subdivision of a federal agency that never before held any jurisdiction over insurance is ominous. So are linguistic red flags within the voluminous Dodd-Frank legislation.
Title V stipulates that the legislation shall not be construed to establish or provide the Federal Insurance Office or Treasury with "general supervisory or regulatory authority" over insurance, yet the law already grants specific and substantial authority, including these powers to pre-empt state law. In a truly open-ended passage, the FIO 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 see the writing on the wall for state insurance departments. The FIO drives a wedge between insurers, policyholders and rightful regulators in each state capital.
Sufficient laws governing insurance are on state books. They force insurers to tailor offerings for each market, discourage one-size-fits-all policies and encourage innovation. Legislatures are far more nimble than Congress at reforming insurance laws, and consumers everywhere would lose if the federal government were left to investigate fraud 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.
John D. Doak is insurance commissioner of Oklahoma.
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