Federal Regulation of Insurance?
By Bud Schauerte

The phrase: “I’m with the Federal government and I’m here to help,” usually brings cynical smiles to those who hear it. Here is a true to life story of how a representative of the Federal government makes such an offer.

The scenario involves a speech by a Washington lawmaker explaining how the Federal government should be involved with all 50 states in the regulation of the nation’s insurance industry. Those favoring Federal participation in state regulation of insurance, a system in place since 1945, suggest three options: pure Federal control without state participation; dual regulation by both Federal and state governments; and, allowing individual insurers to decide for themselves which entity—Federal or state—should regulate their insurance businesses.

In a speech before the prestigious National Association of Insurance Commissioners (NAIC) in March, U.S. Rep. Michael Oxley (R-Ohio), chairman of the House Financial Services Committee, which oversees insurance issues, gave the impression that the Fed’s heavy hand in insurance regulation is not only a sensible legislative idea but an inevitable process which already has begun to happen. He is drafting legislation which would give the Federal government the opportunity to “help.”

Had U.S. insurers ever sought Federal fingers in the state insurance regulatory pie, the deed would have happened decades ago. The nation’s insurance industry is not without political influence. Almost all industry professionals, like those in the NAIC, have never asked the Federal government to come to their rescue.

As jittery state insurance commissioners and NAIC members listened, Congressman Oxley summarized his Trojan horse plan to introduce Federal control gradually by establishing a “Federal-State partnership” to regulate insurance. The scheme would diffuse current state regulatory authority and greatly reduce the power and influence of insurance commissioners in all fifty states.

Congressman Oxley left no doubt about his intention of Federal government domination over insurance regulation when he called for the appointment of what presumably would be a “Federal insurance czar” with a powerful tool—veto power over of state insurance regulation.

“For constitutional reasons,” Congressman Oxley stated, “we may need to create a purely Federal individual appointee who will have no authority other than to stamp ‘YES’ or ‘NO’ on the recommendations of the Federal-State Advisory Council.”

Realizing that state insurance commissioners might be sensitive about relinquishing their authorities to an “insurance czar,” the Congressman tried to downplay the significance of a “Federal individual appointee.” But endowing a political appointee with thumbs up or down authority over fifty state insurance departments is enormous enforcement power derived by usurping it from each of the 50 state commissioners.

Mr. Oxley wants a “Federal-State partnership which protects consumers from fraud, improves efficiency and effectiveness, streamlines company and agent licensing, expands insurance capacity and encourages a more competitive market place.” Why didn’t state commissioners ever think of these new ideas?

State regulation of insurance is imperfect. But there are no structural flaws, or complexities with state insurance regulation, which beg correction by a Washington D.C. bureaucracy. Nor has the Federal government’s performance in assuring the fiscal soundness of the Social Security and Medicare insurance programs earned for it the franchise to regulate the trillion dollar domestic insurance industry.

Motives for establishing Federal participation in state insurance regulation have almost nothing to do with improving regulation and everything to do with money and power—but mostly money.

Insurance, including life and health, and property and casualty products, is the last of America’s giant industries regulated exclusively on the state level. The industry receives more than $900 billion annually in premium income from consumers. And it collects more than $18 billion in state premium taxes. The nation’s insurance industry has well over $1 trillion invested in the U.S. economy.

In addition to the $18 billion in premium tax levies collected and remitted to the states the industry pays other taxes such as sales, use, franchise, property, state income, and regulation fees, according to the Insurance Information Institute, an insurance trade group.

As might be expected, insurance company political action committees, plus industry professionals, contribute impressive sums to the political campaigns of state officials who regulate them—a fact which has not gone unnoticed by Members of the U.S. Congress.

Federal insurance regulation, added to that of each state, would result in a redundant tax burden to finance similar if not identical regulation. Insurance consumers, of course, would bear the cost.
In late 2002, President Bush signed into law the Terrorism Risk and Insurance Act (TRIA), which created a three-year Federal reinsurance program for U.S. insurers. The new law guarantees that the U.S. Treasury will provide limited financial guarantees for insurers who might face insolvency due to losses resulting from terrorist attacks. Without the TRIA, insurance availability would be curtailed as there would be insufficient dollar reserves to pay claims. Without insurance protection, domestic and international trade would stall.

Creation of the TRIA provides needed security for American business. It protects insurers against insolvency, and represents a major accomplishment for the U.S Congress, including Rep. Oxley, who endorsed the legislation. But enactment of this important law does not win sympathy from the nation’s insurance industry for unnecessary regulatory “help” from the Federal government.

–From the June 2004 Austin Review