Insurance Regulatory Reform: Fixing What’s Broken, Not What Isn’t

I recently had the opportunity to testify, on October 6, 2009, before the House Financial Services Committee regarding the proposed Federal Insurance Office (FIO) that is gaining attention on Capitol Hill. I believe it is of tremendous importance for our elected leaders to hear from Main Street insurers regarding the crucial issue of insurance regulation, and it was an honor and a privilege for me to present the point of view of the Property Casualty Insurers Association of America (PCI) and its member companies before the members of this important committee.

I am the CEO of one of those Main Street insurers, United Educators Insurance, A Reciprocal Risk Retention Group. My company is owned and governed by the more than 1,160 educational institutions we insure, including public and private two- and four-year colleges and universities; independent elementary and secondary schools; educational associations and foundations; public school districts and pools; and museums and cultural institutions. I am also chair of the PCI Board of Governors. PCI, America’s largest insurance association, represents more than 1,000 insurance companies, many of which are small- to mid-sized insurers. We are the mainstream voice of America’s home, auto, and business insurance industry.

The first point that must be noted in this discussion is that the home, auto, and business insurance industry is healthy and competitive, and the current system of regulating the industry is working relatively well. In the past five years, our insurance companies have weathered eight of the ten most costly hurricanes in U.S. history including Katrina, Rita, and Ike. During this time, insurers paid more than $90 billion in hurricane-related claims in addition to handling their regular claims—all without having to ask for a federal government bailout. Property and casualty insurance companies weathered the economic storm for four primary reasons:

1) Underwriting risk is our core competence and we have never moved away from that,

2) We retain the risk we take on,

3) We are not highly leveraged,

4) Our investment portfolios are very conservative because we need ready access to cash to pay claims and state regulators place strict restrictions on the acceptable assets.

We have diligently and prudently worked through an extraordinarily difficult operating environment complicated by the worst recession in decades and the lingering effects of an unprecedented financial crisis that brought down many once iconic banks and Wall Street institutions. As a result, moving into the third quarter of this year, insurers had just over $1.2 trillion in funds available to cover losses and other contingencies. This financial stability is important to the industry’s ability to fulfill its promise to consumers.

We’re not broke, we didn’t cause the current financial crisis, and we don’t need new federal oversight or regulations. The property casualty insurance industry has a proven track record of protecting consumers and financial soundness through the state-based system. Adding federal regulations to existing state regulations will duplicate efforts, make the system less efficient, and may ultimately increase costs for consumers.

PCI supports responsible regulatory reforms that reflect principles of good insurance regulation. We believe good regulation should foster education to support consumer choice in a competitive market, protect consumers against fraud and deceptive practices, enhance private-sector function by eliminating unnecessary governmental intervention, and minimize the economic cost of regulation. However there are hazards of over-regulation.

With all of the discussions involving federal financial services regulatory reform, PCI has been very engaged and committed to working to minimize unintended consequences on the property casualty industry and policyholders. Our focus is on ensuring that reforms are based on sound principles of regulation and preserve the existing prerogatives of the states.

We appreciate the leadership of Representatives Paul Kanjorski (D-Pa.), Judy Biggert (R-Ill.), and other members of the committee who began this discussion in this Congress with their proposed Office of Insurance Information (OII) legislation (H.R. 2609) in the previous Congress. While PCI had some concerns with that bill, it was in many ways more restrained and had a more targeted focus than the two subsequent proposals—the Obama Administration’s Office of National Insurance (ONI) proposal, and the most recent Kanjorski draft which amends the Administration proposal and renames the office as the FIO.

While our association has not taken a position on proposals to create an office of insurance information, our members have concerns and questions about a greatly expanded federal insurance oversight office.

Mission Creep

First, the FIO proposal would grant the federal insurance office a broad scope of powers that goes beyond the more limited and focused scope of the OII proposal. For example, the FIO would have the authority to “monitor all aspects of the insurance industry. . .” and to “perform such other related duties and authorities as may be assigned to the Secretary.” This gives the Secretary of Treasury discretion to delve into any insurance issue that can be said to relate in any way to any of the functions of the FIO. The intent of the initial proposals was to coordinate federal and international insurance policy. However the recent drafts create a potential for regulatory mission creep over time. We believe Congress should take care to ensure that the FIO’s mission and powers are limited to addressing gaps in federal and international policymaking coordination.

Unnecessary and Burdensome Information Requests

One of the principal missions of the proposed federal insurance office is to gather information on and from the insurance industry. There are virtually no limits in the bill on the types and volume of information the FIO may seek. While gathering information might sound like an innocuous activity, it can impose extraordinarily high costs and burdens on insurers—especially smaller insurers—who must comply with data requests. State regulators have some accountability in the information they gather, since they do so in pursuit of a regulatory function and with the additional responsibility of ensuring the solvency and stability of the marketplace. The proposed FIO has no such balancing accountability, mandate, or mission. Instead, as noted above, the proposed language directs the office to require information reporting to “monitor all aspects of the insurance industry”—an incredibly broad directive duplicating what the states already effectively implement, and potentially opening the door to costly and overreaching federal information requests.

To its credit, the proposal does require the FIO to “coordinate” with state insurance regulators “to determine if the information to be collected is available from, or may be obtained in a timely manner by, such State insurance regulator or other agency.” However, this does not definitively prohibit the FIO from demanding information that is publicly available or otherwise available from state regulators. The language should be tightened to require the FIO to seek and obtain any needed information from state insurance regulators and other public sources and permit the FIO to request information from insurers only if the information is not available from those sources.

The Kanjorski/Biggert OII bill rejected such excessive reporting requirements, stating that “the submission of any non-publicly available data and information to the Office shall be voluntary.” PCI would commend that approach to Congress.

Duplicative Subpoena Authority

The new FIO proposal and the earlier Kanjorski/Biggert OII proposal wisely exclude any grant of subpoena power to the federal insurance office. For the reasons outlined below, PCI recommends that any legislation creating a national insurance office should do so as well.

The Administration’s proposal includes exceedingly broad subpoena powers for the ONI. The power to issue a subpoena is one of the most potent powers the Congress can grant to a government agency. That power should therefore be granted very cautiously and only in circumstances where it is clearly justified, appropriately limited, and where the need is compelling and outweighs the potential for abuse. The proposed ONI subpoena power exceeds any other subpoena power granted to the U.S. Department of the Treasury and is particularly broad and unlimited for a non-regulator.

As is typical of most agencies, Treasury’s current subpoena powers generally fall into three categories: (1) formal administrative proceedings; (2) criminal or civil investigations and enforcement of laws/regulations; and (3) Inspector General investigative powers. The subpoena power proposed to be granted in Section 313 (allowing the ONI to require insurers and their affiliates to submit information) exceeds any of the above categories and is not constrained in any way other than that the ONI must believe that the information it wants is relevant to its very broad mission that includes “monitoring all aspects of the insurance industry.” No suspicion of criminal or civil violations of a law or regulation is required and no formal administrative proceeding must be initiated.

The proposed ONI subpoenas are particularly extraordinary because the Administration has specifically stated that the ONI would not be an insurance regulator. Thus, as a non-regulatory entity, it in fact would be inappropriate to grant the ONI subpoena power.

Imposing an additional layer of subpoena authority is also unnecessary, because it would duplicate existing powers that state insurance regulators already have to obtain information and data from insurers, either by subpoena or otherwise. Indeed, as noted above, Section 313(e) (4) of the Administration’s proposal requires the ONI to coordinate with state insurance regulators and other agencies on the collection of information from insurers. In addition to their subpoena power, state insurance regulators have the ability to withhold or revoke licenses or to take other disciplinary action against uncooperative insurers. It is unnecessary and inappropriate to grant ONI subpoena powers that: (1) are virtually unlimited; (2) apply in circumstances outside of those for which subpoena powers are typically granted to Treasury; and (3) duplicate subpoena powers already held at the state level.

Due Process

Under the Administration’s proposal, the office can preempt state law if it determines that the state law: (1) directly or indirectly treats a non-U.S. insurer that is subject to an International Insurance Agreement on Prudential Measures (IIAPM) less favorably than it treats a U.S. insurer in that state; and (2) is inconsistent with an IIAPM. Before making such a determination, the FIO is required to provide notice and an opportunity for public comment. Other than a requirement that the FIO must consider all comments received and notify states of determinations of inconsistency, there is no check on the FIO’s preemptive power whatsoever. Thus, the FIO would have substantial power to preempt state law without being accountable for its decisions in any significant way.

The bipartisan Congressional bill by Representatives Kanjorski and Biggert proposed a number of additional checks on OII power, and we believe that those additional prudent limitations should be included in any FIO legislation that moves forward. Most importantly: (1) states and other aggrieved parties should have the right to appeal “determinations of inconsistency,” and (2) determinations of inconsistency and preemption should be expressly subject to the Administrative Procedures Act and to judicial review.

Small Insurers

The information demands and data requests that the FIO can impose without limit on insurers have the potential to impose tremendous burdens on all insurers. These burdens can be especially crushing for small insurers. We are pleased that the Administration has suggested considering a small insurer exception. However, the FIO is not required to adopt a small insurer exception, and the FIO gets to determine what the threshold for a small insurer should be. We recommend that the exception for small insurers be made explicit, with a definition of “small insurer” included, reflecting a threshold of at least several billion dollars in direct written premium, indexed for market growth, or perhaps a similar measure tied to market capitalization. We would note that the bipartisan Congressional OII bill did not impose such costly information demands on insurers, specifying that submission of non-public information was voluntary.

Negotiation of International Agreements

The Administration’s proposal would authorize the Treasury, assisted by the new FIO, to negotiate and enter into IIAPMs. This would be coupled with FIO’s proposed power to preempt state measures deemed to be inconsistent with such IIAPMs. While it may be appropriate for a federal insurance office to coordinate with state regulators on matters of international interest, the proposed federal agreement negotiation and state law preemption powers would permit Treasury and the FIO to preempt current state reinsurance collateral requirements for overseas reinsurers—a key solvency regulatory tool. Elsewhere in our testimony, we suggest a more collaborative role for the FIO in which it would liaise with state regulators on matters of national and international concern and promote state uniformity in key areas, but refrain from usurping state regulatory authority.

FIO Should Facilitate State Uniformity

We have outlined above the ways in which we believe the functions of the proposed FIO are overly broad. However, we hope Congress would consider other potential functions not included in existing drafts that could, if properly limited, assist in a constructive, collaborative way in reaching the goal of greater uniformity in state insurance laws and regulations. PCI sees positive potential to the FIO if its scope were refocused on the unique international trade, advisory, and coordinating roles suggested by the bipartisan Congressional bill. The FIO could also serve as a liaison and coordinator to help encourage more efficient uniformity in state regulation. Without such limits the office may suffer potential federal agency mission creep over time, far exceeding original Congressional intent.

PCI believes that the states have not reformed the current regulatory system into a model that effectively facilitates commerce in the 21^st century. To modernize, we support reforming the state-based system, but where the states continue to fail to make needed improvements, we may consider other approaches if proven necessary to the creation of a fair, effective, and efficient business environment.

In short, we believe that state regulators are making strides toward greater uniformity but are not quite there yet. Precisely targeted legislation could help move us closer to that goal, and in so doing, we can provide greater efficiency for consumers while preserving a wide array of choices for their benefit.

Conclusion

PCI has shared with the Financial Services Committee’s staff a number of suggested amendments to the FIO legislation that would accomplish many of the things we are recommending, as well as a technical amendment to limit Treasury’s authority to exercise preemption powers with respect to International Insurance Agreements it enters into beyond the preemption powers granted to the FIO. We appreciate the hard work and diligent consideration of this issue by our elected leaders and their staff, and especially the joint leadership of Representatives Kanjorski and Biggert. Although PCI has strong concerns about the current legislative FIO draft, we hope to work with members of Congress on addressing those concerns in a manner consistent with past leadership efforts.

It is crucial, as we seek to streamline insurance regulation in America, that we get it right. It benefits nobody to create duplicative regulation for an industry that is already heavily and comprehensively regulated, particularly when our industry is financially strong, competitive, and did not contribute to the economic downturn. By so doing, we would do nothing but create additional costs that consumers ultimately would bear, either through putting some companies out of business—thereby reducing competition—or forcing them to charge higher premiums to cover the additional expense of new bureaucratic requirements. It is completely unnecessary to fix the one segment of the financial services industry that has been a model of responsibility and fiscal soundness during an otherwise dismal economic time.

* CEO, United Educators Insurance, and Chair, PCI Board of Governors.