Will Obama succeed on insurance issues where others have always failed?
In the backrooms of Capitol Hill, where the deals are cut and legislative language is hammered out, there’s a saying that consensus in the insurance industry is like a unicorn. Everyone can describe it, but no one has ever seen one.
That may have been true for past insurance battles, but there is a new urgency for consensus in the industry as 2009 dawns, a new Congress convenes and a new president takes office against a backdrop of the most severe financial crisis this nation has faced since the Great Depression. The federal government has done the unimaginable—partially nationalizing banks and insurers—and major stakeholders expect tough regulatory reform to come next.
Will this force the insurance industry to do the heretofore impossible and engage the unicorn? Nobody is making any wild predictions yet, but key industry players certainly are making noises about cooperation. In the past, reform efforts—especially those that would have usurped state regulation in favor of federal oversight—were stopped by industry groups that “just said no.”
This time, however, there is a sense that obstructionism may come at considerable peril because the regulatory reform train is stoked up and ready to move down the track. If you don’t get on board, you may just be left behind.
“We’ve had conversations, direct conversations, with all of the major leaders in the House and the Senate and also had some conversations with the current and incoming Treasury team, and they have all indicated there is going to be sweeping financial restructuring,” says Robert Gordon, who spent 16 years as a top staff member of the House Financial Services Committee before joining the Property Casualty Insurers Association of America as senior vice president for policy development and research.
“Many of those individuals told us very definitely that insurance will be included. It won’t be optional anything.”
“I think this is going to be the year,” agrees Peter Lefkin, senior vice president of government and external affairs for Allianz of North America. “I believe some form of federal oversight and regulation of the insurance industry is going to occur in 2009.”
Joel Wood, senior vice president for The Council of Insurance Agents & Brokers, expects that at a minimum there will be “an overlay of systemic risk regulation at the federal level for holding companies.”
“I think we may be past this federal-versus-state issue. Once it becomes clear that there is going to be a degree of federal insurance regulation, most in the industry will have to decide what we can live with and what we cannot,” Wood says. “I am less concerned about this being a battle royal within the industry itself, but it is combustible. This is a very anxious environment, and anybody who says they know what is going to happen is blowing smoke.”
Federal regulatory oversight for holding companies would affect many of the major insurance companies.
“What we have learned out of this [financial crisis] is that there really is nothing in terms of regulation for holding companies,” says Scott Sinder, The Council’s general counsel. “The other issue is that nobody really knows what these companies are doing.”
Gazing at the Crystal Ball
The election of Democratic President Barack Obama will likely have less impact on the regulatory reform movement than it will on the benefits side of the insurance equation. Although candidate Obama made it clear that tackling the healthcare system to significantly reduce the number of uninsured was a top priority, property-casualty insurance issues were not part of the campaign dialogue.
“We couldn’t detect any particular policy position that the Obama campaign took in the area of insurance regulation,” says Frank Nutter, president of the Reinsurance Association of America. “I don’t think he comes in with an agenda focused on insurance regulation, but I suspect they are going to inherit a lot of financial services regulation positions from the Fed and Treasury and others.”
Insurance regulatory reform received a fair amount of attention during the last Congress, but most of the talk then was about the merits of an optional federal charter, reform of the surplus lines marketplace and the possibility of enacting a NARAB II approach to producer licensing that would strip away duplicative requirements symptomatic of a state-based regulatory system.
Then this fall, insurance giant AIG toppled under the weight of a huge book of credit default swaps, saved only by a controversial $150 billion bailout by the federal government (read: “taxpayers”). By highlighting the role of the insurance industry in the financial services sector and the dangers of unregulated activities, the AIG crisis dramatically changed the parameters of the discussion.
“The optional fed charter, which is something a significant portion of the insurance industry was pursuing and a significant portion was opposing, is undergoing a new paradigm because of how integral insurance is to the national economy,” Lefkin says. “Many of the policymakers no longer feel the optional is an option because of the economic crisis and systemic risk,” he continued. “The collapse of AIG, combined with the financial impairment of many life insurance companies, has sort of galvanized political and public attention. There is an emerging consensus of people in both political parties that some type of federal oversight is needed, and it is important that unrelated activities of insurance companies and other financial service companies not fall through the regulatory cracks.”
While the debate about an optional federal charter has been around for decades, Wood says, “Now we have the cataclysmic event that will force consideration of federal insurance regulation.”
“We can’t be naive about this process. Historically the industry support for an optional federal charter was conditioned on a fairly massive preemption of state insurance laws, including no state regulation or form regulation,” Wood adds. “Well, that is deregulation, and it is unlikely in this environment that Congress is going to be deregulating.”
Nutter says a “tsunami of financial services reform is sweeping over just about all the financial regulatory community, state and federal institutions.”
“The one thing that seems to be settled in is some sort of federal role relating to a systemic risk analysis,” he says. “Presumably the Federal Reserve would take over the role of looking at institutions or financial instruments that could put other financial institutions at risk. We are all assuming there is a lot of momentum for expanding the federal role in that regard. It is less clear what they would do about the more typical solvency role that state insurance regulators now play.”
“The reality of the financial crisis has changed the political direction,” says Lefkin. “The concern is that insurance is such an essential component of the financial services industry that it has got to have a greater degree of financial security. You don’t want to have unregulated areas of an insurance company posing a risk to the regulated portion of operations.”
Whatever happens, experts agree it will be done fast, with regulatory reform taking second place only to the economic stimulus plan that President Obama is expected to call for as the first major action of the 111th Congress.
“One reason they [lawmakers and administration officials] are reaching out to critical players is they want to be sure to address the problems and make changes, but they also recognize that you need to be careful and talk with the experts,” says Gordon. “It is important not only for PCI but for all our trade brethren to work as closely together as possible to help educate Congress on the best models for regulation.”
Wood predicts that a clear picture will emerge by the second quarter of this year. “It could move with lightning speed, but I tend to think it will be a little more comprehensive,” he says. He doesn’t think that Congress will develop a package of reforms and let the administration figure out how to implement it—as it did with the credit crisis bailout program known as the Troubled Asset Relief Program, or TARP. “Congress is going to preserve its prerogative,” Wood says.
Lefkin says Congress will first go after unregulated products, such as credit default swaps, hedge funds and private equity funds. “After those things, the second area will be a comprehensive review of the nation’s regulatory system,” Lefkin says.
Some of that work has already been done. In March 2008, the Treasury Department released a financial blueprint that contained a number of recommendations to modernize regulation of the financial services sector, including an optional federal charter for insurers and greater oversight for futures and securities.
“I expect that to be dusted off, and a lot of its essential components will probably be brought to place,” Lefkin says.
The anticipation of fast action has left trade associations scrambling, trying to decide whether to rely on their old positions or develop new ones.
“There is lots of behind-the-scenes discussion about the need to share information and coordinate with each other, in part because everyone has a different perspective. But the more you can work together, the better,” Gordon says. “We all need to coordinate—not just property-casualty insurers. Life insurers have different issues at stake, and the banking and security industry has different issues at stake. But the decision of the government to backstop one industry can have severe impact and unintended consequences” on other industries.
Another area where the industry is expecting quick legislative action is reauthorization of the National Flood Insurance Program. Last year, lawmakers tangled over whether to add wind coverage to the federal flood program. The House supported adding wind coverage, while the Senate favored keeping the program as it was, without any expansion of the government’s catastrophe role. Unable to break the deadlock, Congress just gave the flood insurance program a one-year extension, which expires March 6.
Most of the industry opposed adding wind coverage to the flood program, and the RAA’s Nutter hopes the Senate holds firm should the issue arise again.
“The government seems to have higher priorities in providing financial support for a variety of financial institutions and industries,” he says. “One would think that expanding flood insurance would not be a priority.”
Opportunities and Pitfalls
It is reasonable to expect huge policy changes across the board with a Democrat in charge after eight years of a Republican in the White House. But on Capitol Hill, the key players in insurance regulatory reform—Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee; Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee; and Rep. Paul Kanjorski, D-Pa., chairman of the key insurance subcommittee in the House—have not changed, and all are very familiar with issues facing the industry.
That is why Wood and Gordon are hopeful some of the other regulatory improvements that the p-c industry has been pushing for, such as surplus lines reform and NARAB II, may make it into a broader piece of legislation. Surplus lines reform, for example, has passed the House twice on unanimous votes but has yet to be voted on by the Senate, despite Dodd’s indication of interest in the proposal.
“I think there will be more interest in doing it as part of the overall package than in doing it independently,” Gordon says. “Some of the key players have said there is a need to have that as part of the discussion on regulatory restructuring during the next term.” While the legislative opportunities are great, so are the dangers.
“If you have systemic risk regulation—and the ultimate bottom line here is that the promise to pay is upheld—the question is what opportunities will there be to get out from under the constraint of state-by-state regulation?” asks Wood. “We’ve got a terrific opportunity here with Dodd, Frank and Kanjorski on the Hill, and the top economic policy and financial regulatory leaders for this administration are real pros who get it.”
Still, Wood says, there is a great deal of apprehension as the financial meltdown creates potential for legislative backlash and political grandstanding. “We also have concerns about some barnacles that could be picked up in this kind of political process,” Wood says, such as a move to implement credit scoring for insurance or require undesirable underwriting standards.
In addition, money is in short supply, so the insurance industry will need to be particularly watchful for changes in the tax laws and other revenue measures that could have a significant impact on bottom lines. In a debate like this one, Gordon says, the fact that the property-casualty insurers have a better overall balance sheet than the rest of the financial services industry is not necessarily a good thing.
“The fear is that when you are doing relatively well in a crisis that you will get sucked in and have to pay the price for the sins of your competitors,” explains Gordon. “Everyone is looking around right now for sources of revenue and assets, and clearly, the insurance industry is where the money is right now. But that money is necessary to support underwriting.”
Any number of tax-related issues could emerge, Wood says. “Money is scarce, and there are big spending plans on the infrastructure, stimulus packages and healthcare reform. We have to be very vigilant and on guard for Congress looking for ‘pay-fors’ in the middle of the night to pay for spending initiatives.”
Arvidson is a contributing writer. Cheryl.Arvidson@LeadersEdgeMagazine.com