Federal change is in the wind in financial regulation, healthcare reform and insurance regulation
(l to r) John Huff (MO DOI), James Hall (ACLI), Tom Santos (AIA) and Rick Ramsay (AHIP) provide Exchange attendees with the latest, ever-changing news about insurance regulation and healthcare reform.
John Huff, Director, MO DOI, Financial Regulation and Professional Registration, moderates the national trades panel after kicking-off the St. Louis Exchange.
Given that the overarching story of the past 10 months, unseating even the global financial crisis for sheer intensity of emotions and decibels, is the potential for major reform in one-sixth of the U.S. economy – healthcare – you would have to have been in a very dark cave not to have heard that major change is in the wind.
So, it was no coincidence that the first panel discussion at the 2009 Exchange was “Federal Proposals: Its Impacts on Insurers, Regulators and Consumers,” featuring James Hall, regional vice president-State Relations, American Council of Life Insurers (ACLI), Richard Ramsay, vice president-State Advocacy, America’s Health Insurance Plans (AHIP), and Tom Santos, vice president-Federal Affairs, American Insurance Association (AIA). The discussion was led by none other than Missouri State Director of Insurance, John Huff.
Most sweeping changes since the 1930s?
Hall led off, quipping that there was once a rumor afoot that the State of Illinois was going to commission a sculpture of a giant croquet ball to match the giant “wicket” on the other side of the Mississippi River, also known as St. Louis’ famous Gateway Arch. However, the conversation quickly took on a more serious turn as Hall noted that the health insurance industry is not the only component of the insurance industry likely to be affected by changes in federal regulation and oversight.
“All aspects of our business are going to be affected by the pending proposals,” Hall said. “In the wake of the financial meltdown, the federal government is under terrific pressure to ‘do something.’ As a result, we could be looking at the most sweeping changes since the 1930s.”
Hall struck a positive note in his estimation that a good system of state regulation of the insurance industry would likely remain in place, but that the changes in a typically massive piece of proposed legislation wending its way through the House Financial Services Committee would have some as yet not entirely known downstream effects.
James Hall, regional vice president-State Relations, American Council of Life Insurers (ACLI), predicts that a good system of state regulation of the insurance industry would likely remain in place, but would have some as yet not entirely known downstream effects.
“It’s all typical ‘fedspeak,’ and it tends to change weekly,” Hall said. “Hearings are now going on in Washington and you can expect it to continue to change in the weeks ahead.”
One of the key issues is likely to be the establishment of clear guidelines concerning the fiduciary duties of agents and broker dealers with respect to the sale of life insurance and annuity products. Another is the proposed creation of a Federal Office of Insurance that would be given a variety of oversight responsibilities but not necessarily any regulatory authority. In addition, there may be much stronger regulation of the over-the-counter derivatives market, which could affect life insurers since they tend to be among the most significant end users of such instruments.
One of the many “Titles” or chapters contained within the proposed legislation, in fact the very first, Title 1, would create something called a Financial Services Oversight Council (FSOC). This entity would fall under the tutelage of either the Treasury Department or the Federal Reserve. Among the members of the FSOC would be the directors of both federal agencies. The insurance industry is lobbying to have at least one member from the industry on the Council as well.
Another key development would be the development of the aforementioned Federal Insurance Office, or FIO. The FIO would maintain a strictly consultative role, in effect to try the make sure that the actions of other agencies would not “mess up” the orderly delivery of insurance products and services.
Other points of note include:
- Title 6 would expand the federal government’s ability to regulate the relationships between insurance companies and thrift institutions, Glass-Steagall barriers that were largely swept away by the Financial Modernization legislation of the late 1990s.
- Title 7 would address the regulation of over-the-counter derivatives, significantly tightening the oversight and transparency of the “bundling together” and securitization of instruments such as mortgages which are then sold to insurance companies. The intent is to prevent future “domino effects” that could result in severe systemic risk. It would also place a firewall between true insurance and the kinds of credit default obligations and swaps representing systemic risk.
- Title 9 would create an unambiguous, “harmonized” standard of fiduciary responsibility for investment advisors and broker-dealers to assure “conduct in the sole interest of the consumer.” Some proprietary life insurance products would most likely need to achieve harmony with any such standard.
- Title 10 would create a new Consumer Financial Products Administration (CFPA) that would parallel the role of the Consumer Products Safety Commission (CPSC). For the moment, insurance would be excluded since it is being effectively regulated at the state level. Under the proposed legislation, only three types of insurance would be subject to oversight: mortgage, credit and title insurance.
- Title 12 would provide the government with enhanced resolution authority to act to prevent cascade effects on the wider economy when systemically significant companies run into trouble.
Noting that states already have good systems in place through the state guaranty fund systems, especially in the life insurance arena, Hall noted that the industry will continue to watch developing federal regulation with interest.
Transformation from ‘market-driven’ to ‘government-regulated’
Tom Santos, vice president-Federal Affairs, American Insurance Association (AIA), notes, "The emphasis has clearly shifted from a traditionally market-driven orientation to one that is much more government regulated."
The AIA’s Santos noted that the financial crisis of the past year and the now huge federal involvement in the financial system has initiated nothing less than a paradigm shift in much of the thinking in Washington.
“The emphasis has clearly shifted in a number of important ways from a traditionally market-driven orientation to one that is much more government regulated,” Santos said. “The desire of regulators is to help drive a more stable market and reduce reckless risk taking. In effect, we are seeing the tension between economic populism, driven by public outrage over the worst excesses of the financial services industry, and what we have traditionally known as the ‘free market.’”
Noting that AIA’s major concern is achieving the right balance between these two poles, Santos noted that there is some concern within the property and casualty industry as to what constitutes systemic risk. He noted that, at the present time, no significant property and casualty company faces such a risk, and that solvency requirements and mechanisms already in place are sufficient to address companies in distress.
Santos drew attention to the widely underreported fact that the core property and casualty insurance companies of the American International Group (AIG) were and remain in sound financial condition even as the holding company was facing potential catastrophe due to the credit default swaps sold by its unrelated financial products division.
“There remains a widespread perception that the problems included the insurance companies,” Santos said. “As a result, don’t be surprised if insurance continues to be a part of the debate. The question is, at what point would the government step in when they determine that the failure of a property and casualty insurer represents systemic risk.”
Moving target
Richard Ramsay, vice president-State Advocacy, America's Health Insurance Plans (AHIP), shares his thoughts on healthcare reform.
Ramsay, whose organization has been somewhere near the epicenter of the debate over healthcare reform, noted that thinking changes on an hourly basis on Capitol Hill, making it hard to make a forecast.
“One component would be if proposed reform would allow states to merge the individual and small group markets,” Ramsay said, noting that however attractive this approach may seem on the surface, history is not promising.
“The Massachusetts experience is that while individual rates went down, small group rates increased dramatically, which puts additional pressures on small business,” he said.
More promising might be state or regional exchanges based on interstate compacts, allowing groups of 50-100 to buy health insurance through such exchanges in the near future. Still, many unknowns remain to be addressed.
Ramsay noted one proposal would be for the National Association of Insurance Commissioners (NAIC) and individual states to develop model rates and forms for a framework of ‘floor benefits’ that would provide uniformity and a national standard. Indeed, the NAIC is charged with adopting such a framework within 12 months or the Department of Health and Human Services (HHS) may step in a promulgate its own rules.
Acknowledging that achieving such uniformity in a system long dominated by independent state regulation will be a challenge, Ramsay suggested one point of optimism. He noted that HHS has said that various state laws can conflict with a national standard in detail as long as they are consistent with the intent of the federal law in spirit and effect. In addition, states will continue to oversee solvency issues.
“The state-based system would remain,” Ramsay said. “Insurance commissioners would continue to handle rate reviews, reserving and solvency oversight. States would also maintain the responsibility to do market conduct exams.”
Under a system of state compacts in which health insurance policies are provided in one state but the company is domiciled in another, whose laws would be followed?
“In that case,” Ramsay said, “where the policy is written or issued extraterritorially, the state where the enrollee lives would be the deciding factor. Carriers must be licensed in the state where the coverage is issued or must at least meet with all state laws under the various compacts.”
In addition, by 2010 every state must have an ombudsman to oversee the delivery and servicing of health insurance products.
Ramsay noted that given the rapidity with which the healthcare reform target is moving on Capitol Hill, any predictions made before the President’s signature has dried on a final bill are liable to be off the final mark.
ACLI’s Hall offered a closing comment that perhaps best sums up most insurer, regulator and consumer concerns.
“First do no harm.”
Click here to view Ramsay’s presentation.
Contact Info:
James Hall
Regional VP – State Relations
American Council of Life Insurers (ACLI)
913.599.2320
jameshall@acli.com
www.acli.com
Richard Ramsay
VP – State Advocacy
America’s Health Insurance Plans (AHIP)
202.778.3230
rramsay@ahip.org
www.ahip.org
Thomas Santos
VP – Federal Affairs
American Insurance Association (AIA)
202.828.7100
tsantos@aiadc.org
www.aiadc.org
John M. Huff
Director
MO Dept. of Insurance, Financial Regulation and Professional Registration
573.751.1927
john.huff@difp.mo.gov
www.difp.mo.gov
