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 | | From: | Edmund Fitzgerald | | Subject: | INSURANCE CARTEL AND THE PRESENT TENSE | | Date: | Thu, 20 Jan 2005 19:19:45 -0500 |
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 | From:
http://www.roughnotes.com/rnmagazine/2004/december04/12p82c.htm
SPECIAL REPORT
INSURANCE CARTEL AND THE PRESENT TENSE
After six decades state officials blew it, but federal oversight proposals
offer little hope for improvement
By Kevin P. Hennosy
Regulation implications-Analysis & Opinion
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State officials failed to do the job that Congress charged them to do in
1945 when the Congress directed the states to establish a regulatory
framework that ended the old cartel system ... Nearly 60 years later, we
once again talk about insurance cartels in the present tense
The State of New York's complaint against Marsh & McLennan Companies
describes "fraudulent, anti-competitive and otherwise unlawful conduct."
Through a "contingent commission" structure the state alleges that Marsh
engaged in anticompetitive behavior. According to a Marsh executive quoted
in the complaint, Marsh used contingent commissions to determine "who [we]
are steering business to and who we are steering business from." According
to wire service reports, New York Attorney General Eliot Spitzer called it
"classic cartel behavior."
It is a dangerous thing for any commentator to write about a breaking news
story of this potential importance and scope for a monthly magazine. The
writer knows that his or her readers will have more timely and complete
facts due to the passage of time; however, even as a scandal begins-and this
story has all the markings of a scandal-it is possible to make some
observations.
State officials blew it
First and foremost, state officials failed to do the job that Congress
charged them to do in 1945. In return for ceding authority to the states to
tax insurance, the Congress directed the states to establish a regulatory
framework that ended the old cartel system and prohibited the formation of a
new one. Nearly 60 years later, we once again talk about insurance cartels
in the present tense.
The Marsh scandal provides proof that the state officials have not lived up
to that charge-they have not held up their end of the bargain. State
legislatures never gave regulators the affirmative statutory authority and
guidance to prevent anticompetitive behavior. Without proper authority,
there is no reason to think about a proper budget. Some state regulators
have actively shirked seeking such authority or budget from their
legislatures. There is enough blame to go around.
The McCarran-Ferguson Act of 1945 charges the states to establish an
affirmative regulatory framework to protect the public interest that
otherwise would be protected by federal antitrust law and fair trade
oversight.
New York Attorney General Eliot Spitzer alleges that "Marsh's conduct had
the purpose or effect, or the tendency or capacity, unreasonably to restrain
trade and to injure competition and purchasers, both in New York and in
interstate commerce, by, among other things: (a) Limiting the number of
insurers competing to sell insurance to persons seeking such insurance; (b)
Allocating the market for the sale of insurance; and (c) Using inflated
bids, prices and other terms of sale with respect to insurance to mask the
absence of free and open competition by insurers for the sale of such
insurance."
If Attorney General Spitzer is right-and he usually is-what we have here is
an old-time cartel that insurance regulation was supposed to prevent.
NAIC
This is a regulatory failure of national proportions, so one would assume
that any effort to respond would be coordinated through the National
Association of Insurance Commissioners (NAIC). Where were the regulators who
are charged with preventing such actions? Can the states improve the
regulatory framework in the face of this scandal?
The NAIC's vaunted databases of financial, market and enforcement
information did not give insurance regulators the tools they needed to
uncover the Marsh scheme. The NAIC has adopted a "back-end" regulation
approach in recent years. This approach focuses on statistical analysis of
market conditions. The analysis seeks to correct problems in the market, but
does not attempt to prevent problems.
For nearly a week after news of Spitzer's complaint broke, the NAIC Web site
continued to carry the same headline: "No need for federal regulator, NAIC
tells Senate." The NAIC appeared to stubbornly deny reality at a time when
leadership was needed.
The NAIC finally issued a statement in the form of a news release on October
21. "State insurance regulators are actively pursuing all of the facts,
assessing the adequacy of current laws or regulations, and will determine
appropriate collaborative action involving all states in a very short period
of time," said Diane Koken, NAIC president and Pennsylvania insurance
commissioner. "Brokers and insurance companies that have been abusing the
system for personal gain will be identified and appropriate actions will be
taken to see that all consumers' concerns are addressed. We intend to
coordinate directly with law enforcement officials in identifying and
terminating this activity, as well as developing new regulations as needed
to better monitor all sales activities."
The Feds
So if state officials dropped the ball, should the public and ethical
insurance professionals look to the federal government to take over where
the states have failed? There is a strong case in favor of doing just
that-but the devil is in the details.
The proposals for federal oversight of insurance currently before Congress
do not inspire confidence in the eyes of consumers or ethical business
people. Both the optional federal charter proposal and the federal standards
approach promise a weak regulatory environment. The former, based on an
impotent "supervisory," is modeled on the Office of Comptroller of the
Currency. The latter uses federal authority to bully states into removing
affirmative regulatory review of rates and forms.
There are reasons to support a strong federal regulatory agency. First of
all, insurance is interstate commerce. Armed with experience under the
Articles of Confederation, the federalist framers of our Constitution rested
jurisdiction for interstate commerce with the Congress.
Under the Articles, the states had such jurisdiction. The states acted in
parochial ways that hindered the national interest in interstate commerce.
Furthermore, when state officials did seek to exert public interest control
over growing commercial interests, they often were not strong enough to act.
Critics of state insurance regulation have long described the current system
as "big fish in little ponds."
Calls for federal insurance "supervision" are not new. Going back to the
Civil War, sectors of the insurance industry have argued for a federal
charter. Between the times of the Supreme Court decision in Paul v. Virginia
(1868) and the 1930s, insurers brought case after case designed to overturn
Paul and clear the way for federal charter legislation.
With Franklin Roosevelt's revival of federal antitrust prosecutions in the
late 1930s, insurers eased their calls for federal jurisdiction. Yet, some
insurers chafed under the state-by-state system. As late as the Carter
Administration, commercial insurers lobbied for a weak federal regulator to
free them from the "50 Monkeys."
After the repeal of the Glass-Steagall Act of 1999, the call for an
"optional federal charter" revived. Insurers found Senate sponsors for such
legislation but little support.
Nevertheless, the "threat" of federal legislation proved useful in bullying
state officials into regulatory concessions. To push the states further,
insurance interests had friends in the U.S. House of Representatives to
introduce legislation that would coerce states to lower the regulatory bar
even more. At the same time these political games were being played,
anticompetitive behavior grew.
Neither the proposal for optional federal charters in the Senate, nor the
federal standards proposal in the House, offer policies or practices that
seem better suited to prevent, uncover or crush cartel arrangements like the
one alleged by Attorney General Spitzer. The current proposals before
Congress would make the cartel activities alleged in the New York complaint
more difficult to prevent, discover and break.
My guess-and I do believe this is an educated guess-is that if Congress
offered industry advocates for federal supervision a weak oversight agency,
but applied antitrust law and fair trade oversight to insurers, insurers
would balk. These advocates want to have their cake and eat it too! It
should not work that way.
Sophistication
The Congress and the NAIC have bought into the belief that sophisticated
buyers in the commercial insurance markets should not be hindered by
regulatory oversight. For example, the NAIC adopted a model law several
years ago that requires regulators to "assume" competitive commercial
insurance markets.
In the light of Attorney General Spitzer's lantern, that assumption appears
pretty brash.
In his complaint, Attorney General Spitzer alleged "Unbeknownst to Marsh's
clients, these 'services' include steering business to complicit and
profiting insurance companies by, among other things, rigging bids and
fixing prices."
In short, sophisticated buyers can fall prey to sophisticated cons.
The Marsh scandal has shaken insurance regulation to its foundations.
Nevertheless, that foundation remains sound if anyone chooses to build upon
it: The McCarran-Ferguson Act.
The Marsh scandal demonstrates the soundness of that foundation. If the
insurance industry is not regulated, then it should be subject to antitrust
and Federal Trade Commission oversight. If the public interest demands that
insurers engage in some cooperative behavior that is not consistent with
federal antitrust law, then the industry should be subject to public
oversight through affirmative regulation. It does not serve the interest of
the public or the industry to shield insurers from both regulation and
antitrust law, as Congressional leaders now propose.
Botched
Pundits have always explained that federal insurance regulation was
politically untenable, until and unless there was a massive scandal. As the
winds of scandal begin to blow through insurance markets, prognosticators
have to ask whether this is the scandal that will bring state regulation to
an end.
As facts of the case begin to emerge, it looks as if the state regulators
botched this one pretty badly. State regulators allowed a cartel arrangement
to operate in property/casualty sectors in direct and clear violation of the
McCarran-Ferguson Act.
The alleged cartel arrangement resulted in business practices that should
have been seen in market conduct regulation. Furthermore, companies paid
fees and brokers realized profits that should have been at least questioned
in financial examinations. No market conduct examiner, financial analyst or
financial examiner questioned these practices. It took an aggressive
attorney general named Spitzer to uncover the new insurance cartel-simply
because no one else took the time to look.
If state officials seek to hold on to their jurisdiction over insurance,
then the NAIC must rethink the premise behind its vast operation. The NAIC
must realize that it is not enough to simply archive information for
"back-end regulation." The NAIC should drive an affirmative regulatory
effort to discover problems before they become scandals.
In the best of all worlds, state and federal officials would work together
to design "federal standards for state insurance regulation" subject to
Congressional and administrative oversight. That model cleaned up a very
corrupt Medicare supplement insurance market through the Baucus Amendment to
the Social Security Act. Congress sets standards, the NAIC has a short time
to develop rules to implement those standards and if the states do not meet
the standards, a federal agency assumes regulatory authority in those
jurisdictions. The approach is constitutional, tested and reasonable. *
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and
politics of insurance regulation. During his career, he served as public
affairs manager for the National Association of Insurance Commissioners
(NAIC). Since leaving the NAIC staff, he has written extensively on
insurance regulation and testified before the NAIC as a consumer advocate.
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