HR 10 Financial Modernization Act

HR 10–the so-called financial modernization legislation which passed the House of Representatives by a single vote on May 13–won’t win any legislative beauty contests, but it may set new records for industry arrogance and Congressional cowardice.

No where is this more true than in the kid-glove treatment of big insurance companies. Whatever the insurance companies demanded, the House delivered. It is one of the most lopsided series of victories by a single industry in years.

And who were the losers? For starters, we can list communities, particularly low and moderate income and minority neighborhoods, taxpayers, the federal deposit insurance fund and insurance policy holders.

The 214 Members of the House of Representatives who voted for HR 10 gave the insurance industry a free pass to become affiliates in federally regulated financial services holding companies without facing federal regulation.

That means that insurance companies will be essentially free of federal safety and soundness regulation. It also means that these corporations will escape CRA-like community responsibilities and will not be required to report where they make investments and sell policies as commercial banks are required to report where they make loans under the Home Mortgage Disclosure Act.

If the Senate goes along, insurance companies will become major players in the financial holding companies; in many cases, the dominant corporate entity. Should they fall on bad times or fail, these insurance companies would have the potential to drag down the entire holding company including banks guaranteed by taxpayer-backed insurance funds. The federal safety net–but not federal regulation–will be extended directly and indirectly to these insurance affiliates.

The insurance companies, including big operations that reach across state lines and around much of the world, would continue to be regulated–if that term can be used–by 50 separate state insurance departments most of which are under funded, undermanned and overly influenced by the industries they monitor and supervise.

Under the provisions of HR 10, the Federal Reserve Board, the umbrella regulator of the holding company affiliates, would be subservient to the state insurance regulators. Except under extraordinary circumstances, the Fed would be required to defer to the state insurance departments on examinations, capital requirements, and interpretations and enforcement of regulations.

In many cases this process would be an absolute travesty, not worthy of the word regulation.

In January, the Wall Street Journal did a major front page expose of the woeful conditions in the Indiana Insurance Department. The department, the Journal found, has an annual budget of only $4 million to oversee 1,828 insurance companies.

Financial examiners–accountants who verify the financial soundness of the companies–make at most $31,980 yearly in Indiana. As a result, recruiting and keeping qualified examiners is extremely difficult. The division assigned to investigate consumer complaints has no investigators on its staff, only “consumer

consultants” who told the Journal that they do little more than forward complaints to companies. The department doesn’t have a single actuary on staff to examine the fairness of insurance rates.

Indiana is not alone in rendering insurance regulation at the state level virtually meaningless through low budgets, inadequate staffing and legislative oversight dominated by legislators with close ties to the insurance industry.

Congressional hearings and reports, studies by the General Accounting Office, independent research, lawsuits and a growing body of investigative pieces in the media have thrown a spotlight on significant deficiencies in the system of state regulation.

A. M. Best Co., a rating service, says that the 50 states combined expenditures for insurance regulation are less a third of the federal outlays for bank regulation yearly. A few years ago, GAO released a study showing that state legislatures on average allocate only .063 of their budgets for insurance regulation.

Why has this state system survived despite its obvious weaknesses? In answer to a question posed by a Wall Street Journal reporter, the Missouri state commissioner–Jay Angoff–was straightforward in saying that the’ state structure has survived because the great majority of insurers believe they wield significant influence over their home-state regulators.

“They’d rather be regulated by 50 monkeys than one big gorilla,” he told the Journal.

Even in the handful of states where insurance departments are reasonably funded and staffed, the emergence of thousands of companies that do business across state lines as well as overseas makes it is impossible for a single state insurance department to monitor and assess risks. Adding to the difficulty of tracking the financial health of the companies is the growing complexity of investments engaged in by these corporations.

A report issued by the Oversight Subcommittee of the House Commerce Committee in 1990 during the midst of rising insurance company failures, found “numerous weaknesses and breakdowns in this [state] system, including lack of coordination and cooperation, infrequent examinations based on outdated information, insufficient capital requirements and licensing procedures, failure to require use of actuaries and independent audits, and improper influence on regulators.”

While scattering regulation across the uneven landscape of 50 state insurance departments represents a reckless disregard for the safety and soundness of the financial system, the retreat on anti­discrimination and community responsibility provisions is a sad commentary on the fairness and judgment of the 214 Members of the House of Representatives who approved HR 10.

Proposals to extend CRA-like community responsibility to the insurance industry got short shrift. All this issue received was a provision for a vague long-range study about the effect of the new financial services conglomerates on communities.

A surprising number of Members who had 100 percent voting records in favor of anti-redlining, anti-discrimination and pro-community legislation abandoned these basic fairness, economic and human rights issues to embrace HR 10–a testament to the power of the financial lobbyists who filled the halls of the Capitol in the days prior the vote. When it came down to communities vs. corporations, 214 Members who voted to adopt HR 10 made it very clear whose side they were on.

Not only did the House refuse to extend new responsibilities to the insurance industry, but it made it easier for the mutual insurance companies to rip off mutual policy holders–the true owners of the mutual companies.

To facilitate this quick grab of the assets of policy holders, the legislation preempts state laws to allow mutual companies to change their domicile to states with laxer laws governing the rights of consumers when a company converts from mutual to stock ownership. At stake are tens of billions of dollars of assets that belong to the policy holders.

Even in a Congress that has often caved to corporate interests, the totality of the surrender to the insurance industry on HR 10 deserves as special niche in the profiles of legislative cowardice. None of the 214 Members who voted for HR 10 should escape responsibility.