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Ralph Nader > In the Public Interest > Insurance’s own Insurance

The insurance industry continues to live a charmed existence in state and federal legislative halls.

Even banks — no slouches at using corporate money and muscle to gain legislative favor — appear incompetent when compared with large insurance companies that regularly escape regulations designed to protect the public.

Adequate credit on reasonable terms is often the lifeblood of many communities. Equally important is insurance. You don’t build homes, operate small businesses, or buy automobiles without insurance.

Thirty years ago, the President’s National Advisory Panel on Insurance in Riot Affected Areas stated:

“Insurance is essential to revitalize our cities…. Without insurance, banks and other financial institutions will not — and cannot — make loans;… housing cannot be repaired;… efforts to rebuild our nation’s inner cities cannot move forward…. Communities without insurance are communities without hope.”

The Home Mortgage Disclosure Act (HMDA) — a law adopted nearly a quarter of century ago to combat redlining of low- and moderate-income and minority neighborhoods — requires banks to make annual reports of where they make mortgage loans. The law has helped move credit into underserved rural and urban areas and to detect discriminatory lending patterns.

In 1993 the House of Representatives passed legislation to extend HMDA-type reporting to insurance companies, but the insurance lobby rolled out the big guns in the Senate and prohibited the legislation from being considered by the Senate Banking Committee. Later, in 1996, big insurance companies maneuvered behind the scenes to scuttle a proposal by the National Association of Insurance Commissioners to conduct an industry-wide study of redlining.

Financial deregulation legislation now pending in Congress (H.R. 10) provides a great opportunity to extend an HMDA-style antiredlining requirement to insurance companies. But the House and Senate Banking Committees have ignored or dismissed the issue.

Amazingly, deregulation legislation is moving forward in both the House and Senate with provisions that will allow insurance companies to form and become members of federal financial holding companies — without being subject to safety and soundness regulations by any federal banking agencies.

According to the pending legislation, insurance companies would continue to be regulated — if that term can be used — by 50 separate state insurance departments, most of which are understaffed, underfunded, and far too often influenced by the industries they monitor and supervise. The Federal Reserve — which would serve as an umbrella regulator of holding companies — would be prohibited from examining or setting capital standards for insurance company subsidiaries. Even the interpretation of regulations would be left solely to the states. Only in extraordinary circumstances could the Federal Reserve intervene in the machinations of an insurance company to prevent collapse of a holding company.

A few years ago a congressional report evaluating state insurance regulation found a number of weaknesses in this system including lack of coordination and cooperation, infrequent examinations based on outdated information, insufficient capital requirements and licensing procedures, failure to require independent audits and the use of actuaries, and improper influence on regulators.

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 in overseas markets, would make it impossible for a single insurance department to monitor and assess risks. Adding to the difficulty of tracking the financial health of insurance companies is the growing complexity of their investments.

Why is this important to taxpayers? Because many of these insurance companies are big enough to compromise an entire financial holding company should they fall on bad times. If that should occur, taxpayer dollars may be used to bail them out.

H.R. 10 is becoming another sad example of the insurance industry’s influence over state and federal legislators. As Congress seeks to deregulate the financial industry, insurance companies have taken a prominent position in trillion-dollar business that could dominate the financial world.