The AP is reporting that large property insurers might finally get what they've been wet-dreaming about for years: one set of federal regulations rather than the current patchwork of 50 states' regulations. Obama and Barney Frank are said to be open to the idea. This would be a disaster for consumers. I'm not quite sure how to turn this into an action alert, but can anyone here help?
The proposed change would give a property insurer the option to be chartered under the laws of one state, or as a federally chartered institution (currently there is no federal charter option).
Who wants this? State Farm, Allstate, and their ilk. They complain of 50 different states' regulations.
Who doesn't want this? Consumer Watchdog, which points out quite correctly that the idea of letting insurers choose who regulates them -- the federal or state government -- would be legislative insanity and a race to the bottom.
Currently, property insurers have to obey the laws of each state in which they do business. For example, any property insurer wishing to sell auto insurance in California must abide by Proposition 103, which prohibits redlining (determining your auto insurance rates by your zip code rather than your driving record), and requires the state Insurance Commissioner to approve rate hikes; California's auto insurance market is both highly regulated and highly competitive. California's insurance commissioner recently ordered Allstate to lower its premiums an average of 28.5%, or $250/year per driver. So what does Allstate do? Its CEO, Tom Wilson, begs for federal regulation on the op-ed pages of the NYTimes -- never bothering to explain how federal regulation would preempt California regulation, enabling Allstate to pocket more at the expense of consumers.
Generally, State Farm's California property insurance policies cover wind and hurricanes, but not earthquakes, while its Louisiana policies cover earthquakes but not wind or hurricanes. In federal consumer heaven, a federally chartered State Farm would be forced to cover wind, hurricane, and earthquakes; but a federal insurance commissioner would be far more likely to create a consumer hell, in which none of the above is covered anywhere. The AP reports that the creation of a federal insurance commissioner would save insurers billions of dollars a year.
Do you want your property insurance to be as bad as your health insurance? In California, Susie Self-Employed, who has an individual health insurance policy, has a worst-case scenario when Anthem Blue Cross doctors delay sending her to a specialist and deny treatment: she can sue her health insurer. However, Greg Grouper, who is self-employed but gets his insurance through a trade group, and Eddie Employed, whose employer provides coverage, have no similar right. The courts have repeatedly held that a 1974 federal law, the Employee Retirement Income Security Act (ERISA), intended to regulate pensions, applies to group health insurance; it preempts state efforts to hold health insurers responsible for their wrongful actions, so Greg and Eddie can't sue their insurers. ERISA is known as "The Law That Ate Health Insurance." Now property insurers want it to eat property insurance protection too.
Melissa Bean (D-IL) has sponsored the House legislation to create federally regulated insurance companies; she's received $26,550 from Allstate alone in the last four years. She, Paul Kanjorski (D-PA), and Barack Obama are among the top recipients of insurance company donations. Barney Frank, chair of the Financial Services Committee, says that the idea is very much on the agenda of his panel. Timothy Geithner and Ben Bernanke like the idea of federally chartered insurance companies. You shouldn't.
Full disclosure: I'm a California attorney, and a small part of my practice is representing homeowners who sue their property insurers. A federal insurance system would affect my livelihood. However, it would have a far greater impact on my clients: people who pay property insurers for what they believe to be decent coverage, only to find out that they've not only lost everything but their coverage is worthless.