As public officials make tax concessions to prevent other states from raiding Hartford’s insurance business, the state insurance commissioner warns that Connecticut must act decisively against a new threat: federal initiatives to break into the insurance regulation game.
Commissioner Thomas Sullivan said a new Bush administration proposal to allow insurance companies to obtain federal charters would undermine consumer protection and jeopardize the state’s revenue stream — nearly $240 million a year — from premium tax revenues.
Sullivan wants Connecticut to join 31 other states in a compact that cooperates on regulating multi-state insurers and streamlining the approval process for new insurance products. Unless states can work to regulate in unison, his argument goes, unwanted federal regulation will eventually gain traction.
Attorney General Richard Blumenthal also opposes federal regulation but wants no part of the two-year-old compact — even though Connecticut is the lone hold-out in New England.
“Some of the biggest, most vigilant states, like New York and California, haven’t joined,” Blumenthal noted. “We’d be buying into an unknown. We may be reduced to the lowest common denominator in protecting consumers.”
Sullivan counters that the real threat to consumers is not the state compact — which he says goes to great lengths to protect consumers — it’s federal regulation.
Last month, Treasury Secretary Henry Paulson began advocating an industry-backed system that would allow insurers to choose between federal or state charters. Federally chartered insurers could largely sidestep state oversight.
“Privately, [the companies] all want it tomorrow,” Sullivan said. But he noted that many of Hartford’s biggest players — The Hartford, Aetna, Travelers, Cigna, ING and others — tend to let trade groups such as the American Insurance Association and the American Council of Life Insurers do their talking for them on controversial issues.
“These two big lobbying groups have been crying for [federal regulation] for years under the guise of consumer protection,” Sullivan added. “If they could show me how all these efficiencies would be good for consumers, rather than just their bottom line …”
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But Sullivan faces an uphill battle in selling the compact to the legislature. Aside from opposition by Blumenthal, many legislators are cool to the idea.
“Essentially, we’re ceding our state rights,” said John Geragosian (D-New Britain).
Big states like Texas, Ohio, Michigan and Pennsylvania have joined the compact, and at least about a half-dozen others have legislation pending, including New York and California.
At a hearing last month, the president of the National Conference of Insurance Legislators testified that states need to worry that looming federal regulation could siphon off insurance premium taxes now used to balance state budgets.
“When you set up a bureaucracy at the federal level,” said Brian Kennedy, a state representative from Rhode Island who heads NCOIL, “it’s only a matter of time before those dollars need to be re-funneled to keep the bureaucracy moving forward.”
The stakes are high for Connecticut, which collected $239 million in premium taxes and $10.3 million in fees from insurers in fiscal year 2007.
A proposal to cut the 1.75 premium tax rate over several years to meet competitive challenges from Iowa and other states would slice into that total. Federal regulation could take another big bite.
Howard Mills, a former New York superintendent of insurance, said the premium tax becomes “a critical issue” for the states now that federal regulation is a serious possibility.
Mills called the compact a “wonderful idea, an effective way to address questions [about whether] the states can act together” in a time when the insurance industry is increasingly global in scope.
He predicted that international competition issue will give proponents of federal regulation ammunition. For example, Mills said, if Lloyds of London were to ask the British prime minister to try to seek new capitalization rules for reinsurers operating in the United States, it would be helpful to have a single regulator to handle those negotiations.
“It’s a very, very significant event that a Republican administration has opened the door to federal regulation of insurance,” said Mills, now an insurance advisor for Deloitte & Touche USA. “The horse is out of the barn.”
So far, the National Association of Insurance Commissioners has a mixed record of speaking for all its members. While it can claim big successes in the multi-state exams of insurers and in streamlining the process of approving policy forms, it can’t always get the states to act in unison.
Failure to convince all states to join the compact is a prime example.
