"Pick Your Own Regulator" Plan Would Dismantle State Consumer Protections
Santa Monica, CA — Treasury Secretary Timothy Geithner’s apparent support for a proposal to allow insurance companies to opt out of state regulation and choose, instead, federal oversight caused alarm among consumer advocates. The so-called "optional federal charter" would deregulate the one industry in the financial sector that, because it is overseen exclusively by the states, was not left to its own destructive devices by weak federal regulators, said the nonpartisan, nonprofit Consumer Watchdog in a letter to Geithner sent today.
At a House Financial Services Committee hearing last Thursday, in response to a question from Rep. Paul Kanjorski of Pennsylvania, Geithner said:
"I think there is a good case for introducing an optional federal charter for insurance companies."
In the letter to Geithner, Consumer Watchdog’s Executive Director Douglas Heller said "This ‘optional federal charter’ is on the wish list of big property-casualty insurance companies who have pined for the opportunity to escape strong state insurance regulations…. Your statement appears to favor allowing the biggest insurers to simply opt out of state oversight they find too onerous." Download the letter here.
Consumer Watchdog noted that Geithner’s statement contradicted his own opening statement at the hearing, during which he twice criticized the policy of letting financial institutions select their own regulator.
"We can’t allow institutions to cherry-pick among competing regulators and shift risk to where it faces the lowest standards and weakest constraints."
And, moments later:
"[We have to] end the practice of allowing banks and other finance companies to choose their regulators simply by changing their charters."
Property and casualty insurers – those that sell such policies as auto and homeowners insurance and most businesses’ insurance policies – hope to tie deregulation of their industry to the financial overhaul moving through Congress. Companies particularly want to free themselves from laws like California’s landmark insurance reform measure Proposition 103. That law, passed by voters in 1988, created the most stringent regulations in the nation and, according to a 2008 Consumer Federation of America study, saved consumers $62 billion on their auto insurance alone over the past two decades. In addition to reining in premiums, the California law also prohibits discriminatory practices and applies antitrust rules to the industry. According to the Consumer Federation study, California’s highly regulated market is also the 4th most competitive for auto insurance in the nation. Read about the study here.
"Under the optional charter approach, the industry, wielding its considerable lobbying clout, will pit state policymakers and regulators against federal overseers, creating a race to the regulatory bottom," Heller wrote. "We hope … that insurance deregulation is not the policy of the Administration."
Read Consumer Watchdog’s letter here.
“Policyholders will pay more for insurance and get less protection if insurers are allowed free themselves from state regulation. It would be a terrible irony if Washington’s response to the financial fiasco was more deregulation,” Heller said.
– 30 –
Consumer Watchdog, formerly The Foundation for Taxpayer and Consumer Rights, is a nonpartisan, nonprofit organization.