There is no need for a federal consumer protection agency for property/casualty insurance products, state insurance regulators and insurers told Congress.
In testimony before the House Committee of Financial Services on a proposed federal Consumer Financial Protection Agency, the industry said that while it may not be the case with other financial services, property/casualty insurance products are already closely regulated by states.
The current proposal for a federal Consumer Financial Protection Agency does not call for the new agency to oversee any insurance products and insurance groups and regulators want to keep it that way. The CFPA blueprint addresses credit and banking products.
Even a leading consumer group agreed that it is not necessary to include property/casualty insurance products under the CFPA.
Harvard Law University Professor Elizabeth Warren, who is credited with the idea for the CFPA, said the new agency could not only protect consumers but also level the playing field for big and small financial institutions and encourage competition. She urged lawmakers to recall the creation of the federal agency that now monitors non-financial consumer products– and the fact that it was opposed by businesses.
“The Consumer Product Safety Commission isn’t perfect, but would we better off with fewer protections over infant car seats, bb guns, or lead in children’s toys?” Warren testified. “People are alive today because agencies made sure that products were safe. Markets work better today because agencies put basic safety regulations in place, so that competition is about things consumers can see. People who charge too much or who buy houses they cannot afford shouldn’t be bailed out, but everyone should have a fighting chance to make good financial decisions.”
She said there is no way consumers can currently compare the thousands of financial products with varying terms and conditions set forth in small print now on the marketplace. She said the average credit card contract is 30 pages long.
“I am a contract law professor, and I cannot understand some of the fine print. Even people who try to understand their contracts and who do their best to live up to their side of the bargain fall into traps and get stuck with well-hidden risks,” she said.
She acknowledged that part of the problem is some bad regulations that encourage fine print but also maintained that much of the problem can be traced to the business plans of financial firms.
“Giant lenders ‘compete’ for business by talking about nominal interest rates, free gifts, and warm feelings, but the fine print hides the things that really rake in the cash. Today’s business model is about making money through tricks and traps,” she said.
The Property Casualty Insurers Association of America (PCI) and the National Association of Insurance Commissioners (NAIC) were among those testifying on the proposal for the new agency that is backed by the Obama Administration.
PCI said the current state-based system already does a good job protecting P/C insurance consumers and advised against creating a system of dual regulation.
“New federal standards will not improve upon the present state-based system,” said David A. Sampson, PCI’s president and chief executive officer. “”New federal protections administered by any new agency would create a duplicative, inefficient system that would add even more costs for consumers, with little or no benefit.”
Sampson cited some of the protections already in place to protect insurance consumers, including financial requirements insurers must meet before they can sell policies; product regulations, such as restrictions on the kinds of insurance that can be sold; readability standards; cancellation and nonrenewal restrictions; availability of buyers guides along with post-sale safeguards such as rules regarding grounds for cancellation and consumer notification; financial regulations to ensure the insurer’s ability to meet policyholder obligations; and restrictions on unfair claims practices.
“Unlike mortgages or related financial services products, there is no gap or regulatory arbitrage in consumer protections for property/ casualty insurance,” said Sampson.
Speaking on behalf of the NAIC and state insurance regulators, Maryland Insurance Commissioner Ralph S. Tyler offered a similar view.
“In our view, insurance solvency regulation and consumer protection are inextricably linked,” Tyler testified. “State insurance regulators have long been responsible for not only the safety and soundness of an insurer, but also how the insurer treats its customers and what protections are in place around its often complex products.”
He said state regulators are not passing judgment on whether new protections are needed for non-insurance financial products but they do believe a new agency to regulate consumer protections in “insurance is not necessary, and would cause the kind of overlaps that lead to preemption of state laws and rules designed specifically to address the complexities of insurance.”
Bankers agreed that the regulation of products should be tied to that of financial soundness and that a new federal agency is unnecessary.
“Consumer protection is not just about the financial product, it is also about the financial integrity of the company offering the product. Simply put, it is a mistake to separate the regulation of an institution from the regulation of its products,” said Richard Yingling, American Banking Association president.
Consumer groups, however, suggested that while the current regulatory system prioritizes financial soundness of institutions, that is not a substitute for regulating the actual financial products being offered.
Travis Plunkett, Consumer Federation of America, said that although a CFPA “would not be a panacea for all current regulatory ills, it would correct many of the most significant structural flaws that exist, realigning the regulatory architecture to reflect the unfortunate lessons that have been learned in the current financial crisis and sharply increasing the chances that regulators will succeed in protecting consumers in the future.”
Noting that the current proposal is silent on insurance products, Plunkett urged Congress to include some insurance products under the CFPA authority, although he stopped short of including property/casualty products.
“We would recommend that strong consideration be given to providing the agency with jurisdiction over insurance products that are central or ancillary to credit transactions, such as credit, title, mortgage and forced place insurance. This would provide the agency with holistic jurisdiction over the entire credit transaction, including ancillary services often sold with or in connection with the credit,” Plunkett said.
Plunkett said there is “ample evidence of significant consumer abuses” in many of these lines of insurance, including low loss ratios, high mark ups, and “reverse competition” where the insurer competes for the business of the lender rather than of the insurance consumer.
The CFA leader said that this federal jurisdiction could apply without interfering with the licensing and rate oversight role of the states.
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