What About Insurance?
It looks like the administration is serious about the Consumer Financial Protection Agency. The Treasury Department sent a draft bill to Congress, and while I haven't read the full 150 pages, what I've heard about it sounds good to me; here's a quick summary.
But I have one big question I haven't seen a good answer to: What about insurance?
Under "Definitions," in the section on "Financial Activity," we find this (Sec. 1002(18)(O):
any other activity that the Agency defines, by rule, as a financial activity for the purposes of this title, except that the Agency shall not define engaging in the business of insurance as a financial activity (other than with respect to credit insurance, mortgage insurance, or title insurance, as described in this section)
So the CFPA can regulate anything it wants to call a financial activity - except insurance.
From a political perspective, my guess is that the administration just didn't want to fight that fight. Insurance is regulated at the state level, so in addition to resistance from insurers, they would have to deal with resistance from states. But that's not a good reason.
If we think about the financial products that a middle-class, middle-aged household has, they probably include a couple of bank accounts, a 401(k), a few credit cards, a mortgage, maybe a car loan, a homeowners insurance policy, an auto insurance policy, and a life insurance policy (and let's not even mention health insurance for now). Those insurance policies probably add up to a few thousands dollars of annual premiums; more importantly, they are your protection against your largest financial risks -- your house burning down, running over a pedestrian, dying, etc. Insurance policies are also very hard to read and even harder to understand -- even for someone like me who used to market and sell policy systems. It's hard to say that consumers are protected from defective financial products if they aren't protected from defective insurance policies. And we know that consumers don't like their insurance companies; insurers are routinely rated among the least trusted industries. (This distrust is not warranted, as far as I can tell based on lots of experience with the industry, but it's there.)
More ominously, omitting insurance opens up the system to regulatory arbitrage. If you want a financial product to escape oversight by the Consumer Financial Protection Agency, just call it an insurance product. Life insurance policies are already used as investment products by many people; I believe guaranteed fixed-payout annuities can only be sold by insurance companies. I'm sure someone out there is clever enough to design an insurance product that has the features of a credit card. (Imagine a whole life policy that you can take loans from, even if the loans exceed the amount of your investment in the policy.)
I know that insurance policies won't be unregulated; all the existing regulators will still be there in the future. But this oversight looks like a missed opportunity and a big loophole at the same time.
June 30, 2009; 11:24 AM ET
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