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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.

By James Kwak  |  June 30, 2009; 11:24 AM ET
Categories:  Regulation  
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Next: State vs. Federal Banking Regulators in Our Imperfect World


Thanks for your excellent blog, always a good read.

I think the insurance business, of any and every sort, is the biggest put-over on the public there can be. It involves taking in lots of money, dispensing some of it and taking a generous cut in between. Where is the value added? Given statistical information, a single provider should be able to provide insurance for anything and everything at minimum cost with one procedural system.

I stand in downtown Chicago and what do I see? The giant John Hancock (insurance) building. The giant Prudential (insurance) tower, the CNA (insurance) building etc. Who pays for these buildings if not the insured?

Providing a protection agency for insurance will simply add to the cost of insurance while providing information that is already available to those who will take the time and effort to learn about it and pro-actively grill an insurance agent about what things mean before taking out a policy.

von Mises is my idol, but when it comes to the dull, routine, statistics driven business of insurance, let the government take over the whole thing, it already is the biggest statistics collector in the universe and with insurance that is 95% of what needs to be done. As it is we have each private insurance company with its army of employees duplicating the work of its competitors and every one of those companies picking and choosing from policy applicants in order to maximize profit.

Deny and profit - the insurance motto

the motto for the insurance consumer should be - get the absolute minimum amount of insurance necessary to avoid catastrophe and no more because the odds are very high (and insurance companies know it) that you will never see even a fraction of your premium payments come back to you in any way. Ponder this the next time you see a skyscraper.

Posted by: Clif | July 1, 2009 1:50 PM | Report abuse

They're trying, I think, to be nice to the insurance companies, and hoping to gain concessions on health care. I don't think it's going to work.

Posted by: TheRaven2 | July 1, 2009 2:10 PM | Report abuse

It has since occurred to me that the insurance industry has a number of profitable personal-finance products that simply aren't worth the money to most people. An honest CFPA would severely penalize the insurance industry for its marketing of whole-life policies, for instance. There's an enormous amount of taking advantage of fear. So the insurance industry has a lot to fear from a CFPA. They seem to have gotten the usual pass from Congress, too.

From the corvid viewpoint, it's all silly: eventually we're all food, anyway. Krawk!

Posted by: TheRaven2 | July 1, 2009 6:34 PM | Report abuse

As a final thought--though there's not much carrion left on this dead horse--a CFPA would also come down hard on many health insurance products. I wonder if this isn't prep for the days when the insurance industry will be competing with a public option.

Posted by: TheRaven2 | July 2, 2009 12:39 PM | Report abuse

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