Patrick McHenryChairman

Washington, November 29, 2018 -

November 29, 2018

By The Editorial Board

GOP House leaders have done yeoman’s work shepherding a compendium of bipartisan bills to expand access to capital that could pass in the lame-duck session. But White House officials are doing the work of Elizabeth Warren by trying to kill a provision reinforcing the U.S. state-based insurance regulatory regime.

House Financial Services Chairman Jeb Hensarling’s Jobs 3.0 passed the House in July on a 406-4 vote and would fulfill several items on Securities and Exchange Commission Chairman Jay Clayton’s deregulatory agenda. Most of its 32 measures would ease securities regulations and promote participation in capital markets.

But some Treasury officials are hung up on a measure by Sean Duffy (R., Wis.) and Denny Heck (D., Wash.) that says any international agreement related to insurance solvency must recognize the U.S. state-based system. State insurance commissioners would also get a seat at the negotiating table.

Treasury is worried the bill will tie U.S. hands in international negotiations when Europeans are trying to impose their solvency standards on the rest of the world. But that’s not a bad thing, especially since Democrats could control the White House by the time an agreement is finalized.

The U.S. state-based insurance system dates to the 19th century, and in 1945 Congress formally ceded authority to the states with the McCarran-Ferguson Act. Although the system has flaws—such as less cross-state competition—policyholders here are better protected than those in Europe.

States require subsidiaries to be individually capitalized, so insurers can’t charge higher rates for car insurance to reduce homeowner premiums. State commissioners also can’t use the assets of subsidiaries in other states to suppress rates in their own. Thus, homeowners in New Mexico can’t be forced to subsidize premiums in California or Florida.

Insurers in Europe are regulated like banks at the holding company level. This means insurers can cross-subsidize products. Subsidiaries are also on the hook for one another’s liabilities, so life insurance policy holders in Germany can wind up rescuing those in Italy. In the U.S., state guaranty pools funded by insurers protect policyholders if a subsidiary fails.

Although creditors in the U.S. may get wiped out in bankruptcy, losses are contained at the subsidiary level. Most of AIG’s problems last decade stemmed from bad mortgage bets in its financial products division. Even without the federal rescue, the state-based system would have shielded AIG policyholders.

The issue now is that European regulators and insurers are trying to export their group-based prudential regulations on the pretext of “levelling the playing field.” This is Brussels code for tying foreign companies with their regulatory noose.

U.S. insurers with global footprints could be locked out of European markets if Brussels declines to recognize the state-based solvency regime. The Obama Administration negotiated a “covered agreement” with EU regulators that would drop local-domiciling requirements for U.S. insurers and recognize the state regime as “equivalent” to their own—but only if states develop new solvency standards.

The Duffy-Heck measure would ensure that international negotiations are used to ease cross-border regulations rather than force conformity with EU rules. This could become a bigger worry with a Democratic Administration since many liberals think insurers should be regulated like banks. See the Obama designation of insurers MetLife and Prudential as systemically important.

Congress has often failed to guard its constitutional authority over foreign trade, and Duffy-Heck is a modest re-assertion. One irony is that international agreements must be approved by the European Parliament, yet there’s little to stop a U.S. President from binding the U.S. without Congressional assent.

The best chance for passing Jobs 3.0 is the spending bill since Senate Democrats who were defeated in November will have little political incentive to vote on a stand-alone bill. But Treasury officials are demanding Duffy-Heck’s removal by the Senate. President Trump and Treasury Secretary Steven Mnuchin haven’t objected to Duffy-Heck, and Senate Republicans shouldn’t scuttle what could be one of this Congress’s better achievements. 

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