Tom Wilson, CEO of Allstate Insurance, wants Uncle Sam to regulate his industry more strictly.
Is Mr. Wilson a public-spirited businessman who is proposing a policy that he believes might well harm him and his company but one that will also, in his view, be worthwhile for the public at large?
Or is Mr. Wilson a keen businessman who understands that, in this case at least, stricter national regulation of his industry will benefit both his firm and the public at large?
Or is Mr. Wilson a duplicitous businessman who understands that, compared to the current regime of heavy reliance upon regulation by state governments, a regime of stricter national regulation can more easily be captured by himself and other insurance-industry insiders — and, hence, is a ticket to higher industry profits extracted from the wallets of customers who will buy insurance in a less competitive market?
I truly do not ask these questions rhetorically. I know too little about the details of insurance-industry regulation to offer a firm assessment. I suspect that Mr. Wilson is not knowingly proposing a policy that will harm his company (so the answer the the first question is likely 'no'). But beyond that, I'll not venture a guess as to what's going on in Mr. Wilson's mind.
Your thoughts?
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I think that's the right way to take this – I'm not sure either, and I don't think we can presume to know. All sound very likely. The first sounds somewhat unlikely to me. I think you're point about state regulation in the third option is precisely why the second option could potentially be true. Framing it in terms of regulatory capture is one likely possibility, but you can also think of it simply in terms of transaction costs – which are almost certain to go down when you move from 50 regulatory structures to one regulatory structure. In other words – the state regulations point is an excellent one, and it has significance far beyond questions of regulatory capture.
I'll go with explanation c, but he probably sleeps at night by diluting himself into thinking he's purely motivated by a little bit of a & b.
For years, many insurers have favored a so-called optional federal charter. The idea is that for insuers who operate in many states it would be less costly to deal with a single federal regulator than to deal with 50 state insurance departments. Here's a friendly Q&A that the Competitive Enterprise Institute put out supporting the idea: http://cei.org/pdf/6170.pdf. Not sure if that's what Wilson is referring to in his piece (he doesn't name any specific legislation), but the optional federal charter's an idea Allstate's supported for some time. Looks to me like this is just putting a different spin on it.
The idea of allowing insurers to opt in and out of federal regulation — being able to play state and feds off against one another and try to get the best deal — seems interesting. Whether they'd be able to keep it "optional" for long seems doubtful, though.
I think he'd like to keep his market share and minimize risk and competition. Federalizing insurance regulation would effectively make it like banking, with its own FDIC to underwrite huge but rare insurance losses, like from major hurricanes, earthquakes, terrorism. etc. It would keep new, innovative players out of the market, by setting standards that discourage innovation.
Frankly though, if you live in a state like California, where insurance regulation is downright oppressive, federalization would be more than a coin flip toward net benefit for companies and consumers. Even the choice of realistic buying out of state policies would provide a great deal of competition to the status quo.
I like the cartoon with all the guys tied with the rope. The rope is government. Cut it, and when the big guy falls, the little guys just learn from his mistake, and press on.
I would guess that many insurance companies that operate on a national scale would like to see national insurance regulation. Dealing with one set of regulations (at the federal level alone) would probably be easier for many of them than dealing with 50 separate sets of regulations as is currently the case.
I'll take door number three, Monty.
Ding! Ding! Ding!
It's a new car!
It is to allow large national insurers to swing the big stick of federal regulation at small, localized insurance companies, as well as the many small state run insurance pools and associations.
The problem is he doesn't consider the cleanest option:
Eliminate BOTH federal and state insurance regulations.
We already have the courts to handle cases of fraud, misrepresentation and bad faith claims handling.
State regulators eliminate rate-making flexibility, impose onerous capital requirements, and enforce insanely restrictive policy term requirements on insurers.
The result: more state intrusion in the name of "protecting" policyholders.
If Big Brother from Orwell's 1984 were to be real and alive, Daniel will be his right hand man. Daniel will be telling us why a global monopoly government, one size fits all regulation, lack of competition amongst local governments etc. will all be in our best interests.
Regardless of the intention the consequences are inescapeable.
Imagine a world where there are 50 regulatory boards with different measures, different standards for arbitration, and different entry, exit, and payment structure guidelines.
Then that world shifts to one set of basic standards set by one group that can be lobbied by a single firm representing your interests.
@ The Other Eric
Exactly!
The only option is less regulation OVERALL, not greater CONCENTRATION of regulators.
Yay! More power at the Federal level. Eventually there will be no escape.
Does the Federal Government know that the word "state" is synonymous with "country" and not "county"? That little "r" makes a whole load of difference.
"I'll go with explanation c, but he probably sleeps at night by diluting himself into thinking he's purely motivated by a little bit of a & b.
Posted by: Matt | Apr 16, 2009 2:58:47 PM"
I notice that muirduck hasn't been trolling us lately.
But TRUMPiT has.
I don't know, Don, I read the article a little different than you.
I don't see Mr. Wilson requesting stricter regulation, or necessarily more regulation.
The way I read his point is that the insurance companies are regulated but by 50 different states. Which, as my ex-insurance agent brother can tell you, can be devastating to particularly small agencies. Texas, in the early 90s regulated several insurance agencies completely out of the state. The main company my brother dealt with was one of them.
I read Mr. Wilson as requesting that the federal government become the single regulator, which he seems to believe will make oversight easier and more effective.
Now that is something that can be debated.
And, of course, his piece contains all the platitudes of sorrow, regret, guilt, and ambiguity sufficient to deflect criticism enough so that it is cast on all of us.
Dr. T's rule: Any top executive requesting additional government regulation of his industry is a crazy person, a rent seeker, or both.
Well, someone *could* believe that without regulation, insurance companies will tend towards insufficient reserves. If you are insuring something rare, like earthquakes, you can make a really good profit that way, until the Big One hits.
And if you do put aside reserves for that rare event and charge appropriate prices for your policies, absent regulation, your competitors could underprice you. So there might be a case for regulation.
This is only true for rare, huge events. If a company offered fire or auto insurance but routinely lacked the ability to pay claims, it would go out of business.
It would be nice if they could standardize the industry without creating a whole new federal bureau but I doubt it. I think the real problem is that all CEOs and other industry advocates with regulators get into negotiating these menus of picyune crap that stifles honest producers but does nothing to promote an ethical atmosphere inside the organization,in fact, I think the biggest single impediment to creating an ethical atmosphere is chicken$hit regulations that serve no useful purpose the insurance and financial svs industry is full of such things.
The first step to higher profits is government collusion…
Don-
Mr. Wilson is self serving and confused. He knows not what he is getting into. His self-righteousness leads him to believe he is serving humanity. His lack of strategic understanding leads him to believe that he is going to gain the upper hand. He is harming his customers, Agents, employees, and shareholders.
I certainly understand, and believe, that one regulatory environment instead of 50 is something with which it's much easier for a large company to deal.
But…why, exactly, is this considered desirable from the point of view of the consumer? Why, exactly, do I want it to be easy for one large company to dominate a big chunk of the insurance market nationwide? I should prefer less competition, more uniformity (= fewer choices), less flexibility? Hmm. I think not.
From the point of view of the consumer's interests, I'd say keeping 50 different regulatory environments is a net plus. First, it does indeed encourage a little competition among regulatory environments, a competition in which both consumers and businesses respond. An environment that is too anti-business will drive away business and fail. An environment that is too pro-business (or rather anti-consumer) will drive away consumers and equally fail.
Secondly, just the sheer obnoxiousness of having to deal with 50 regimes will put barriers in the growth path of InsuraMegaCorp. I'm kind of OK with that. I'm confident the net amount of insurance business done will remain the same, it's just a question of whether it will be done by 5 big companies or 250 smaller ones, and 250 smaller ones seems pretty good for consumers to me.
One might argue about economic inefficiencies, of course, and a good fascist will do just that. How much more efficient things will be when The Leader decides everything.
I don't know much about the insurance industry, and I don't think any of us have sufficient information to know with certainty Mr. Wilson's ideals and motives — the cynicism in me says he knows it would be good for his business in getting rid of smaller competitors, the other part of me says he simply doesn't know better.
While I see the potential "streamlining" that *could* be available in dealing with one regulatory body versus 50, my bias is towards having 50 competing "laboratories of regulation". Let's have a contest to see who can come up with the best system that promotes competition (and thus innovation and efficiency) while protecting against fraud and coercion.
Best not to read his mind. But I will anyways.
Allstate would benefit from a single regulator. It would greatly reduce the number of legislators and officials we have to keep, er, "friendly" across 50 states.
The biggest companies will benefit the most from efficiency and simplification. And the cost of entry to new competitors would rise. And we are very big.
OTOH this would make us a captive in the Good Hands Of Washington. Currently we can withdraw from states where the regulators are insane. Goodbye to that tactic.
But maybe we will make Washington a captive in our Good Hands instead.
The creation of a new regulatory agency should stop other agencies, state or federal, from bothering Allstate for a year or so. The new regulators will need time to get organized.
I will be retired and rich no matter what they do.
From the point of view of the consumer's interests, I'd say keeping 50 different regulatory environments is a net plus.
It is, but only if the consumer gets to choose which regulatory environment they prefer. Consider health insurance. The more types of conditions that must be covered by law, the higher the minimum cost of insurance. I would like to choose a regulatory regime with minimal or no mandatory coverages, but I can't because my state's law prohibits me from buying insurance from an out of state carrier. Why should I have to move in order to buy the insurance I want? The correct regulatory response, in my opinion, is not to regulate insurers differently, but to prohibit states from preventing their citizens from buying insurance from any insurer they like.
I kept hoping someone else would cover this issue. While it is true that there are 51 different regulatory bodies (don't forget D.C.), the reality is that the difference between the various states' regulations, including reserve requirements, is minimal. Think about traffic laws. There is no federal oversight involved and yet everyday people drive from state to state with no concern for local variations. Also, the National Association of Insurance Commissioners studies various insurance issues and makes recommendations to their constituents. The reality is that there is no demand coming from policy holders to have the feds takeover insurance regulation due to the ineptitude of their state regulators.
This is rent-seeking behavior that we are warned about in Wealth of Nations, nothing more.
I agree with Vidyohs' take on Wilson's intent. I would have much rather he make the case that customers could regulate their industry much more effectively than one or fifty-one governments can.
Methinks works in one of the most heavily regulated businesses in America (in spite of Mierduck's idiotic assertions to the contrary). I'll be interested in her take on this.
S Andrews -
RE: "If Big Brother from Orwell's 1984 were to be real and alive, Daniel will be his right hand man. Daniel will be telling us why a global monopoly government, one size fits all regulation, lack of competition amongst local governments etc. will all be in our best interests."
Excuse me? Where did you draw from that that I'm somehow opposed to federalism. I see two potential positives:
1. the efficiency of a single regulatory structure, and
2. the competition of 50 regulatory structures.
Those two opposing forces form the basis of all tension in a federalist society. And I distinctly didn't say which I thought won out. Kevin O'Reilly brought up an excellent argument for how we can get the best of both worlds. I don't know the insurance industry, so I have no idea which is better – but if an insurer says "man it's tough to keep up with 50 different regulations", I'm willing to give them the benefit of the doubt and assume that it really is tough and regulatory capture isn't the only thing on their mind.
Yup – I guess that sort of Madisonian acknowledgement of the costs and benefits of both federal and state action really puts me in line to be Big Brother's right hand man.
Can you talk seriously about a question, S Andrews, or do you have to just pick at things?
My reply to Don, above, didn't address what I believe was Mr. Wilson's motivation for writing his piece.
I just disagreed with Don's interpretation of the actual piece itself. I didn't see Mr. Wilson seeking "stricter" regulation, but seeking a regulatory environment that he could dominate. Having one agency, federal goverment, to deal with instead of 50 would, as suggested upthread, make it easier to buy congresscritters and grease palms……cuts down on the travel expenses and maintenance of 50 seperate offices, doncha know?
I believe, like most others, that his motivation was, as Don suggested, purely to get an environment that Mr. Wilson believes his company can dominate. I believe that Mr. Wilson understands that further regulation is coming for certain, so his motivation is to channel that to his company's benefit.
I am not sure, but this may say a lot about the clear cut and easily understood nature of economic theory.
http://www.chron.com/apps/comics/showComic.mpl?date=2009/4/17&name=Dilbert
There is an area in which insurance poorly serves the client, and that is subrogation.
If you are injured in a car, for example, and your medical coverage runs out, you still collect from the at-fault driver's liability insurance, right? WRONG! Through subrogation, YOUR insurance co. has first claim on that liability pot, EVEN IF YOU ARE LEFT DESTITUTE as a result.
The remedy for this is the "make-whole doctrine", which varies greatly from state to state. Subrogation collections has become a profit center for the insurance industry. There are "consultant" (or Pirate) agents who assist the insurance co's. in avoiding the make-whole rule. They will even visit your bedside and threaten not to pay until you sign a waiver of make-whole.
If a national insurance regulator is ever established (which I do NOT advocate), one area that MUST be addressed is subrogation.
@True_Liberal
Who is forcing you to buy insurance?
If you don't like the terms, don't buy the policies.
I'll agree this is primarily an education problem, but just like the Chinese-made drywall, it's a pretty esoteric subject for the typical consumer. It's one in which the local agent is probably ignorant. Can government improve the situation? Is the cure worse than the disease? Dunno. Prolly not.
But if Tom Wilson and Allstate want to open a public discourse on federal regulation, whatever the outcome, THIS is a subject that needs more exposure.
As a former long-term insurance industry employee and a recent beneficiary of an Allstate insureds' negligence-I've never been impressed with Allstate-they are the perfect example of "cheap" insurance. Their 3-D claims paying is legendary (delay, deny, demoralize)
Any business in any industry seeks regulation to erect barriers to entry.
Rent-Seeking and Regulatory-Capture are two terms that come to mind.
As a Libertarian actuary, I see very little sinister in Mr. Wilson's piece.
For Life Insurance, most states agree and have few variations. The most pliable states tend to be small states. So, any gain from less regulation is made up for by lack of market size. Regulation matters where you are selling product more than where the company is headquartered. So competition is pretty much nill.
However, there are a few states that are major pains and hold ridiculously antiquated viewpoints. Cough, cough, New York, cough cough. So much so that the industry sets up separate companies to operate in that state so that the rest of our operations aren't needlessly harmed.
National regulations would more likely eliminate bizarre requests from a handful of state regulators. So, I suspect he's offering a rhetorical bargain where he suffers additional regulation nationally to eliminate a number of regional headaches.
What's worse? 50 different sets of rules where few are onerous, or 1 set of rules that is a little more onerous than the average of the 50?
As a former Allstate agent and still an insurance "guy", I'd say that Mr. Wilson is engaging in the kind of "corporatism" that many in middle America are coming to hate. The large insurance carriers favor federal legislation for two reasons 1) It will release them from the expensive and onerous state by state regulatory process as well as local politics (see any story over the last few years in my home state of Florida re: property catastrophe insurance 2) Allstate's (and State Farm's and Zurich's and Travelers' et al) reach and operating efficiency will be extraordinary. One set of rules, one set of guidelines, 25% less underwriters, 50% less marketing people, 90% less compliance officers. But, this type of ruling clearly favors the biggest and baddest of the insurance and will stifle the upstarts and small regional players. In the short run it will mean lower insurance costs because of gain in efficiency but long term will knock out the little guy competition and drive rates upward (less supply of insurance-same demand).
I would note here that most of the large national insurance companies favor both federal legislation and the federal "catastrophic backstop". Allstate (under now AIG CEO Ed Liddy) has for years asked the federal government to have a national risk pool. This shifting of risk from private to public is the property and casualty equivalent of socializing medicine. But, if Allstate could sell insurance without much risk (isn't that oxymoronic?) they would benefit immensely. Unfortunately, it would mean some guy in Iowa would have to subsidize my house (about a half mile from the Atlantic Ocean) for hurricane insurance. And that's fair…right?
Some state regulators are pains in the butt for insurance companies.
So in order for Mr. Wilson to seek a uniform federal regulator, he must have some assurance that the federal regulations will be less cumbersome than those trouble states.
Does this benefit consumers?
We can't know.
But it seems certain that large insurers will have the most say, if a federal scheme is enacted.
Regarding the National Risk Pool- this is 100% corporatist nonsense. They just don't want to pay for Reinsurance. They can easily get all the capacity they need from reinsurers, banks offering Catastrophe bonds and many other arrangements.
Tiger,
Well said.
It is the same old game, just in a different industry.
"However, there are a few states that are major pains and hold ridiculously antiquated viewpoints. Cough, cough, New York, cough cough. So much so that the industry sets up separate companies to operate in that state so that the rest of our operations aren't needlessly harmed."
NY still thinks the early 1900's standard fire insurance law -accepted as something of a touchstone of enlightened regulation among statists-provides it with some sort of primacy.
The real issue driving seperate companies in NY is its status as an "extraterritorial" state-which means that it requires a company that sells anywhere to conform to NY requirements. The obvious way around this is to set up a subsidiary as libertarian actuary indicates. That's why late night guaranteed issue commercials will say policies offered by "Alpha Beta Life" and in New York, AB life.
In all my years in the insurance industry, I never received a good answer as to how a state regulating business occurring outside its borders could occur. I think there was an "interstate commerce" clause in the Constitution that gave that power to the feds.
Hmmmmm . . . certain people want government regulations for insurance for evil entry-barriers and rent-seeking. By the same token why would people want to look to the government for protection and crime? Does the governmnet how to plan and solve the problem of crime via central planning? Why not just let the market sort out the crime? Individual players in the market will try & fail and before long you'll have high quality law enforcement for a song.
(Go anarcho-Captialist! You know y'all want to!)
Start from the premise that the origin of most regulation comes from the efforts of those who are being regulated. In the case of insurance companies – they sought regulation as a means of receiving the government imprimatur of being safe. Prior to the regulated world of insurance, nearly anyone could get into the business including those who were less than honest in their intents. It made life difficult for those who thought insurance was a good thing and they wanted to make money selling it to the public. With government regulation they pushed out their competition and recieved the government's goodwill as something that was good and safe for the public.
Fast forward to the present and you have the same underpinnings being expressed by Mr. Wilson. Also – as a regulated entity already – the mindset of the insurance industry in general is that this is the general accepted business model. They don't challenge the basic concept of regulation. Instead they look at how they can best operate within the regulated environment – with significant focus on gaining favor with the government regulators.
As a general rule it safe to assume that when a "business" person ask for more government intervention in their market place it is NOT for the benefit of the public as a whole.
Also one note for Truly Liberal – In most states you are required to have a minimum insurance coverage (or post a performance bond of equal value) to operate a motor vehicle. Again you cannot buy a house with a mortgage unless you also maintain an insurance policy to protect the asset in event of damage or loss. Some states now require every individual to have health insurance coverage.
P.O. – Great overview!
However – let me point out it was not I who said you could drive w/o insurance – it was Veritas. I think the point he was making was to shop around for acceptable subrogation clauses.
I hope everyone is aware that in many states, insurance companies are actually required to get their rates and policy forms approved by the insurance regulators before they can begin to charge them to insureds.
Rent control is alive and well.
Veritas: and in New York State a doctor who wanted to charge a flat fee per month for doctoring, was charged with running an illegal insurance scheme.
Back to Don's question on why a CEO would ask for Federal Regulation. I think one reason is that it is easier to serve one master than 50. Regulatory costs and uncertainty likely fall in a Fed dominated world. This does not mean that profits will rise for at least three reasons – competition, transfer to consumer surplus and Fed regulations. Federal charter will enable market entry given sharply lowered costs to enter. Regulatory costs will fall for all parties and thus likely to be transferred to consumers. Third the government will likely manage agenda to their congressional benefit (subsidizing high loss states).
Thus, Mr. Wilson is incorrectly thinking about his problem. He will get more competition given lower entry costs (managing 50 states), costs reductions will be transfered to consumers (nature of competition), and higher loss costs given government forcing companies to subsidized entire states that have higher costs.
A final reason why Mr. Wilson may be pushing a Fed charter is to manage the agenda versus have on hoisted upon him by economically illiterate politicians. Again he may be fooling himself. Is he really more clever than politicians? I would bet against that notion by simply appealing to the fact that there are more of them and they are actually in the game (versus just playing as a spectator).
Net, Mr. Wilson is playing a game he does not understand. On the business front he is not fully informed on the real economics of the insurance game when structure is changing. A quick look at earnings and sales suggest that Allstate is loosing profitability and share. Tom and his top leaders can't play the current game. As a political player Mr. Wilson is a neophyte. He like his mentor Mr Liddy (AIG savior) will learn politics is not business. Talk is cheap, real problems always require painful remedies.
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