INSURANCE IN THE 21ST CENTURY:
Herb Denenberg Column for January 08, 2003
The Decline of Regulation, Litigation, and Taxation And Its Consequences for the Industry, the Consumer and the Economy
The insurance industry and the entire business world have not yet learned that they need regulation (economic, safety, health, etc.) as much as the consumer. They have not learned that when sound and effective systems of regulation are
not in place, they are likely to experience a cascade of catastrophes, in a wild-west marketplace. With no regulator on the marketplace beat, just as with no police on the street, bad things happen.
The opening decades of the 21st century are bringing regulatory failures into sharp perspective, as we receive what is perceived as the best of news and the worst of news to the American insurance industry in particular and to all of American business in general.
GOOD NEWS FOR BUSINESS.
The best of news, from the view of business, is that the Republican Party is now in control of all branches of government, and that control is in the process of being advanced and solidified. That means a continuation of the Republican pro-business philosophy. That, in turn, means less regulation, weaker regulation, more business freedom, a continued erosion of the right to sue, and no regulatory taxes, new or otherwise.
The Democratic Party, which historically has been a significant countervailing force, is in disarray, without leadership and without programs. It lost the election of 2002 and came out looking weak and wimpy on the overarching issue of the war on terrorism and the threat of Saddam Hussein. The voters see the Democrats on the wrong side of these terrorism issues, which make other issues fade into insignificance.
So the Democratic Party's ability to fend off further erosion of regulation and to fend off tort reform may be entirely crippled by recent and continuing electoral trends on a national basis and state basis as well.
What's more, the Democratic Party, in order to position itself as "centrist," has virtually abdicated its role of advocate of essential regulation. By like token, it abdicated its role of advocacy for tax justice. It let the Bush tax plan pass that blatantly and outrageously favored the wealthy at the expense of most of the population. Even during the campaign of 2002, the Democrats did not launch any real call for repeal of these incredibly generous tax breaks for the wealthy. While the Democrats are passive on regulation and taxes, the
Republicans are passionate and persistent. So business can expect favorable litigation and tax legislation.
BAD NEWS FOR BUSINESS.
So much for the good news. The bad news, perhaps not so perceived by business, is that the failure of the regulatory system has produced multiple catastrophes, but the three most notable and expensive catastrophes in insurance history make the point most clearly. And the same failed regulatory system that produced this triumvirate of catastrophe has many more in store
(1) World Trade Center Catastrophe. The World Trade Center mega catastrophe of September 11, 2001 is now ranked as the greatest insurance catastrophe in history, coming in at $40 billion and more by some estimates. This catastrophe can be blamed in large measure on the total failure of the Federal Aviation Administration, the Immigration and Naturalization Service and other federal agencies to do their job. It was a total regulatory failure, a total neglect of airport and airline security and border security.
(2) Asbestos Pandemic. Then there is the pandemic of asbestos claims, which spread bankruptcy through a wide swath of American industry and whose impact is still being felt across the insurance business and other sectors as well.
(3) Savings & Loan Scandal. The savings and loan scandal, another mega catastrophe for everyone involved, decimated an entire industry and had reverberations throughout the economy. As usually, financial regulators were asleep. They were undoubtedly cut from the same cloth as the people who gave us Enron and other companies like Enron.
BAD NEWS GETS WORSE.
The bad news is likely to get worse.
" ITEM. If such a horrendous event as the World Trade Center catastrophe did not wake up our airport security system, what will? That suggests the extent of the regulatory rot. All evidence suggested, based on media and government reports, that airport security is still little more than a joke and most certainly is inadequate, and is not likely to become adequate anytime soon. If that's not enough look what has come out on the Immigration and Naturalization Service.
" ITEM. The Bush Administration has certainly not strengthened our environmental agencies such as the EPA, and there is no reason to believe they will be anytime soon. If we were serious about the environment, we would have taken dramatic steps to force vehicle manufacturers to increase fuel efficiency. to fight pollution and our dependency on Middle Eastern oil.
" Our financial regulators have been grappling with the Enron phenomenon, which almost destroyed public confidence in our financial markets. Yet the regulatory reform delivered came in the form of the likes of Harvey Pitt and William Webster, and will be carried forward by a regulatory agency, the U.S. Securities and Exchange Commission, which is inadequately staffed and budgeted.
The bottom line is that our regulatory system - insurance regulation included - isn't up to the task of protecting the consumer and the economy itself.
FURTHER REASONS FOR CONTINUING REGULATORY FAILURES.
Crippling the Right to Sue. In the absence of regulation, litigation is an essential method of indirect regulation. The tobacco industry killed multiple millions worldwide every year while Congress and the executive branch did nothing. Tobacco genocide was a greater catastrophe to the economy than the triumvirate of insurance catastrophes discussed above. Only litigation exposed the tobacco industry for its decades-long fraud, deception, and genocidal-proportion killing. Only litigation forced big tobacco to pay multi-billion dollar judgments for what it has done. But now, with Republican majorities in Congress, another party mantra is tort reform, which is often a euphemism for restricting or destroying the right to sue. Republican majorities will also assure a more conservative judiciary, which will be more sympathetic to tort reform and business interests.
The End of Regulation by Taxation. The other possible social control is new or higher taxation, a form of indirect regulation. For example, the taxing power could be used more effectively to get gas guzzlers off the roads; to restrict the market for cigarettes, especially among teenagers; to cut the market for junk foods in order to halt the deceptive marketing of packaged food and restaurant food that have ridiculously high levels of sodium, fat, especially saturated fat, and calories.
But a central theme of the new and emerging Republican majority is to reduce taxes. One item certainly not on the current agenda is new taxes of any kind, and especially if they are for some regulatory purpose.
The continuing weakening of regulation, of the regulatory power of taxation and litigation, will assure us more record-making catastrophes. Regulation is the policeman of the marketplace. When regulators are not on the beat, everyone in the market - consumer and business alike - suffers.
(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)