October 2, 2016; Washington Post

State governments regulate the U.S. insurance industry. The National Association of Insurance Commissioners (NAIC) is the trade association created and governed by the states’ chief insurance regulators. Through the NAIC, these 50 state insurance regulators establish standards and coordinate regulatory oversight.

Michael J. Mishak at the Center for Public Integrity just produced this investigative report: “Drinks, dinners, junkets and jobs: how the insurance industry courts state commissioners. Center probe reveals cozy relationships, revolving doors and shady financial ties.” The report resulted from a review of insurance industry lobbyist reports, regulator financial disclosures, campaign finance records and more than 3,700 pages of emails obtained through open-records laws.

Mishak asserts that the insurance regulators have been largely “captured” by the insurance industry. Empowered to act in the public interest, Mishak makes the case that the majority of state insurance regulators prioritize the commercial interests of the industry they are charged to regulate leading to a presumed net loss for consumers. Why? The report shows that the insurance industry hired half of the 109 state insurance commissioners who left their posts in the past decade. Only two regulators went on to serve as consumer advocates.

“It’s very difficult at times to take a stand for consumers and have your voice heard,” said Sally McCarty, a former Indiana commissioner and retired consumer advocate. “A lot of commissioners don’t bother doing that for that reason—and they don’t want to alienate the industry. […] Many people consider the job an audition for a better-paying job.”

The insurance industry is monolithic and touches almost every U.S. citizen in some way. There are 5,926 insurance companies employing 2.5 million people. Net premiums written totaled $1.2 trillion in 2015. This industry, like any other, has a vital financial stake in any regulatory activity that can determine its fate, like rate increases and investigations. These companies are far more motivated and skilled to influence insurance regulators than individual consumers, if the average person even knows how insurance is regulated.

State governors appoint most regulators, sometimes called commissioners. Eleven states elect their commissioners, and insurance companies are among their top donors.

Turnover is high. The median tenure of a commissioner is less than four years. “Most commissioners operate outside of public view, sometimes exempted from disclosure requirements that cover other state officials and often ignored by the decimated statehouse press corps.”

States are fine with the current scenario. They receive significant revenue from insurance taxes. Texas collects more in insurance taxes than it does from levies on natural gas production. The insurers contend that their effort to inform commissioners and other policymakers helps them regulate responsibly.

Just as commissioners leave public service to work for the insurance industry, 24 of the 50 current state commissioners came from the insurance industry.

“You get somebody with expertise, and you get someone who is qualified to do the job from Day One,” said Kathleen Sebelius, a former Kansas insurance commissioner who served as U.S. secretary of health and human services in the Obama administration. But, she added, there is a fine line between “appropriate expertise and overly cozy” relationships.

Each state has ethics laws, but how aggressively they are enforced is a concern of consumer advocates. All business industries have an elemental incentive to control anything that has power over them, including the media, let alone regulatory agencies. The financial crisis was in large part a consequence of regulatory failure, or rather “regulatory capture.”

Regulators don’t need additional power; they need to use their existing power appropriately. Laws and regulatory reforms will not matter unless there is disinterested enforcement. The Center for Public Integrity report is not necessarily saying that the insurance industry is not working in the consumer’s best interest. It is saying that that the industry itself has too much say about what is best for the consumer.—James Schaffer