What is going to be the impact on the insurance industry under an Obama administration? With every new administration in Washington, especially one portending dramatic change, those in the insurance industry have questions and concerns about change and what impact the new government may have on the industry. The purpose of this posting is to discuss what if any changes the insurance industry will face under an Obama administration. And also it is to seek debate, feedback and ideas as to how the insurance industry can respond to these possible changes.
I was complimented to be called to Chicago last week to meet with President-elect Obama and he has asked me to form a study-group of distinguished insurance executives to review the challenges and opportunities in the insurance industry and to propose possible actions. (Since Obama clearly wanted “distinguished” insurance executives, the group should be fairly small.) This blue-ribbon panel will report its findings next year. But first, some words of caution.
It is often misleading to equate the rhetoric of a campaign with what the candidate actually does when elected. Still, the candidates’ fundamental philosophy can be discerned. In the new Obama administration there will be a push for increased federal regulation, and this will have an impact on the life and annuity portion of the industry, but not nearly so great as how an Obama administration will affect health care companies. As I talked with President-elect Obama it was very clear that he is deeply concerned about health care issues.
In one of the presidential debates Obama was asked if health care was a “responsibility or a right” and he responded that it is a “right.” Of note is the fact that of all the industrialized nations in the world, the United States is the only country that has not declared health care to be a “right” of citizenship. And that portends both great change and even greater opportunity for the health insurance providers.
Let’s first tackle the impact of an Obama administration on the life and annuity sector of the insurance industry. The debate over state versus federal regulation of the insurance industry has gone on without resolve for more than a decade. Generally, the large companies have favored federal regulation of the industry, while the smaller companies would like to continue the current system of state supervision. The current financial crisis has already prompted a call for greater federal regulation of the financial services industry and it will probably prove to be the final tipping point that moves regulation of insurance companies from state to federal levels.
Another factor that has created momentum toward federal regulation of insurance companies was the 1999 repeal of the Glass-Steagall. Since the repeal of this law the lines that differentiate banks, investment firms and insurance companies have been blurred to the point that few in Congress can distinguish the differences. As a result, the entire financial services industry is lumped together in one bucket.
Thus it is likely that, at a minimum, insurance company financial strength and viability to meet liabilities will be regulated by the federal government. The mistakes and problems of AIG, The Hartford and Met Life provide perfect ammunition for those in Washington to claim that underfunded, understaffed and inexperienced state insurance departments do not have the ability to effectively regulate these companies, especially when it comes to financial strength. This federal regulation will demand more transparency in the balance sheet, the type of liabilities being assumed and the extent of risk taken.
Still uncertain is the impact that federal regulation of insurance companies will have on the development of consumer products and the distribution system. The SEC proposed action (Reg. 151A) to regulate the sale of Equity Indexed Annuities (and possibly all annuities) along with a parallel attack on agents who sell the product indicates that the current momentum favors federal regulation of product and distribution. This is a direction the large companies will probably favor (while offering disingenuous lip-service support to their agents), because a system that regulates products at the federal level will have the tendency to move all products to a commonality and a commodity style that will eliminate diversity. This will favor the large companies, because if all companies are selling basically the same product, the power of size will prevail. Likewise, the medium-size and smaller companies will resist product regulation, because innovation and creative product design is the only leverage they have to compete against the largest companies. If product development and approval is federalized, it is just a small step to federal regulations for licensing and supervising those who sell the products.
Health Care in the Obama Era
Clearly, due to President-elect Obama’s promises and interests, it is the health insurance segment of the insurance industry that will feel the most impact of an Obama administration.
Let’s be honest, the private, for-profit health insurance system has failed to provide adequate health care coverage to scores of millions of Americans. Over 40 million Americans have no health care coverage. That does not mean the health care companies have failed to provide excellent coverage and service – they have – but only to those who could afford it. As a result of this system, of the 28 largest industrial companies in the world, America ranks 23rd in infant mortality and 21st in life expectancy. When it comes to immunization against disease, out of 100 countries, America ranks 67th even behind Botswana. This is not a criticism of health care companies because their mission has never been to provide “universal” health care, but to make a profit by providing health care to those who had the money to buy it. But clearly there is a problem with our current health care system. As Albert Einstein once said, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”
If Obama truly believes health care is a “right” of all citizens, then, ipso facto, the system must be dramatically changed. The fundamental truth is that the bestowing of “rights” upon an individual does not work well within a private, for-profit system. Education, for example, is considered a right, and accordingly, is made available to all citizens in a universal, not-for-profit system. Equal justice under law is a right of all citizens that is best provided without profit incentive. The right of safety and security in one’s home is best provided to all citizens by a police force not motivated by the fees they can charge for their services. Likewise, if access to health care is a “right,” then it is best provided without the pressure of profit.
Of course, bestowing a “right” on citizens does not eliminate the potential for private sector participation. Education is a good example. While governments provide all citizens with the right of basic education there is a thriving private system of education that exists for those who have the wherewithal to seek education that exceeds the basic right. The important lesson here is that both the public and private sectors accept that education is a right of each citizen. The private education sector does not argue that government should not be involved in education, but instead seek ways to co-exist in order to go beyond the basic right.
There will never be a solution to the health care issue unless the parties involved can agree on the “right” versus “responsibility” question. If you believe that it is the individual’s “responsibility” to secure personal health care, then you will resist any change to the current system. On the other hand, if you agree with President-elect Obama, that basic health care coverage is a “right” of all citizens than you will recognize that the system must be changed.
In light of the likely Obama administration push to declare health care a right of all citizens, the private, for-profit health care companies have the opportunity to protect their future and increase their profits, but only if they exhibit real leadership and embrace health care as a right for all citizens.
This is not the place to debate which path is the best way to assure health care as a right of all citizens, but whether it is a single payer, multipayer or some other yet to be proposed system, if the health care companies are to survive and prosper it will mean taking a proactive leadership role working with the government to create plans and programs that assure and deliver that right. It’s a little like the old saying, “If you are being driven out of town, get out in front and make it look like a parade.”
Private health care companies should embrace health care as a right for all citizens not as a threat, but as an opportunity. My concern is that should health care companies persist in the philosophy that health care is only for those who can afford it, their future may be bleak. “Change is the law of life,” said John F. Kennedy, “And those who look only to the past or present are certain to miss the future.”