Dodd-Frank Is Like Obamacare

by John Berlau
It raises premiums by treating insurance companies as banks.

‘If you like your life, home, and auto insurance, you can keep them.”

President Obama didn’t make this promise when he signed into law the Dodd-Frank financial overhaul on July 21, 2010, a few months after signing the health-insurance law — Obamacare — about which he had made the equivalent pledge. But as syndicated columnist Jay Ambrose points out, “if the Dodd-Frank regulatory law does what is now plotted,” Obama may get off the hook with respect to the charge that he deceived us, but “he will still share responsibility for the insurance provision that, along with others, could bloody lots of noses.”

As Dodd-Frank approaches its fourth anniversary, Obama is singing its praises. He told NPR on July 2 that Dodd-Frank is “an unfinished piece of business, but that doesn’t detract from the important stabilization functions” it has provided.

Yet even to lawmakers from Obama’s own party, this “financial reform” legislation is looking more and more like a destabilizing force — much like the so-called reform of health insurance. Even at the outset, there were many similarities. Both Obamacare and Dodd-Frank contained about 2,500 pages that were rammed through a Democratic-controlled House and Senate at breakneck speed. Because of the length of the law and the rapidity of its passage, many did not understand the bills. Many hadn’t even read them.

Also as with Obamacare, unintended consequences of Dodd-Frank almost immediately began to surface. First, there was a sharp reduction in free checking due to the Durbin amendment’s price controls on debit-card transactions. Then, community banks and credit unions — including some with close to zero foreclosures — found the “qualified mortgage” rules so costly and complex that they slowed down or stopped altogether the issuance of new mortgages. Then, with regard to a provision that has no plausible connection to sound banking and finance, domestic manufacturers found themselves having to trace back numerous materials they use, to determine if they had originated as “conflict minerals” from the Congo.

The latest unintended consequence may be the one that bears the most striking similarity to Obamacare. Life-insurance rates alone could soar by $5 billion to $8 billion a year, according to the respected economic consulting firm, Oliver Wyman. Just as health-insurance premiums and deductibles skyrocketed owing to Obamacare’s many mandates, so too may the premiums for life, home, and car insurance thanks to provisions of Dodd-Frank. And as with Obamacare, choices of policies will be more limited and some policies may even be canceled.

The good news is that, amazingly, the Democratic-controlled Senate – perhaps chastened by the experience of Obamacare — passed a bipartisan bill last month to attempt to provide relief from these Dodd-Frank provisions. The House should pass identical legislation, dare Obama to veto it, and then push for more.

It has been said that, under Obamacare, health insurance companies are no longer insurance companies but public utilities. With Dodd-Frank, many insurance companies face regulation as if they were banks. Under the Federal Reserve’s interpretation of the Collins amendment, sponsored by liberal Republican senator Susan Collins (Maine), insurance companies with a small thrift operation — or even those without any banking component but deemed “systemically important” by Dodd-Frank’s Financial Stability Oversight Council — will face the same capital standards that banks do.

This is so despite widespread bipartisan consensus that it is insane. While both banks and insurers face risks, they use very different business models. Typically, banks make short-term payouts on deposits for millions of customers. Insurers, by contrast, either pay claims for just a fraction of policyholders or, in the case of life insurance, pay out after years or even decades.

Consequently, insurance firms, with the oversight of state regulators, have designed portfolios that contain high-quality corporate bonds and some blue-chip stocks to build up reserves in the event of a catastrophic loss. Banks, though, with primary assets of loans, are limited to only a small number of corporate bonds and virtually no stocks.

Applying bank-centric capital standards to insurance companies would massively increase costs. The Oliver Wyman study found that imposing these rules on insurers would raise costs for life insurance consumers by $5 billion to $8 billion. These costs could hit policyholders through both higher premiums and reduced benefits. And some policies simply could become unavailable as insurers “exit certain product lines,” according to the study.​

Yet ironically, such bank-like standards would also likely heighten risks for insurers, according to risk-management professionals. A letter to Congress from the American Academy of Actuaries warns that forcing insurers to follow bank-capital rules both “assigns risks to insurers that are not necessarily significant to them” and “understates risks that may be more significant to insurers than to entities such as banks.”

So who thinks it’s a good idea to apply bank-capital rules to insurance companies? Virtually no one. Take Senator Sherrod Brown (D., Ohio), who would never be mistaken for a deregulator. “I want strong capital standards, but they have to make sense,” Brown said. “Applying bank standards to insurers could make the financial system riskier, not safer.”

Federal Reserve chairman Janet Yellen doesn’t seem to disagree, but says the language of Dodd-Frank’s Collins amendment ties the Fed’s hands. “The Collins amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules,” Yellen said at a Senate hearing.

For her part, Collins, one of three Senate Republicans to vote for Dodd-Frank, says her provision has been misinterpreted. “Since I am the author of the Collins amendment, since I am Senator Collins, I think I know what I meant,” she stated at a Senate hearing in March.

Hopefully, next time a behemoth piece of legislation is being rushed onto the Senate floor, Collins, Brown, and others will not pass the bill before they know what’s in it or how any loose language might be interpreted by regulators. That may be too much to hope for, but to their credit, and to the rarely deserved credit of everyone in the U.S. Senate, a corrective bill passed that body by unanimous consent on June 3.

Co-sponsored by everyone from Brown and Collins to conservative senators Pat Toomey (R., Penn.) and Tim Scott (R., S.C.), the Insurance Capital Standards Clarification Act of 2014 (S. 2270) revises Dodd-Frank to make it clear that the Collins amendment does not apply bank-capital rules to insurance firms. No one — not Elizabeth Warren (D., Mass.), not Bernie Sanders (I., Vt.) — objected to the measure when it hit the Senate floor.

Now the ball is clearly in the House’s court as the unhappy Dodd-Frank anniversary approaches. The first step is simple: Spoil the euphoric leftist Dodd-Frank anniversary party by passing the Senate bill exactly as written. Obama will then have two politically unpleasant choices. He can either sign this bipartisan bill highlighting Dodd-Frank’s failure or try to stand firm in shifting sand and watch his usual allies help override the veto. Either way, much of what little luster there is from Dodd-Frank will be rightfully gone.

Then we can move on to repealing the many misguided sections of Dodd-Frank that shower Main Street with mandates and further entrench Fannie, Freddie, and other institutions deemed “too big to fail.” Four years after Dodd-Frank, it’s time for authentic free-market financial reform that lifts barriers to competition and ends bailouts.

John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.