Private Insurance: Cut Out the Politics and Look at The Real Issue

If you ever want to learn a lot about something, pretend you know absolutely nothing. Even though I heard the same stories, specifically about past failures of private insurance and how private insurance was started, told over and over again I went in fresh each time because how someone makes the facts fit their opinion of private insurance helps you understand why there is such deep seated division.

Do you think stats tell the story of private insurance? Think again. In fact you can make the stats work for either side of the story. Look at the similar 1.30% equity ratio of the NCUSIF and ASI. Look at the 1% deposit requirement (though ASI has a risk-based mechanism that causes deposits to vary that NCUSIF does not). Look at the $.01 per $1,000 of insured dollars claim history. Consider that neither fund has ever cost taxpayers a dime.

Do you think the structure of ASI versus NCUSIF is the lynchpin in figuring out whether private insurance is a viable, safe alternative? ASI is a cooperative with credit union control. Don't credit unions like cooperatives? NCUSIF is funded by many more CUs, over 8,000, but the CUs have no control. Which is better? It depends who you ask.

To boil it down look at the top argument of each side. If you ask them to pick just one fact (as they see it) to prove their point, there are two things you will hear.

Those against private insurance will say federal insurance has the "full, faith and credit" of the federal government–private insurance does not.

Those in favor of private insurance say it's all about choice. Taking away private insurance hinders a true dual chartering system.

Those are the top arguments bar none. Don't get caught up in the stories of the past. Take a 2007 look. Consider RISDIC, the most famous private insurance failure case. You can say that RISDIC was the ultimate example that credit union private insurance doesn't work. You could also say that RISDIC was actually caused by bank fraud, and credit unions were merely a victim. If it was a CU-only fund would RISDIC have ever happened? You could counter that and say it doesn't matter who caused the failure, it showed how private insurance handles massive losses.

What about all the states that shut down private insurance? Some will tell you it proves the point that private insurance is flawed and those CUs were lucky to have their deposits moved over to NCUSIF. Others will tell you that those shutdowns were an overreaction by lawmakers and in fact many CUs made a nice profit when they were given back their deposit with interest. Also consider that right now although ASI only operates in nine states, private insurance has been approved by the legislatures in some 20 states pending regulatory approval, which is what's going on in Washington State right now.

Yes, federal insurance has government backing, which is powerful. However that hasn't impacted the credit union industry to date because credit unions have never cost taxpayers money. The federal government backing point is a worst-case scenario argument. We are talking about an industry that is inherently safe and conservative. Credit unions have more capital than any financial institution. They have more restrictions than any financial institution. Is the doomsday scenario that would be necessary to cause a massive failure of privately-insured credit unions enough to take it away as an option? I certainly don't think so.

On the other hand is choice, as CUNA recently stated in a letter to the regulator in Washington state, a reason to keep private insurance around. No way. Credit unions certainly want choice, but if private insurance is fatally flawed, choice isn't worth it.

Despite all the rhetoric, private insurance in 2007 is only about one thing–American Share Insurance in Dublin, Ohio and its 170 privately primary insured credit unions. Critics of private insurance like to say it's not about ASI, it's about the private insurance concept. In 2007, it's all about ASI.

Critics of ASI believe the problems start from the top down because ASI's board is made up of the very credit unions that fund it. So what? Take a look at CUNA Mutual. Who sits on that board? Who sits on the board of corporate credit unions? Who better to sit on the board of ASI than those who have the most at stake. To criticize ASI's board structure is like saying that ASI CUs are with ASI just to avoid regulatory oversight. They may be there because they don't want two masters, but not to avoid oversight. They already answer to a state regulator. Are state regulators subpar to NCUA?

Critics of ASI also say it doesn't have reinsurance. If it has the same 1.3% equity ratio as NCUA and can assess a premium of up to 3% of assets on an ASI insured CU should it incur heavy claims, is reinsurance a must? No one could argue that reinsurance wouldn't be welcome, but it's not a reason to cut out ASI. The board at ASI looks at reinsurance every year and does not believe the high cost is worth it given the fund's many safeguards. Doesn't ASI's very comparable 33-year claim history with NCUSIF count for anything? In fact, ASI's risk-based approach to funding was cited as an advantage over the NCUSIF by the GAO in '03. You can't take ASI's performance out of this debate.

Critics also say ASI is duping members because they probably just assume their money is federally insured. I went to many (not all) of the Web sites of privately-insured CUs and found the disclosures very easily. This of course wasn't always true. Back in 2003, the GAO found that only 67% of privately insured CUs were giving the proper disclosures. Oddly, it's the FTC that would enforce violations, and the FTC has admitted it has never monitored this. After the GAO report, the FTC did allocate appropriations to enforce disclosures, but has yet to promulgate anything. ASI did swing into action. It lobbied very hard to get a provision in last year's reg relief bill (one of the few CU-only provisions that made it through) to empower state regulators to enforce the disclosures. ASI spent time and money to bring stricter oversight of its insured CUs–this is not a patsy insurer. It works closely with NASCUS and state regulators on this issue.

Critics say if members knew their funds were privately insured and not federally insured they would pull their money out. There are trillions of uninsured dollars in the stock market. Tyco, Worldcom and Enron taught us your employer's 401k certainly isn't always safe and it too is not federally insured. Americans have trillions in car insurance, home insurance, health insurance, and life insurance that isn't federally backed.

Critics also say Patelco, with a 25% share, makes up too much of ASI's fund, yet if you compare the small number of CUs in ASI and the many more number of CUs funding the NCUSIF, there is just as much concentration risk in the NCUSIF in a handful of very large credit unions. ASI's bigger concentration issue is state specific (California, 42%).

ASI is made up mostly of Camel 1 and 2 credit unions. It works closely with state regulators. It is examined annually by the Ohio Dept. of Financial Institutions and every five years by the Ohio Dept. of Insurance. It has to follow the financial regulatory rules of all nine states it operates in and those regulators visit it annually to examine ASI. ASI conducts on-site exams of its CUs that represent 80% of its exposure. It has a similar deposit funding mechanism as NCUSIF. It can assess premiums. It clearly has a vested interest in insuring healthy, thriving CUs. Would ASI take on risky CUs and put its entire future at risk? No.

This debate shouldn't be about which insurance is better. The NCUSIF has outstanding claims history. NAFCU has every right to tout federal insurance and its stellar performance. There is a proud history there, though many CUs would tell you they wish they had more input on how NCUSIF is run. But should NAFCU be leading the charge to eliminate an option over a catastrophic scenario that would be needed to drain ASI?

What is this debate about? I have spoken at length with Mr. Becker on NAFCU's longstanding position. I believe he simply thinks credit unions are safer with the federal insurance guarantee, and that is worth protecting. You could never argue that the federal backing isn't a more powerful safety net, but the problem is NAFCU is arguing to put out of business an insurer that has a stellar 33-year history. Taking away a CU's option to go to private insurance when the private insurer has an outstanding record doesn't make sense. NAFCU likes to ask, "when has private insurance ever worked?" It's been working for over 30 years at ASI. Again, in 2007 this debate is about ASI.

I believe behind the scenes NAFCU is getting very concerned about a potential trend to private insurance. There are rumors of a large Texas CU making the jump and then there's Washington State. I also believe NAFCU is concerned about cream of crop CUs (CAMEL 1 and 2) going to ASI, and NCUSIF getting all CAMEL levels, impacting the NCUSIF.

NAFCU's push to end private insurance also infers that state

regulators are not at the same level as NCUA and we all know that's not true.

Wherever you fall, why are credit unions having this debate now? Credit unions are showing their safety by how they are weathering the mortgage problems. That's what credit unions should be championing, not raising red flags for a "what if" scenario. Credit unions need to focus on passing CURIA. Material on private insurance was circulating on Capitol Hill recently. That's a shame. Let's have a solid internal debate first.

I offer up Credit Union Times to host an objective private

insurance forum/debate with the key players on this issue. Let's get more people engaged than the very, very select few who are making all the noise.

–Comments? E-mail pgentile@cutimes.com