As of Nov. 14, the control of Congress was too close to call. There was not an official winner in several races, and some projected losers are contesting the results. The U.S. Senate will remain under Democratic control, even though the Georgia race will be determined by a runoff election on Dec. 6. Control of the House remains undecided, though trending toward the Republican party.
Regardless of this outcome, with Joe Biden remaining president, we expect Capitol Hill will remain gridlocked. Given that this was a mid-term election, most of the key elections occurred at the state level, with many of the national issues being fought locally. For insurers, this will result in multi-state efforts to understand and respond to regulatory challenges.
Uncertainty around election outcomes and control extended to the state level. Eighteen states remained in Democratic control, while Republicans retained control of 23 states. Eight states remained divided, with one party controlling the governorship and the other party controlling both houses of the state legislature.
The Post-Mid-Term Market Overview
If Republicans do gain control of the U.S. House of Representatives, investors will likely celebrate the end of one-party rule, as many of the most anti-growth measures being contemplated in Congress will fall by the wayside. Regardless, we believe 2023 could be a difficult year for markets, especially in the first half.
There are four major policy drivers of growth—monetary, fiscal, trade and regulatory.
- Monetary policy - The Federal Reserve’s Federal Open Market Committee (FOMC) is not likely to change course based on the election outcome. We expect the Fed to drive the economy into recession, one we hope will be mild and short, to bring inflation down into its target range.
- Fiscal policy - As spending bills must start in the House, per the U.S. Constitution, House party control is important. If Republicans gain control, as seems likely, it is unlikely that any new spending and, consequently, more inflation-spurring demand-side stimulus will be forthcoming. New taxes are less likely, as well. The lame-duck session will probably deal with funding the government (avoiding a shutdown threat, we hope) and the National Defense Authorization Act, as both will have some bipartisan support. If Democrats keep control, we would expect higher spending, such as a re-invigorated Build Back Better bill, and higher taxes.
- Trade policy - Trade and foreign relations are largely purviews of the Executive Branch, so we expect little impact from the mid-term results. Further, there is not that much difference between the parties when it comes to dealing with China and Russia, the two biggest concerns right now.
- Regulatory policy - We can expect continuing aggressive regulatory initiatives from the current administration. However, as Congress holds the purse strings, whichever party gains House control will determine how easily the Biden team can achieve the appropriations to fund them.
So, we expect earnings and equity markets to struggle, especially in the first couple of quarters of next year, until the FOMC ends the tightening cycle. We believe the U.S. dollar will ease a bit but continue to be strong against economies still under stress, especially in the U.K. and continental Europe. In this environment, high-grade USD bonds in the short to middle part of the yield curve should provide the best opportunity for income and stability. If we have a recession and it is short and mild, we will look for an earnings recovery in consumer sectors in the second half of next year, with opportunities in USD equities and longer-dated bonds.
Environmental, Social and Governance Progress or Pushback?
Regardless of what happens in Congress, with the election further locking in single-party control at a state level, insurers will continue to face a patchwork of ESG disclosure and investment regulations. Our opinion is that this is likely to lead to higher compliance costs for insurers as the differences in ESG disclosure among the states increase. We also think the ability to reallocate investments will be hampered as some states continue to prohibit divesting from fossil fuels. From a public relations perspective, these differences among the states may make it more difficult to provide a clear and consistent message about ESG from insurers to their stakeholders.
Evidence of the gap between state views on ESG has been on display during 2022, and the mid-term elections have widened that gap. Red and red-leaning states have begun to push back against efforts to increase ESG disclosure and investment. Blue and blue-leaning states are likely to increase their oversight of ESG corporate initiatives.
Insurers are stuck between a rock and a hard place. On the one hand, stakeholder pressure to divest from fossil fuel investments and withdraw underwriting support for fossil fuel products is strong and growing, particularly in Europe, where a string of insurers and reinsurers have adopted such measures in recent years. On the other hand, a number of Republican-controlled U.S. states – notably Louisiana, Florida and Texas – have pushed back on actions that they perceive as a violation of fiduciary duty and as damaging to local fossil fuel interests.
The state pushback against ESG has taken two forms: 1) No ESG investment and 2) Boycott. The states with “No ESG” laws do not allow state funds to be used for ESG or social investment. The boycott states bar local authorities from doing business with banks and investment management companies that have adopted ESG policies and divested from fossil fuel-based energy companies.
See also: Climate Change and Product Liability
Little Progress in Tort Reform
Tort reform typically has bipartisan support, and this mid-term election saw little progress. No state had tort-law reform on the ballot, but Arkansas, California and Missouri were considering initiatives.
Although ballot initiatives were absent, Republican success in achieving or tightening control of state legislatures and governorships creates a more favorable business environment for future tort reform. Our eyes will remain on Florida, as it convenes a special legislative session in December to address the challenges facing its home insurance market. Florida is by far the most expensive state in the nation for home insurance, with premiums in 2022 running at nearly three times the U.S. average, so pressure for reform will continue to be strong.
Industry Pushback on the PRO Act
When it comes to insurance distribution and advice, many state and federal regulators have focused on suitability. However, proposed changes to U.S. labor laws have been a growing concern among advisers and their firms. The Protecting the Right to Organize (PRO) Act, if passed, would affect U.S. labor law. The House passed the PRO Act in early 2021, and unions and other Democratic groups were pushing for the Senate to pass the PRO Act in 2022. The PRO Act has stalled in the Senate, as it would need at least 60 votes to avoid a filibuster, and obtaining those votes may continue to prove difficult given the continuation of the Senate’s near balance of Republican and Democrats.
The PRO Act offers broad reform, and multiple insurance and financial advisory trade groups have pushed back against the act because it would reclassify many independent agents and advisers as employees. To determine the independent contractor status of an employee, the PRO Act would use the “ABC” factor test employed in similar legislation in California, though the California rule included a carveout for financial advisers.
Medicaid Expansion Slowly Continues
Healthcare continues to be a focus within every election cycle. While the topic of the Affordable Care Act (ACA) was muted compared with prior election cycles, in some states Medicaid expansion was a hot topic. Based on mid-term results, that expansion slowly continues.
For insurers, an increase in Medicaid-eligible individuals provides the industry with an increase in membership and premium growth. Only 12 states have yet to adopt and implement the Medicaid expansion program per the ACA; of those 12, 10 had a gubernatorial election, and one had a ballot initiative focused on Medicaid expansion.
Ballot initiatives have been popular and effective in expanding Medicaid. However, in the 12 remaining states, only Florida, South Dakota and Wyoming allow voter-driven ballot initiatives. The remaining nine states would require voters to elect a governor and local state representatives who would support an initiative.
Voters in South Dakota passed a ballot initiative to amend the state’s constitution to expand Medicaid eligibility. Governor Kristi Noem (R), who won reelection, has stated that, while she does not support Medicaid expansion, she will implement the amendment if it is passed.
Private Equity Annuity Insurers Remain Focused on the States
One subject where control of the Senate is particularly important is the involvement of private equity firms in the annuity industry. In March 2022, Sen. Sherrod Brown (D-OH), chair of the Senate Banking Committee, called on the NAIC and Federal Insurance Office to study private equity annuity insurers’ impact on the retirement security of individuals. He was especially interested in the impact on retirees who transferred their defined benefit pensions to such insurers. That request was followed by Banking Committee hearings in September in which Sen. Elizabeth Warren (D-MA) echoed Sen. Brown’s concerns.
We think, with the Senate remaining close, there is a low likelihood of federal regulation affecting the ability of private-equity-backed annuity insurers to continue engaging in pension risk transfers.
Data Protection and AI Regulation, the Question Is When, Not If
As technology firms expand their scope, the potential for hidden biases in the algorithms driving those systems is a concern among some regulators.
While there were no initiatives addressing data protection or AI on state ballots, control of governorships and state legislatures will determine the course of regulation. Both political parties have expressed interest in increasing data protection and privacy regulations.
According to the National Conference of State Legislatures, in 2022 at least 35 states and the District of Columbia enacted or considered consumer privacy bills. Insurers would like the freedom to use personal data for underwriting and pricing. Sensor-based technologies are rapidly developing uses in property insurance underwriting. Data-privacy legislation differs across jurisdictions but focuses on creating and regulating boundaries around the collection, use and disclosure of personal information by businesses.
Social media and genetic information are of interest to life and health insurers to help improve underwriting. All sectors are leveraging AI and machine learning to increase efficiency.
At the federal level, the bipartisan American Data Privacy and Protection Act (ADPPA) would create a comprehensive federal consumer privacy framework and generally preempt state laws. At this point, we believe it is unlikely that the bill will be considered in the full House or Senate before the conclusion of the 117th Congress on Jan. 3, but ADPPA could become a priority issue for the new Congress.
See also: The Risks of AI and Machine Learning
State Insurance Commissioners
Insurance is regulated at the state level, and a change in a state’s insurance commissioner can affect the regulatory priorities of those states’ insurance departments. In the 2022 mid-term elections, the states in which insurance commissioners were on the ballot -- California, Georgia, Kansas and Oklahoma -- all kept their incumbents in office.
California: Commissioner Ricardo Lara (D) won reelection.
Georgia: John King (R), the incumbent appointed by Gov. Brian Kemp (R) to replace the former commissioner who resigned, won election to a full term.
Kansas: Incumbent Commissioner Vicki Schmidt (R) won re-election. Schmidt has been a national leader at the NAIC across health and property/casualty work.
Oklahoma: Commissioner Glen Mulready (R) ran unopposed for his second term.
In addition, in several states, the governor appoints the insurance commissioner. A change in the state’s executive branch could bring about a change in the office of the insurance commissioner, but we will need to wait and see which of those elections will result in a change of commissioner.
It Ain’t Over ‘Til It’s Over
While this election has been bitterly fought and the outcome of many key races remains unknown, neither side can declare total victory in Washington. As a result, at the federal level, the likely election outcome is gridlock. This will lead to further rule by agency and executive regulations. However, the U.S. Supreme Court’s ruling in West Virginia v. Environmental Protection Agency may have opened an avenue for lawsuits blocking some agency and executive regulations. At the federal level, then, the 2016 presidential election remains dominant, as it enabled the GOP to obtain a 6-3 majority on the Supreme Court.
Where Republicans strengthened their control at the state level, we would not be surprised to see several outcomes favorable for insurers. There is likely to be less regulation, a more friendly tort environment and higher barriers to ESG or DEI (diversity, equity and inclusion) investment and reporting requirements. Health insurers may be relative losers due to more restrictions on Medicaid.
On the flip side, where Democrats enjoyed success at the state level, we think the outcome will be slightly negative for life-annuity insurers due to more regulation around underwriting. We also see a negative for property-casualty companies, leading to a less friendly tort and business environment with added pressure to divest from fossil fuels. Health insurers appear to have emerged as the relative winners, with no major adverse changes, at least for the near term.
One of Yogi Berra’s most famous quotes was, “It ain’t over ‘til it’s over.” With the U.S. elections, it’s never over. With that in mind, in 2023, as executives manage their way through higher inflation, possible recession and increased economic uncertainty, it can be tempting to put the 2022 midterms in the rear-view mirror. We think that management teams, however, should remain engaged at all political levels to shape a more favorable regulatory landscape. After all, the next election is less than 725 days away!