Is Federal Regulation Inevitable?
Has the financial meltdown on Wall Street–with AIG derivative trading one of the chief catalysts–guaranteed not only that Congress will move for direct oversight of insurance next year, but that any chance of the new federal charter system being “optional” is out the window?
That possibility was suggested last week–during a RIMS webinar on the state of the market moderated by yours truly–by Steven Weisbart, vice president and chief economist at the Insurance Information Institute.
Steve said that in the rush to compensate for the lack of regulation that resulted in a financial tsunami, Congress “might take the ‘O’ out of ‘OFC,’” meaning federal charters for certain types of carriers could be mandatory.
(To hear the entire Webinar, click here, which will take you to the Risk and Insurance Management Society Web site’s webinar archive. Sign up for “RM Strategies for Managing in an Unsettled Financial Environment.”)
While I agree Congress will be gung-ho for new oversight rules after allowing unregulated credit default swaps to nearly drown the financial system, and while I know a number of insurers and their associations would welcome a national charter, I hope Washington doesn’t go overboard and strip authority from the only entity that seemed to be doing its watchdog job the past few years–state insurance regulators.
After all, it wasn’t a state-regulated AIG entity that got the parent company–and the entire economy–into such trouble. In fact, Washington set the stage for our current debacle by explicitly exempting certain derivative trading from national, let alone state oversight.
If ever one could argue that Uncle Sam isn’t up to the task of regulating insurance, the fact that Washington was asleep at the wheel while our financial system was being undermined by termite-like derivatives trading allowed under federal law is compelling proof indeed.
Frankly, it isn’t reassuring to see members of Congress running around like chickens with their heads cut off, allocating hundreds of billions of dollars via vaguely structured bailout programs, which the Treasury Department allocates as it wishes, making up the rules as it goes along.
Can we really trust Washington to take over insurer regulation–given the fact that insurance is about the best regulated segment of the financial services industry at this point, thanks to sound state oversight?
What do you folks think?
Entries (RSS)
Sam, why do you give state insurance regulators such a free-pass for the current state of the financial markets? Weren’t the bond and mortgage insurers that served as the canaries in the coal mine for this financial crisis state regulated?
SAM RESPONDS:
Excellent point, but unfortunately I have no confidence the Feds would have done any better a job.
I happen to live in a state with two major insurers in liquidation–Reliance and Legion. I can’t think of one situation where the state regulatory system stepped in aggressively BEFORE insolvency was inevitable to avoid the collapse of insurers.
Regulatory bias is geared more to pricing and underwriting constraints than forcing rogue underwriters to demonstrate pricing restraint or underwriting discipline.
With the growing complexity of insurer asset and liability management that crosses over from the control and visibility of the insurance regulator, something must be done. And while I don’t trust Congress to have the answer, I don’t think the current system is the answer, either.
If we continue down this socialist track we find ourselves traveling, it won’t matter.
From “1984″:
“Though Winston did not rush out into the streets, mentally he was joining in with the cheering crowds. The face of Big Brother loomed large over the announcement and Winston felt his eyes fill with tears of joy and reconciliation. The last lesson had been learnt. ‘He loved Big Brother.’”
This really should be required reading. Federal regulation of our industry will continue the imposition of federal control of our lives.
If we went to federal regulation, I suppose there would have to be local offices in every state. Who would staff them? Might one expect that many of the state regulators would simply shift to the federal payroll?
How much of our current trouble is due to a failure of competent oversight, as opposed to a lack of power to oversee? If the talent pool remained the same, we might not see much real difference in regulation, other than some unity of rules–despite my cranky comment in response to an earlier article on this topic.
We seem to have forgotten that one of the founding principles of our system of government is that what can be done locally, should be done locally.
The sole reason for a federal government was to accomplish that which we HAD to do collectively. Simply put, if the States can, the Fed’s shouldn’t.
The Consumer Federation of America opposes the notion of a bailout for life insurers since we seriously question whether it is needed at all.
But, if money does flow to insurers, the insurers backed by taxpayer money surely cannot be allowed to harm either taxpayers or consumers.
Therefore the insurers getting such money should be regulated by the Feds.
The entire entity, including the holding company (the source of the AIG debacle), should be regulated for both financial/solvency and consumer protection.
The Federal Trade Commission must be part of this to provide their consumer protection and antitrust oversight. (Surely a federally-regulated insurer would not be covered by McCarran’s antitrust exemption provisions!)
If an insurer does not take federal money, then it can stay under state regulation, at least for now.
If the states later are shown to have failed (proven by massive infusions of tax dollars to more than just AIG), then consideration should be given to a complete federal takeover of insurance regulation.
While my instinct is that the states did fairly well, the jury is still out on whether state insurance regulators have been doing their job on safety and soundness.
Was New York asleep at the switch on bond insurance, for instance? Are the awful earnings being reported this week by life insurers a rousing endorsement of state success? Does the fact that life insurers are now asking for bailout assistance reflect poor state oversight? Time will tell.
For now, the states appear to have done better than the Feds, and the need for a bailout for insurers is not apparent, thus there is no need to consider full federal takeover of insurance regulation at this moment.
If life insurers really want to be part of the bailout, they must be tested on the need for such a dole. Insurers must be very transparent in making that case.
America needs a good close, public look at their books – and the valuations they are currently placing on their assets – to determine whether any taxpayer help is appropriate.
The insurers must be public about their specific reasons for wanting these dollars in sufficient detail that we all can understand the need and comment upon the proposed resolution of the need.
In general, on the issue of safety and soundness regulation, I think any entity that poses a risk to the stability of the overall financial system has to be subject to good risk management standards.
Participating in the bailout would be evidence of the need for such federal regulation, but what about after they have paid back the loan and the national economy is stable once more?
Does it follow that, once they’ve paid the money back, they can go back to state regulation? If inadequate state regulation allowed them to get into trouble to the point where they could threaten the financial system, then what is to prevent a recurrence of the problems if safety and soundness regulation is relaxed?
Are we satisfied that states will adequately police federal standards under such circumstances?
I believe that insurers should stay federally-regulated once they have crossed over, unless they return to state control in states that would meet new, tough federal minimum standards of financial and consumer protection regulation.
Sam, I believe what I said in the webinar was that the current financial crisis had highlighted the problem of having so many players in financial services regulated (or not) by separate agencies, and suggested the need for a single, coordinated, over-arching regulatory apparatus.
I believe I said that if this view takes hold, it would likely include the insurance business.
Note that this doesn’t take any position on whether state or federal regulation is “better.”