|
Critical Issue Report
Federal regulation—Good or bad;
wanted or unwanted?
Recent large losses have opened the door to federal
reinsurance programs; will regulation follow?
By Phil Zinkewicz
Thirty-some years ago, the various segments of the property and casualty insurance industry spoke with one voice regarding the possibility of federal regulation of the insurance business: They were against it. Speeches were made at industry meetings, and articles and editorials in insurance trade publications warned of “letting the camel’s nose under the tent.” The camel being federal regulation and the threat being that once you let the feds take over one segment of the business, the door would be open for complete federal control.
Over time, the insurance industry has let the camel’s nose in—and possibly the whole head. When losses from race riots became too much for the industry, insurers asked the feds for a riot reinsurance program. When floods around the country produced serious losses, insurers let the federal government establish its own federal flood insurance program. After September 11, 2001, insurers looked to the federal government to step in with another reinsurance program that addresses losses from terrorism.
Still, the industry was able to avoid a complete takeover of the day-to-day regulation of insurance. Bills for federal regulation have been put before Congress, but without success. Today, however, the industry is no longer speaking with one voice.
Large insurers now want federal regulation, saying that the state regulatory system has become too cumbersome and inefficient. They argue that, in today’s global economy, state regulation is a drawback for insurers as they try to compete with foreign insurance markets where insurance regulation is more centralized. Smaller regional insurers do not agree, saying that creating a new federal bureaucracy would be detrimental to the business of insurance and that federal regulators have not done well for other industries such as banking and securities. As a compromise, legislators have developed a concept called the optional federal charter, where insurers could choose whether to be regulated by the states or the feds.
Producer organizations are also split on the subject of federal regulation. The Council of Insurance Agents & Brokers is in favor of a national charter. The National Association of Professional Insurance Agents (PIA National) and the Independent Insurance Agents & Brokers of America (IIABA) are against it.
The debates have gone on for many years, but some believe that this is the year that federal regulation might be achieved. PIA’s president, Kenneth Auerbach, is especially concerned about a recent attempt by legislators to push for federal regulation.
“It was particularly appropriate that Reps. Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) picked April Fools Day to again reintroduce their bill that would enable a federal takeover of insurance regulation from the states,” Auerbach said in a PIA Web site commentary.
“Unfortunately, their bill is not a joke. I will spare you the details of this latest attempt by the ‘big boys’ of financial services to tilt the playing field toward them and away from Main Street insurance agents and their customers,” he continued. “Suffice it to say that the bill allows carriers to pick their own regulator. It would open a federal insurance office in all 50 states, mandate the creation of a federal insurance bureaucracy and provide for a federal insurance guarantee fund. In short, it would drive a stake through the heart of state insurance regulation.
“The proposal tracks the strategy laid out by the illustrious Henry Paulson, our former Treasury secretary from Goldman Sachs,” explained Auerbach, “who said that it was necessary to ‘prepare’ the insurance industry for assimilation and complete absorption into a unified federal system.”
Auerbach concluded by saying that PIA members “support Congressional efforts to address the systemic regulation of the major players in financial services, as long as they do not undercut our state insurance regulators or undermine state insurance law. Congress needs to focus its regulatory reform efforts on the areas where the problems occurred—in banking, securities and capital markets.”
The London-based Reactions Magazine recently sponsored a 90-minute Webinar on the subject of insurance regulation in the United States, noting: “The industry is agreed on one thing—regulatory overhaul is coming in the U.S. What is less clear is what form it will take and how that will affect the insurance industry.”
Panelists in the Web cast were Michael Loney, Reactions editor and panel moderator; David Sampson, president and CEO of the Property Casualty Insurers Association of America; and Stephen Zielezienski, senior vice president and general counsel of the American Insurance Association.
Sampson said that, at present, Washington, D.C., is in an “over-reaction” mode. “Reforms being considered are bank centric, but there is the possibility that insurance will be swept up in federal regulatory reform. It is important for the insurance industry to provide legislators with good, objective data on how we’re performing and how financial reform will impact insurance.”
The industry must distinguish insurance from other financial services sectors, Sampson said. “It is possible that federal regulation proponents will have a bill on the president’s desk by the end of the year.”
Sampson said that legislators should understand that the vast majority of property and casualty insurers are well capitalized. “The P-C industry has suffered a loss of net income but was still profitable in 2008,” he said. “We want to have a federal systemic risk overseer to monitor insurance companies that might be in financial difficulty to measure how their problems affect the overall economy. But that can be handled without creating a new federal bureaucracy,” he asserted.
Zielezienski pointed to what he perceived as the inefficiencies of state regulation of insurance. “Prior to today’s economic meltdown, we had confidence in our financial institutions,” he said. “That is not true now. Now the federal government is poised to take on a greater role in regulating financial institutions. The state regulators are only concerned with what insurance companies do in their own states. They don’t see the broad picture of their impact on the entire economy. Therefore, functional federal insurance regulation may be unavoidable. Foreign financial institutions and governments need to know that the U.S. insurance industry is acting in a unified manner. What happened with AIG proves that federal regulation is needed.”
Commentary: There is no question that state regulation of insurance has grown cumbersome and inefficient. Anyone who has ever attended an annual meeting of the National Association of Insurance Commissioners knows that a proposed law can take years from conception to fruition and then has to be adopted by each of the 50 states.
However, to move to a federal regulatory system is also fraught with difficulties. The feds’ handling of the savings and loan crisis of the 1980s was less than efficient. FEMA’s handling of Hurricane Katrina was an abysmal failure. And the current economic crisis is the result of the federal government’s failure to monitor the banking and securities industries. Congress should not let the insurance industry be swept up in overall financial services regulation because the business of insurance is unique in the financial services sector.
The author
Phil Zinkewicz is an insurance journalist with more than 30 years’ experience covering the international insurance and reinsurance arenas. He regularly writes for a number of London publications.
|
