Office of National Insurance

The big insurance news of the past week is the Obama administration's release of a white paper primarily focused on federal regulations of financial services industries. I'm sure most readers of this blog are fully aware that insurance is regulated at the state level. What makes this white paper news is that it proposes a newly created Office of National Insurance under the Executive branch of the Federal Government. It would be in the Treasury department. The paper argues that the federal government needs to get involved in insurance regulation for a few reasons:

• Systemic Risk – aka the AIG Clause – The government argues that large, interconnected firms like AIG can pose systemic risk to the entire American economy. It's hard to argue otherwise, given recent experience. Politically, this is a done deal, in my view. The devil's in the details, like with anything. Details we've yet to see.
• Strong capital standards – of course, adequate capital is essential for insurance companies. It's the one area of regulation, at whichever level, that makes perfect sense for insurance. You want to ensure that companies can survive to meet their promises and pay legitimate claims. So the only question is whether state regulation on this front has been inadequate. I see no evidence of that. As I mentioned in an earlier blog post, insurance was the ONE area of financial services that didn't melt down last Fall. Do you think that was just a coincidence?
• Consumer Protection – like with capital adequacy, I see no evidence that state regulation has proved insufficient for protecting consumers. That fact that states have varying laws on this front is a good thing, in that different states can experiment with higher or lower levels of regulation, to see which ones provide the sweet spot balancing consumer protection and industry health and innovation. Consolidating all state laws into one uniform set of federal laws stifles all of that, and leaves the public dependent on the vagaries of a single group of politicians in Washington DC. The other thing that troubles me on this point is its vagueness. Which consumer protections do they mean?
• National uniformity – that's the term used in the white paper, and it's not a point unto itself, but a restatement of the above two points. The paper argues that increased uniformity is good for financial stability and efficiency. As Brian Sullivan pointed out at the recent AIR conference, a little inefficiency is an acceptable trade-off versus having every state regulated in a most burdensome manner. Which is what many of us in the business expect a federal charter (call it uniformity, if you wish) would bring. Overall, I find this very weak sauce as an argument for federal intervention.
• Those pesky affiliates – another AIG clause – The argument here is that because many insurance companies are part of larger holding companies that are into other financial services, and because those other services fall under the purview of the Federal Govt, and because the health of the insurance elements of the holding company are then threatened by those potentially troublesome affiliates, then the federal government should be overseeing insurance. Though that's a bit like a parent arguing that because they are responsible for their own children, and because those children come into contact with and are influenced by their classmates, then that parent can act as a parent to the classmates. At least a bit.
• International Coordination – this one just sounds made up, like a college student stretching out a term paper to fit the required number of words written. We need to change insurance regulation in America to "satisfy existing international frameworks"? Maybe we do – I'm not entirely sure what that means – but once again, we are left with the same basic, fundamental question…

Why are we to believe that the federal government, regardless of which political party is running it, is better suited to understand, enact, and enforce these regulations? This strikes me a little more than opportunistic power-grabbing (thanks again, AIG, among others), and the state insurance commissioners should fight back hard. For should this come to fruition, it's not just a federal camel's nose under the state-regulatory tent; it's a whole camel's behind, and a hump or two to boot.

If you are skeptical, consider this phrase from the report that should give us all pause… "The ONI should be responsible for monitoring all aspects of the insurance industry." I posit, with great intellectual ease, that monitoring leads inevitably to recommending, which leads to political, quid pro quo strong-arming, which leads to outright legal requirements.