Would federal regulation better protect big commercial buyers? The Risk and Insurance Management Society's leadership is excited about the recent endorsement by the Bush administration of an optional federal charter. But all I can say is, be careful what you wish for, because federal oversight certainly has not produced good risk management under this hands-off White House, and I doubt any cost efficiencies will be passed along to consumers.
At a press briefing yesterday with senior RIMS officers here in San Diego at the Society's annual conference, Terry Fleming, a director for the group who deals with legislative issues, spoke about the "very nice surprise" from the Treasury Department, which included a call for an OFC in its recent pitch for a comprehensive overhaul of financial services regulation.
The first step proposed by Treasury towards an OFC would be the establishment of an Insurance Information Office, which Mr. Fleming called a "wonderful idea." He noted that the banking and securities industries have long had the ability to coordinate information and report back to the federal government, adding that having a similar function within Treasury for insurance was long overdue.
However, when I played the familar role of skunk at the garden party, asking what made RIMS think Uncle Sam would make a better insurance regulator than the states, given the federal government's dismal history with the subprime mortgage debacle, the importation of dangerous toys from China, the deliberate downplaying of environmental hazards at Ground Zero following 9/11, and so many other oversight failures by an administration openly hostile to regulation, Mr. Fleming defaulted to a longer-term efficiency argument.
"We see this as a competitive opportunity," he said, emphasizing the "optional" part of an OFC. "Right now there are 56 jurisdictions over insurance, and not one of them has the authority to manage the business in any comprehensive way--particularly with coverage provided by foreign carriers and reinsurers."
He noted that "every other country in the world has central insurance management, and the U.S. should, too."
I remain skeptical, especially given the record of the current administration. I have a feeling that if insurance oversight is nationalized, it will be lost in a regulatory black hole, and buyers--commercial or personal--will ultimately suffer.
A federal insurance administrator might be more efficient, but it will not necessarily be more effective in policing market conduct and assuring insurer solvency.
I am also doubtful that any cost savings achieved via regulatory efficiency will be passed along to buyers. It is not even clear at this point whether insurers ever really lowered their prices to reflect the fact they no longer pay contingency fees to the mega-brokers, and that represented some serious money.
I don't mean to say state regulation doesn't need reform. But rather than a radical change, such an OFC, why not just pass the bill floating around Congress to set federal benchmarks for state regulators to follow on surplus lines and reinsurance, throw in a national licensing facility for insurers and brokers, and then after a few years determine whether you need to go any further?
What do you folks think?
Comments (3)
I think your skepticism of federal regulation of insurance is admirable. But I think you're missing a key piece of the puzzle and it comes from your comment that the current administration is hostle to regulation.
The Bush Administration is not just hostle to regulation, it is hostle to American business. In a conversation I was part of with one of Congressman Ed Royce's aides during the PIA's annual federal legislative summit, I learned that the OFC is part of a bigger plan to globalize the U.S. economy.
Royce, as you know, is the author of the House version of an OFC.
His aide said it is one step in a move to globalize insurance and globalize the economy. When pushed about how this might impact American consumers and business, the aide brushed concerns aside.
The promoters of all of these changes really think they are a good thing for the consumer and for insurance. Like you, I remain skeptical. None of what the Treasury wants to do with the nation's financial system makes me excited.
It makes me very, very nervious.
And the skunk at a garden party picture is perfect.
Posted by Gary Wolcott | May 1, 2008 3:11 PM
Posted on May 1, 2008 15:11
I don't think big buyers need a nanny in Washington to protect them from the evil insurance carriers, who are all competing desperately for their premium dollars.
Any cost savings from efficiency gains will get passed along, not because the evil carriers want to pass them along, but because they will force each other to do so through their bids for business from buyers.
That said, I think a single country-wide regulator will be dangerous for carriers. If the business climate for carriers in a state is made intolerable by its regulator, carriers can stop selling there and focus their efforts in other states, and stay in business.
But if a national regulator does the same, carriers may have no choice but to go out of business completely.
Posted by Mikk | May 1, 2008 4:30 PM
Posted on May 1, 2008 16:30
Interesting that your topic du jour yesterday on federal regulation of insurance met with a wall of silence. That pretty much says that the industry doesn't want federal regulation.
If activists need to go down this path at all, your minimalist approach is better than a full plunge into federal regulation, but personally I see no value added by having another level of regulatory bureaucracy to navigate at an increased cost to the consumer.
Posted by Joan | May 2, 2008 9:06 AM
Posted on May 2, 2008 09:06