NU Online News Service, March 27, 3:34 p.m.EDT

Establishing a national regulator responsible for overseeingsolvency and insurance pricing and products would help fix the"critical shortcomings" in the property-casualty insuranceindustry's current state-based regulatory structure, a consultingfirm report argues.

The study titled, "Improving Property and Casualty InsuranceRegulation in the United States," was produced by New York-basedMcKinsey & Company.

It states that the current p-c regulatory structure "strugglesto stay abreast of the increasingly sophisticated companies andproducts it seeks to regulate"; is costly and ambiguous forinsurers; is a barrier to international competition; and "isineffective, especially on safety and soundness, with seven of theten largest insurer failures occurring in the last ten years."

The report suggests five alternate regulatory options underdiscussion:

o A systemic risk regulator, which would involve a new nationalregulator who would monitor and manage risk to the entire financialsystem and could overrule existing regulators on issues relating tosolvency. The states would continue to regulate p-c insurers.

o Split stability regulation, where the national governmentwould take on some responsibilities such as setting capital andreserve requirements and conducting solvency examinations ofinsurers. The states would retain regulation over price andproducts and ensuring fair treatment of customers.

o A comprehensive stability regulator, where the nationalgovernment would regulate insurers, and the states would onlyensure fair treatment of customers.

o A national regulator for large and complex insurers, where thenational government would oversee the largest and most complex p-cinsurers, while the states regulate smaller insurers.

o An integrated financial activities regulation, where a newnational regulator or regulators would regulate all financialservices firms, including p-c insurers.

Splitting regulatory responsibilities, as options one and twopropose, would do more harm, the report states, leading toconfusion, lack of accountability and tension.

The report concludes options three, four and five "wouldincrease the quality of solvency regulation by improving the talentand resources the regulator would bring to bear, while alsoensuring that regulators had a comprehensive view of all theactivities of insurers."

The report notes that its analysis and research "suggests theU.S. would benefit from a change in its regulatory structure forp-c insurance, with the national government playing a more activerole."

While proponents of state-based regulation point out that U.S.p-c insurers have fared better than banks during the recentfinancial crisis, critics of the state-based model say otherfactors–such as rating agency capital requirements and the relativesafety of insurance versus banking–are responsible for thecondition of p-c insurers rather than the regulatory structure, thereport said.

Blain Rethmeier, spokesman for the American InsuranceAssociation (AIA), which has supported the idea of an optionalfederal charter, applauded the report's conclusions. "The McKinseyreport is encouraging," Mr. Rethmeier said. "It's a well-respectedfirm that employs a number of smart people."

Mr. Rethmeier noted that Treasury Secretary Tim Geithner also"said there's a good case for introducing an optional federalcharter for insurance" in comments he made yesterday to the HouseFinancial Services Committee.