Does the crisis at AIG and the fear of a meltdown in the U.S. financial services system prove Washington should be allowed to regulate insurance–or exactly the opposite? The answer depends on whether you’re for or against an optional federal charter, a debate between leaders of one pro-OFC insurer group and a state lawmaker association opposing the concept revealed.
“The recent turmoil in our economy highlights a number of flaws in financial services regulation, including insurance,” according to American Insurance Association President Marc Racicot, whose group strongly supports an OFC.
But George Keiser, a Republican representative in the North Dakota legislature, as well as secretary of the National Conference of Insurance Legislators, begged to differ. He suggested that the recent troubles on Wall Street and with AIG demonstrate that Washington shouldn’t be trusted to impose a “one-size-fits-all” regulatory system on the industry.
The two faced off in a debate last week launching The National Underwriter Company’s second annual Virtual Conference and Exposition, moderated by this reporter.
“Let’s talk about how federal regulation has worked, given developments over the past week” in the banking and securities markets, said Rep. Keiser, noting that supporters of an OFC often point to the state/federal regulatory system in banking as an example for insurance to follow.
“What’s happening today in the wonderful banking sector?” he added later in the debate–which may be accessed for the next 90 days by registering free of charge at http://presentations.inxpo.com/Shows/Summit/09-08/Registration/agenda.htm. “We have some banks in a serious crisis, even going bankrupt. Who was regulating them? The federal government.”
He added that prior federal failures in regulating savings and loans provide further evidence the U.S. government should not be given sweeping national powers over insurance.
However, Mr. Racicot called this argument a “red herring.” He pointed out that many of the activities that undermined the financial services industry and overall economy were not in fact regulated by either the federal or state governments.
“Your argument misses the mark,” he added, reiterating his position that for a variety of pragmatic, economic and legal reasons, insurance players should be given the right to be federally chartered.
“The bill we support would simply create an option to be federally chartered,” said Mr. Racicot–the former governor of Montana and chairman of both the Republican National Committee and the 2004 Bush-Cheney Re-election Committee, who joined AIA in August 2005.
“What we seek is not a displacement of the state insurance regulatory system but an alternative to it for those who need a single set of rules and a single authority to report to, so they may do business nationally and internationally,” he added.
Rep. Keiser–a working lawmaker who owns the Quality Printing Service in Bismarck, N.D., and who sits on his state’s legislative committees dealing with insurance–countered that allowing direct federal involvement will create a “dual regulatory system” that will “force companies to begin to play the game” of pitting federal against state oversight to see which one better suits their needs, rather than the consumer’s.
But Mr. Racicot argued that the industry already suffers under something worse than just a “dual” regulatory system, with up to 56 jurisdictions potentially having a say over an insurer’s operations. He said a federal charter will allow insurers to get more new products to market faster and cheaper, to the benefit of consumers.
He added that on a global scale, “as good a job as state regulators have done,” given their limitations in terms of jurisdiction, “they simply lack the authority and ability to represent the United States on a planetary scale. The Constitution gives the power to negotiate trade agreements strictly to the federal government.”
State regulators, he said, “may have the best of intentions, but legally they are impotent here.” He noted that no insurance commissioner, acting individually or in concert with regulators in other states, has authority under the Constitution to represent the entire country on global trade matters.
He said establishing a full-fledged federal regulatory authority–or, at least in the interim, an Office of Insurance Information–to negotiate international trade deals would bolster the standing of U.S. carriers abroad and encourage more competition from foreign insurers looking to enter the U.S. market, again to the ultimate benefit of consumers.
However, Rep. Keiser said Congress doesn’t need “a new bureaucracy” like OII or an OFC regulator to provide information about the industry, suggesting that the National Association of Insurance Commissioners could fulfill that role, given all the data and expertise it already has at its disposal.
But Mr. Racicot countered that “we cannot reach trade agreements with countries given our patchwork quilt” of state regulation. Indeed, he said it is “preposterous to believe we can conduct insurance business on a planetary scale with such a fragmented oversight system.”
Rep. Keiser conceded that “there are some areas of state regulation that are problematic,” citing the need to keep improving speed-to-market of new products, uniformity in producer licensing, market conduct examinations, “and all the expenses associated with those activities.”
However, he said state regulators have “taken a very aggressive approach” in dealing with such concerns, and have achieved progress in making the state system more efficient and effective–and will continue to focus on those goals.
Mr. Racicot said the states have had more than enough time to get their collective regulatory act together, yet gross inefficiencies persist.
“We’ve been waiting 135 years for regulatory uniformity and reciprocity, so that an insurer, agent or broker could be licensed in one state and do business everywhere under one set of rules,” he said. But such a dream has yet to be realized, with no final resolution in clear sight–other than passage of an OFC, he noted.
Other “piecemeal” attempts to create something in between the status quo and an OFC–such as setting up an OII, establishing federal benchmarks for regulation of surplus lines and reinsurance, or creating a National Association of Registered Agents and Brokers–are supported by AIA, but establishing an OFC would be a far more effective step to take, according to Mr. Racicot.
Rep. Keiser disagreed, stating that halfway measures such as OII, NARAB and federal regulatory benchmarks are “merely a transition” to an OFC, which NCOIL adamantly opposes.
“What exactly is the problem?” he asked early on in the debate, later arguing that a number of “great myths” about alleged state regulatory shortcomings are exaggerated at best and inaccurate at worst.
“The United States has the largest, most competitive and best regulated insurance market in the world,” he said, contending that giving more authority to Washington would be counterproductive.
“Let’s not throw away a system that works so very well,” he concluded.