One thing has struck me about this year’s round of property and casualty insurance industry-association conferences I’ve attended—the seething contempt many executives have for federal-regulatory involvement in the insurance industry.
More than a few people of this mind point to the current financial morass as justification for their opinion.
They argue that when the mortgage-backed securities house of cards fell for the banks, insurers were immune from the fallout. Banking institutions were federally supervised and those regulators failed to see the problem and failed to prevent it. Whereas, insurers, regulated by the states, did not fail because they did not make the bad bets banks did.
Many insurance industry people like to pat themselves on the back for avoiding such a fate.
They further argue that imposition of federal regulation would pose an unnecessary burden on the industry with a one-size-fits-all mentality, duplicating processes and increasing costs for consumers. No consumers would receive more protection, they argue.
For others, there is nothing to argue, just a deep aversion to any federal involvement that they view as a near-death experience. There are some in this crowd that snicker over the fact that the institutions under the federal regulatory eye suffered the largest financial collapse in recent history.
The one insurer that almost imploded during the economic meltdown was American International Group. Some use that as an example of why insurance companies should be considered for inclusion as systemic risk under the Dodd-Frank Wall Street Reform and Consumer Act. Others argue that AIG’s near failure is an outlier of the industry because the insurance business did not fail. It was the investment arm running rogue.
In fact, AIG should be a lesson for strong federal-regulatory oversight of the financial-services industry. More importantly, it also demonstrates why the strong presence of state-insurance regulation needs to be preserved.
I remember as the events surrounding AIG unfolded, I was struck by two things. First, management at AIG failed to grasp what kind of creature they were handling until it bit them. Second, New York’s regulator recognized something needed to be done, but his actions were limited because the business that was tearing AIG down was outside of his jurisdiction, while the federal regulators responsible for the investment side of the corporation sat on their hands.
And when you think about it, the reality is that the industry did not walk away unscathed.
The Hartford was among a group of insurers that took TARP money. That lifeline allowed the company time to recoup and kept it from ruin.
Then there are the bond insurers—MBIA and Ambac. They are still fighting for their lives because they did what insurers are supposed to do, and AIG failed to do: insure a product by underwriting it.
Today, they’re in the middle of a legal tangle over whether they were properly informed of the risk they were underwriting and whether they are obligated to pay, or even owed money.
You can’t help but feel at times that the carriers have a case. Take for instance Citigroup’s $285 million settlement with the Securities and Exchange Commission on Oct. 19 for trading credit-default obligations without informing investors that the bank was betting on their failure.
The questionable investment practices stemming from the financial meltdown only prove one thing: where money is involved someone has to be looking over the other guy’s shoulder, and it needs to be a strong look.
The idea that one form of regulation is better than another is bogus. If the fed hadn’t been asleep at the switch we could have avoided the turmoil we have today. In my mind, it is not incompetence on the part of the fed that was at fault, but a failure of leadership at the White House and Congress to ensure regulation was strong and effective.
Today, the debate rages over the perimeters of authority of the Federal Insurance Office. Is it there for the sole purpose to collect information, or is it a stepping stone for a federal regulator?
The reality is, while state regulations work well for local-business issues, the industry cannot expect to compete on an international basis with 56 different jurisdictions against the efficiency of Solvency II.
The fiasco surrounding implementation of the Nonadmitted and Reinsurance Reform Act is the perfect example where implementation of a solution to a national issue without a federal authority behind it leads to endless bickering and confusion.
Some large states are keeping tax revenues from the surplus-lines transactions instead of distributing it to where the business is. Others are trying to form cooperatives that share in the tax distribution. Surplus-lines brokers look for guidance and they are left with advice, but no definitive resolution.
If a federal regulator was involved he or she would make a definitive decision. It would probably not make everyone happy, but at least everyone would know the ground rules. And if it doesn’t work, the aggrieved would have somewhere to go to try and make it right.
At some point, regulators, legislators and the insurance industry are going to have to come up with a realistic mix of federal and state authority in the pursuit of efficiency and uniformity. The status quo cannot continue.