Ted Besesparis is senior vice president of the NationalAssn. of Professional Insurance Agents, Alexandria, Va. Beforejoining PIA National in 1995, he was a reporter and radio talk showhost in Palm Beach, Fla., and Washington, D.C. He is a member ofAA&B's editorial advisory board.

A report by the Government Accountability Office (GAO) has foundthat the state insurance regulatory system helped mitigate thenegative effects of the 2007-09 financial crisis on the insuranceindustry. GAO also found that state insurance regulators continuedefforts to strengthen the insurance regulatory system.

The report noted that state regulators were especially criticalin maintaining general stability in the market during the crisis.“The effects of the financial crisis on insurers and policyholderswere generally limited, with a few exceptions,” the reportstated.

The GAO report was prepared for the chairman of the HouseFinancial Services subcommittee on Housing and Insurance, Rep.Randy Neugebauer (R-Texas), as well as subcommittee member Rep.Steve Stivers (R-Ohio). PIA worked closely over the past 18 monthswith Reps. Stivers and Neugebauer, along with then-Rep. JudyBiggert (R-Ill.), to bring the report to fruition.

A GAO study on the benefits of state insurance regulation isimportant because it serves as an objective counterbalance to anupcoming report that will likely not be objective: a study ofinsurance regulatory modernization by the Federal Insurance Office(FIO). This study was mandated by Congress in the section of theDodd-Frank bill that created the FIO. The questions that FIOpublished as it solicited input for this study belied a clear biastoward federalization of insurance regulation, raising concern thatthe forthcoming report already has a preordained conclusion.

The GAO report found that the financial crisis “generally had alimited effect on the insurance industry and policyholders,” withthe exception of certain annuity products in the life insuranceindustry and the financial and mortgage guaranty lines of insurancein the P/C industry. In addition, the report notes that “industrybusiness practices and existing regulatory restrictions oninsurers' investment and underwriting activities helped to limitthe effects of the crisis on the insurance industry.”

“The GAO report and its resulting message would have benefitedfurther by including one key point,” said PIA National Senior VicePresident Patricia A. Borowski. “It should have included acomparison of how the insurance industry and state insuranceregulators (with NAIC) performed during the financial crisis,versus the performance of the other sectors of financial services,banking and securities.”

“The conclusion is obvious from the assessments made in thisreport—as compared to the other GAO reports that assess theperformance of banking, investment and capital markets during thesame time period—that the insurance sector did well,” Borowskisaid.

As additional protections are considered in the effort to avertanother crisis, regulators should take their cues from thestate-based oversight already in place in the insurance sector andits overall success in protecting the financial stability of theinsurance industry and policyholders. In contrast, using federalregulatory systems that failed so spectacularly as a template forthe insurance industry would makes little sense.

Related: Read “HealthcareBack in the Ring“

NAIC's issues with FIO

Meanwhile, a contretemps has developed pitting theNational Assn. of Insurance Commissioners (NAIC) against thefledgling Federal Insurance Office (FIO).

Ever since the FIO's creation, Director Michael McRaith—whileacknowledging repeatedly that the statute creating the agencyspecifically prohibits it from acting in any manner as an insuranceregulator—has given the impression that he may be chafing underthis restriction. Asked at a congressional hearing about the scopeof activities of the FIO, McRaith stated that “the range and depthof our portfolio is still being defined.” Of course, that portfoliohas already been defined in the Dodd-Frank bill, which establishedclear parameters on the FIO's activities.

Asked to assure that the impending FIO study of insuranceregulation will not be biased in favor of federal regulation,McRaith did not answer directly, instead pointing to the provisionof the Dodd-Frank law that mandated the study and saying, “the biasis framed by the statute.”

This political dynamic changed for the better when NAIChired former Sen. Ben Nelson as its CEO. Nelson wasted no timeasserting the authority of state insurance regulators, relative tothe FIO. PIA heard from reliable sources that the FIO report wasabout to be issued in March, but was abruptly pulled back shortlyafter Nelson, days into his new post, gave a speech in which hesaid that the FIO needed to do “the job it was intended to do, butnot our job.” Restating that the FIO is not a regulator, Nelsonadded, “I think they're beginning to understand that.”

Related: Read “BenNelson to the Rescue“

In March, 2013, the White House issued a statement acknowledgingthe limitations of the FIO and the primary role of state insuranceregulation.

Then in congressional testimony on June 13, 2013, Nelson saidthe FIO and the Treasury Department should show deference to stateinsurance regulators in certain regulatory forums.

“The NAIC believes that the FIO can enhance existing efforts ofthe NAIC and theU.S.insurance regulators, and adds another federalvoice. However, FIO does not speak for insurance regulators,”Nelson said, adding that only representatives of state regulatorybodies should speak on behalf of regulation. “We expect theTreasury Department to give deference to, and be supportive of, theviews of the regulators in forums that focus almost exclusively onregulatory issues.” He said it is “inappropriate” for the FIO toseek to participate in supervisory colleges “without an invitationfrom the [state] regulators.”

Ben Nelson's immense clout as a former senator, governor andinsurance commissioner is unmatched and his outspokenness as anunabashed advocate of state-based insurance regulation is veryrefreshing. He arrived just in the nick of time.

Related: Read Electronic Revolution