Editor's note: Arthur D. Postal writes aweekly column for PC360 on insurance-related developments inWashington. Prevoiusly, he was National Underwriter'sWashington Bureau chief. Opinions expressed are the author'sown.

A recent paper on insurance supervision by a Wharton Schoolprofessor suggests that the industry's current state-basedregulatory system is out of date, is "focused on the wrongproblems," and that the federal government needs to play a strongerrole in overseeing an industry that is becoming increasinglyglobalized.

The report was published in the Jan. 22 issue of The NewYork Times.

It was written with the naïve belief that Congress may use itsoon for prompt action in determining how the industry should beregulated going forward. But it should be scrutinized by everyonein the insurance industry as raising the issues that Congress willultimately deal with when it returns to the middle from its currentdysfunctional state.

The report was prompted by the Federal Insurance Office's (FIO)recent report on insurance regulation that calls for greaterfederal oversight of insurance regulation.

It also comes amidst signs that the Financial StabilityOversight Council is examining whether Berkshire Hathaway, whichhas a number of insurance units, should be designated assystemically significant and therefore overseen by the FederalReserve Board.

The report in the Times was produced by David Zaring,an assistant professor of legal studies at the Wharton School ofBusiness. He said the FIO report "set down a marker" for the kindsof reforms "that will be part of the conversation when Congresstakes the matter up."

Let me make clear that Congress is not going to "take the matterup" anytime soon. Members of Congress at the moment are jockeyingto raise the campaign funds needed to win control of the nextCongress, and are focusing on doing everything they can toingratiate themselves to an industry that has been in motion sincethe Sept. 2008 collapse of American International Group, faces ahost of operating problems and rightly believes that any changes inindustry oversight are not imminent.

But while members of Congress at the moment are focused on whowill control the next Congress, by no means are the issues not onthe minds of a lot of industry officials.

For example, several state-insurance regulators in Novembervisited President Obama, who was reeling from the flawed rollout ofthe health-insurance exchanges, making clear that uppermost in theminds is the minds of state regulators is remaining relevant in theaftermath of the collapse of American International Group(AIG).

Changing the subject from the health exchange crisis thatprompted the meeting, the regulators secured from the president acommitment that he would tell Treasury Secretary Lew to consider arole for states in any talks aimed at establishinginternational-insurance standards.

At the same time, designation of Berkshire Hathaway assystemically significant is also a long-term issue. If designated,it will not be for a while. The FSOC is being very deliberate inweighing whether a nonbank financial company would pose a threat tothe financial system if it collapsed,

But the Zaring report articulates the regulatory problems thatsurfaced when it was it was necessary for the federal government toinvest billions to bail out AIG in September of 2008. The reportsaid that the "collapse of AIG, along with the failure of a host ofits bond insurers, suggests that the insurance industry was notnecessarily a stable, staid keeper of our rainy day funds." 

And despite current efforts by some to rewrite history, otherinsurance companies sought federal aid during the 2008-2009economic downturn.

The Federal Reserve Board has assigned staff at least three ofits regional banks as well as its Washington headquarters toincrease its knowledge of how the industry works, and establishquantitative tools to evaluate performance. And, through aprovision of the Dodd-Frank Act, the Fed now is the consolidatedregulator of insurance companies that operate savings and loanholding companies.

Zaring also said the crisis's aftermath suggested that "the restof the world is increasingly adopting a different set ofpriorities" than the consumer protection and contract-law oversightthat state law and regulators focus on.

That priority, Zaring said, with Europe as theexample, is to ensure the ability of the insurance industry tosurvive financial shocks, "and the empowerment of a continent-wideinsurance supervisor."

He implied that one of the concerns raised by the Treasuryreport is that the European Union's Solvency II framework, whichU.S. insurers criticize, "raises the specter" that Europe may useits solvency rules to keep foreign insurers out of European markets"on the grounds that they are too risky to trust with the money ofEuropean consumers."

Zaring added, "That threat, among other things, means thatcopies of the European approach are taking root across theworld."

That isn't consistent with the current U.S. approach, Zaringsaid. "… keeping pace with Europe doesn't work well with theAmerican system of insurance regulation, where the federal role isminimal and each state has a different regulatory scheme," hesaid.

Zaring noted that that this is where the Treasury Department'scall for a stronger role in insurance regulation, "something thatthe largest insurance companies would like to see, makessense."

Zaring makes clear that a "stronger," but not necessarily"exclusive" role for federal regulation is what the FIO reportsuggests.

He said the FIO report did not urge the repeal of theMcCarran-Ferguson Act, and that the report "seemed happy to let thestate court systems and insurance commissioners take the lead onpolicy payout disputes, market conduct regulation and the like,though it did urge the states to try to develop a consistentapproach to these matters."

Zaring said that foreign insurance regulators "have consistentlycomplained" about the difficulties of doing business with theirdisaggregated American counterparts. "But given the long history ofstate-based insurance regulation, there could be some logic in theTreasury report's recommendation that federal-state cooperation beembraced," he said.

Zaring suggested that states might continue to perform theconsumer-protection role, which, he said, "has never been astrength of federal-financial regulation."

The federal government could then worry about overall systemicstability, and "perhaps some nationwide insurance markets where itmakes little sense to give the states a role."

Zaring said the "division of labor" advocated in the FIO report,might, if implemented, "make it possible for the United States tokeep up with its international counterparts in thinking about thestability of insurance companies."