Will Uncle Sam Look Out For Big Buyers?

Would federal regulation better protect big commercial buyers? The Risk and Insurance Management Society's leadership is excited about the recent endorsement by the Bush administration of an optional federal charter. But all I can say is, be careful what you wish for, because federal oversight certainly has not produced good risk management under this hands-off White House, and I doubt any cost efficiencies will be passed along to consumers.

At a press briefing yesterday with senior RIMS officers here in San Diego at the Society's annual conference, Terry Fleming, a director for the group who deals with legislative issues, spoke about the “very nice surprise” from the Treasury Department, which included a call for an OFC in its recent pitch for a comprehensive overhaul of financial services regulation.

The first step proposed by Treasury towards an OFC would be the establishment of an Insurance Information Office, which Mr. Fleming called a “wonderful idea.” He noted that the banking and securities industries have long had the ability to coordinate information and report back to the federal government, adding that having a similar function within Treasury for insurance was long overdue.

However, when I played the familar role of skunk at the garden party, asking what made RIMS think Uncle Sam would make a better insurance regulator than the states, given the federal government's dismal history with the subprime mortgage debacle, the importation of dangerous toys from China, the deliberate downplaying of environmental hazards at Ground Zero following 9/11, and so many other oversight failures by an administration openly hostile to regulation, Mr. Fleming defaulted to a longer-term efficiency argument.

“We see this as a competitive opportunity,” he said, emphasizing the “optional” part of an OFC. “Right now there are 56 jurisdictions over insurance, and not one of them has the authority to manage the business in any comprehensive way–particularly with coverage provided by foreign carriers and reinsurers.”

He noted that “every other country in the world has central insurance management, and the U.S. should, too.”

I remain skeptical, especially given the record of the current administration. I have a feeling that if insurance oversight is nationalized, it will be lost in a regulatory black hole, and buyers–commercial or personal–will ultimately suffer.

A federal insurance administrator might be more efficient, but it will not necessarily be more effective in policing market conduct and assuring insurer solvency.

I am also doubtful that any cost savings achieved via regulatory efficiency will be passed along to buyers. It is not even clear at this point whether insurers ever really lowered their prices to reflect the fact they no longer pay contingency fees to the mega-brokers, and that represented some serious money.

I don't mean to say state regulation doesn't need reform. But rather than a radical change, such an OFC, why not just pass the bill floating around Congress to set federal benchmarks for state regulators to follow on surplus lines and reinsurance, throw in a national licensing facility for insurers and brokers, and then after a few years determine whether you need to go any further?

What do you folks think?