Would federal regulation better protect big commercial buyers? The Risk and Insurance Management Society's leadership definitely thinks so, but I am not so sure.
RIMS enthusiastically endorsed the recent call by the Bush administration for an optional federal charter as part of a broader overhaul of financial services regulation.
"The risk management and commercial insurance buyer community has long supported the concept of an optional federal charter, and believe that a regulatory system structured in the method proposed will provide an effective and much more efficient process to manage insurance transactions for policyholder operations," Terry Fleming, a RIMS director who oversees legislative issues for the Society, said in a statement.
All I can say is, be careful what you wish for. As far as I can tell, federal oversight has not produced good risk management of late under this hands-off White House. In fact, Uncle Sam has more often than not been asleep at the wheel.
Call me cynical, but I also doubt any cost efficiencies achieved via a federal charter system will be passed along to consumers–big or small. Any additional profits are more likely to bolster the insurance industry's own historically low return-on-equity.
When Mr. Fleming reiterated the risk management community's support for an OFC at a press briefing last month with senior RIMS officers in San Diego at the Society's annual conference, I played the familiar role of skunk at the garden party.
I asked what made RIMS think Washington 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 other oversight failures.
Mr. Fleming defaulted to the longer-term efficiency argument. "We see this as a competitive opportunity," he said. "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 added that "every other country in the world has central insurance management, and the U.S. should, too."
A federal insurance administrator might be more efficient, but will it be more effective in policing market conduct and assuring insurer solvency?
I fear that if insurance oversight is nationalized, it will be lost in a regulatory black hole, and buyers–commercial or personal–will ultimately suffer.
Risk managers also might be dreaming if they think federal regulation will lower insurance premiums. It is still not even clear whether insurers ever really lowered their prices to reflect the fact they no longer pay hundreds of millions of dollars in contingency fees to the mega-brokers.
What makes buyers think insurers won't just pocket the difference if administrative expenses go down under a federal charter?
I certainly don't mean to say state regulation doesn't need reform. And I can understand how buyers for multistate and often multinational organizations would tout the logic of having a single set of regulations to follow to lower costs and entry barriers.
But rather than a radical change, such as 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, expand the Liability Risk Retention Act to allow for coverage of property risks, throw in a national licensing facility for insurers and brokers, and then after a few years determine whether you need to go any further?
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