Is Federal Regulation Inevitable?

Has the financial meltdown on Wall Street–with AIG derivative trading one of the chief catalysts–guaranteed not only that Congress will move for direct oversight of insurance next year, but that any chance of the new federal charter system being “optional” is out the window?

That possibility was suggested last week–during a RIMS webinar on the state of the market moderated by yours truly–by Steven Weisbart, vice president and chief economist at the Insurance Information Institute.

Steve said that in the rush to compensate for the lack of regulation that resulted in a financial tsunami, Congress “might take the 'O' out of 'OFC,'” meaning federal charters for certain types of carriers could be mandatory.

(To hear the entire Webinar, click here, which will take you to the Risk and Insurance Management Society Web site's webinar archive. Sign up for “RM Strategies for Managing in an Unsettled Financial Environment.”)

While I agree Congress will be gung-ho for new oversight rules after allowing unregulated credit default swaps to nearly drown the financial system, and while I know a number of insurers and their associations would welcome a national charter, I hope Washington doesn't go overboard and strip authority from the only entity that seemed to be doing its watchdog job the past few years–state insurance regulators.

After all, it wasn't a state-regulated AIG entity that got the parent company–and the entire economy–into such trouble. In fact, Washington set the stage for our current debacle by explicitly exempting certain derivative trading from national, let alone state oversight.

If ever one could argue that Uncle Sam isn't up to the task of regulating insurance, the fact that Washington was asleep at the wheel while our financial system was being undermined by termite-like derivatives trading allowed under federal law is compelling proof indeed.

Frankly, it isn't reassuring to see members of Congress running around like chickens with their heads cut off, allocating hundreds of billions of dollars via vaguely structured bailout programs, which the Treasury Department allocates as it wishes, making up the rules as it goes along.

Can we really trust Washington to take over insurer regulation–given the fact that insurance is about the best regulated segment of the financial services industry at this point, thanks to sound state oversight?

What do you folks think?