Federal Regulation Would Be Beneficial, Report Contends

WASHINGTON--A new study paid for by two insurance trade groups and a financial services organization says federal oversight would allow regulators to move more quickly on industry problems than state insurance departments.

The study by the Promontory Financial Group consulting firm in Washington also found that a federal insurance regulator would reduce the cost of regulation to the industry.

Promontory is headed by Eugene Ludwig a former comptroller of the currency. The study was funded by the American Council of Life Insurers, the American Insurance Association and the Financial Services Roundtable.

A national insurance regulatory office "would give Congress the leverage it presently lacks to force action to address new problems," Promontory found.

Mr. Ludwig, Promontory founder and chief executive officer, said the group "approached this project as an analyst, not an advocate." Mr. Ludwig served as comptroller of the currency during the Clinton administration.

"The objective was to assess the nuts-and-bolts of creating a new federal regulatory agency," he said today in unveiling the study.

Ultimately, he said, "it will be up to Congress and the Obama Administration to determine the overall structure of financial services regulation and how insurance fits into that structure."

The study found that a federal insurance office would likely employ 2,390 full-time staff and have an annual budget of $465 million.

This would make the insurance office a "relatively small agency" compared with the OCC, the Securities and Exchange Commission and the Federal Deposit Insurance Corp., the study found.

"Moreover, these figures do not take into account economies of scale that would occur if the largest insurers come under federal oversight, which would reduce costs [of regulation]," the study found.

Since the federal office would be funded by user fees, it would impose no new burden on the federal government and taxpayers, the study found.

It stated that a national insurance regulatory office would be able to attract and retain top specialists in insurance regulation, such as experts in capital markets, because of the professional interaction and development afforded by a national regulator.

"Because ONI would be a national regulator, the staff would be better positioned than state regulators to apply industry-wide solutions to emerging issues," the study found.

As for market conduct, ongoing oversight by Congress will ensure against deterioration in standards. The interplay between consumer-oriented legislators and regulators on the state and federal levels could raise the bar for best practices in market conduct regulation, thus leading to a "race-to-the-top" as opposed to a feared "race-to-the-bottom."

The study is titled The Proposed Office of National Insurance: Organization, Functions, Size and Cost."

Mr. Ludwig said the purpose of the study was to analyze the structure, cost and operations of a federal insurance regulatory office modeled on the Office of National Insurance legislation that would have been created by S. 40 and H.R. 3200, legislation introduced in the last Congress.

On the international front, a federal office would improve the way the U.S. relates to the international regulatory community, according to the Promontory analysis.

As a national regulator, the federal office would carry the requisite weight and authority to negotiate and collaborate in international forums as a peer to regulators from other jurisdictions, Promontory said.