The FSB’s Report Misses The Mark

In the United States, football season has just arrived. In Europe, football season has been underway since August. While both are a sport and called “football,” they couldn’t be more different. They have different histories, scores are tallied differently, and most importantly, the rules of the game are different. Imagine, Premier League Chairman Anthony Fry calling Roger Goodell of the National Football League to share his assessment of the league and make recommendations on how it can be improved.

While there may be some commonalities – professional athletes, intense fan loyalties and large facilities, for example – the differences are stark and must be adequately understood for the ideas to be on point. Surprisingly, this is a fitting analogy for recent developments in global financial regulation, particularly with the Financial Stability Board’s (FSB) Peer Review of the U.S. financial regulatory system.

The FSB was established to coordinate global efforts to ensure that the global financial sector is safe, secure, and stable. The FSB’s peer review of the U.S. was ostensibly written to examine the progress made in implementing measures to increase financial stability. While on the one hand, the FSB praises the U.S. for “good progress” and that it’s “already regulating itself effectively,” the peer review’s recommendations attempt to impose bank-centric regulations on the American insurance industry. In doing so, the FSB fails to appreciate the differences between the American insurance industry and the European insurance industry and the banking sector in general.

American Insurance Market

The American insurance market is not only financially strong, it is highly regulated, and extremely competitive. The state-based regulatory system in the U.S. has successfully weathered natural and financial storms for more than 150 years, ably guiding the world’s largest insurance system – a fact recently reaffirmed by Congress in the Dodd-Frank Act.

The FSB’s report, and the global, non-elected team that prepared it, simultaneously acknowledges and ignores the U.S. system’s success while calling upon the U.S. to look more like the European system of centralized oversight. But our sector is simply not structured the same way the European system is. A few big companies, many of which are affiliated with very large banks, dominate the European insurance industry, while, by contrast, the American insurance market is composed of many companies of all sizes, most of which are unaffiliated with large banking conglomerates. That’s why it makes sense for centralized regulation in a European system that is very interconnected, while it’s more rational to focus on individual insurance businesses at the state level in the U.S.

A recent report of the E.U.-U.S. Regulatory Dialogue concluded that, while they look different, both U.S. and European insurance regulatory systems have been effective in protecting consumers and the soundness of their respective insurance markets. Just as it would be nonsensical to impose European football rules on American football games without regard for the differences in the sports they are trying to regulate, we believe that financial regulatory systems should be judged both by the nature of the markets they govern and by the results they achieve.

We will continue to work with regulators at the state, national, and international level to ensure that our financial regulatory systems are agile, robust, and modern. That is our goal and I know it is the goal of the FSB as well. But in pursuit of that goal, we must not forget what works. It appears that the FSB’s peer review recommendations are little more than solutions in search of a problem.

Topics USA Legislation Europe Market