State insurance regulators are drawing on the country’s founding principles as they resist international pressure to give the federal government a greater role in overseeing the industry.
Ben Nelson, chief executive officer of the National Association of Insurance Commissioners and a former Democratic senator from Nebraska, said the current system of overseeing insurers at the state level exemplifies Thomas Jefferson’s ideas about restraints on centralized government. A Financial Stability Board review of U.S. insurance regulation has called for greater uniformity of oversight.
“There is, I think, a philosophical difference about government here,” Nelson, 72, said today in an interview at Bloomberg’s New York headquarters. “We come from the Jeffersonian idea of the states.”
Jefferson, the third U.S. president, advocated for limited federal-government power. The U.S. needs consistent insurance supervision and the federal government should play an increased role, the FSB said in an Aug. 27 report. The FSB, established in 2009, is led by Bank of England Governor Mark Carney and works to improve financial oversight.
“Given the drawbacks of the current regulatory setup, U.S. authorities should carefully consider and provide recommendations to Congress as to whether migration towards a more federal and streamlined structure may be a more effective means of achieving greater regulatory uniformity,” according to the FSB report.
The federal role in insurance regulation is already expanding under the Dodd-Frank law. The Federal Reserve will oversee insurers that are deemed systemically important by the Financial Stability Oversight Council, which was created by Dodd-Frank to prevent another financial crisis. U.S. insurers are primarily overseen by state regulators.
Nelson said U.S. insurance regulations have become more similar in areas that demand uniformity, while retaining some variation to account for differences among states. Nelson was hired this year as CEO of the group of insurance watchdogs to help “defend our turf,” Jim Donelon, NAIC president and Louisiana insurance commissioner, said in January.
“There is value in regulation that is closest to the people, because New York is different than Nebraska,” Nelson said today.
Supervision of insurers’ holding companies has improved since the financial crisis, said Thomas Leonardi, Connecticut’s insurance commissioner. Regulators are meeting in groups with watchdogs from other states and countries to oversee large firms that do business in many locations, he said.
American International Group Inc., once the world’s largest insurer, received a U.S. rescue that began in 2008 and swelled to $182.3 billion after bets soured at a unit that wasn’t overseen by state regulators.
The Office of Thrift Supervision, AIG’s primary federal regulator prior to the crisis, said in 2009 that it “fell short” and failed to recognize the risks of the firm’s credit- default swap portfolio. Most OTS functions have since been assumed by the Office of the Comptroller of the Currency. New York-based AIG repaid its rescue last year.