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Obama Administration White Paper Outlines Views on Insurance Sector

June 17, 2009
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The U.S. Treasury department today issued a white paper entitled, Financial Regulatory Reform: A New Foundation. The following is an excerpt from the report on insurance:

Enhance Oversight of the Insurance Sector
Our legislation will propose the establishment of the Office of National Insurance within Treasury to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector. Treasury will support proposals to modernize and improve our system of insurance regulation in accordance with six principles outlined in the body of the report.

Insurance plays a vital role in the smooth and efficient functioning of our economy. By insulating households and businesses against unforeseen loss, insurance facilitates the efficient deployment of resources and provides stability, certainty and peace of mind. The current crisis highlighted the lack of expertise within the federal government regarding the insurance industry. While AIG’s main problems were created outside of its traditional insurance business, significant losses arose inside its state-regulated insurance companies as well.

Insurance is a major component of the financial system. In 2008, the insurance industry had $5.7 trillion in assets, compared with $15.8 trillion in the banking sector. There are 2.3 million jobs in the insurance industry, making up almost a third of all financial sector
jobs. For over 135 years, insurance has primarily been regulated by the states, which has led to a lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher costs to consumers. Beyond a few specific areas where the federal government has a statutory responsibility, such as employee benefits, terrorism risk insurance, flood insurance, or anti-money laundering, there is no standing federal entity that is accountable for
understanding and monitoring the insurance industry. Given the importance of a healthy insurance industry to the well functioning of our economy, it is important that we establish a federal Office of National Insurance (ONI) within Treasury, and that we develop a modern regulatory framework for insurance.

The ONI should be responsible for monitoring all aspects of the insurance industry. It should gather information and be responsible for identifying the emergence of any problems or gaps in regulation that could contribute to a future crisis. The ONI should also recommend to the Federal Reserve any insurance companies that the Office believes should be supervised as Tier 1 FHCs. The ONI should also carry out the government’s existing responsibilities under the Terrorism Risk Insurance Act.

In the international context, the lack of a federal entity with responsibility and expertise for insurance has hampered our nation’s effectiveness in engaging internationally with other nations on issues related to insurance. The United States is the only country in the International Association of Insurance Supervisors (IAIS – whose membership includes insurance regulators and supervisors of over 190 jurisdictions) that is not represented by a federal insurance regulatory entity able to speak with one voice. In addition, the European Union has recently passed legislation that will require a foreign insurance company operating in its member states to be subject to supervision in the company’s home country comparable to the supervision required in the EU. Accordingly, the ONI will be empowered to work with other nations and within the IAIS to better represent American interests, have the authority to enter into international agreements, and increase international cooperation on insurance regulation.

Treasury will support proposals to modernize and improve our system of insurance regulation. Treasury supports the following six principles for insurance regulation:

  • 1. Effective systemic risk regulation with respect to insurance. The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry. However, if additional insurance regulation would help to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.
  • 2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies. Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position for all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.
  • 3. Meaningful and consistent consumer protection for insurance products and practices. While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance. Further, any changes to the insurance regulatory system that would weaken or undermine important consumer protections are unacceptable.
  • 4. Increased national uniformity through either a federal charter or effective action by the states. Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states. Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.
  • 5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business. As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy. Any new regulatory regime must address the current gaps in insurance holding company regulation.
  • 6. International coordination. Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.

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