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The Obama administration’s views on insurance regulation are in keeping with those of many within the property/casualty insurance industry as well as state regulators who now regulate the industry.
Most in the industry are happy that the Obama Treasury Department white paper on financial regulation did not propose scuttling state regulation in favor of a federal regulator for insurance and that Obama supports modernization of the existing state-based system.
But industry leaders want to be assured that a proposed Office of National Insurance (ONI), as outlined by the Obama Administration, will not eventually morph into more federal intervention in insurance regulation.
“We are pleased that the Obama administration’s proposal retains the current state regulatory system and does not directly call for the creation of a federal regulator,” said Robert Rusbuldt, president and CEO of the Independent Insurance Agents & Brokers of America (the Big “I”). “The proposal clearly states that any changes to the insurance regulatory system that weaken or undermine important consumer protections should be discarded, and we will continue to press the point that the state regulatory system has done and will continue to do a solid job of protecting consumers and ensuring that they receive the insurance coverage they need. Of course we will continue to work for more efficiency and uniformity in the regulatory system as well.”
The ONI proposal appears to mimic legislation already filed in Congress to create a federal insurance information office. According to the white paper, the ONI would monitor all aspects of the insurance industry, gather information and identify any problems or gaps in regulation that could contribute to a future crisis.The ONI would also recommend to the Federal Reserve any insurance companies that it believes should be supervised as as financial holding companies.
The proposal stops short of assigning any regulatory authority to the ONI, which is fine with most in the industry.
“If crafted properly, IIABA could support the creation of an Office of Insurance Information as it has been previously introduced in Congress,” said Charles Symington, Big “I” senior vice president of government affairs. “We are optimistic that the President’s plan will not be used as a precursor to federal regulation and that this proposed ONI will be designed to work with the existing state system to protect consumers and the marketplace and ensure international coordination.”
Agent groups have long supported increasing regulatory uniformity within the existing state regulatory framework. They contend that this can be done for producer licensing and other issues through targeted federal measures to improve the state system.
The Obama white paper on insurance appears to agree.
“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,” the white paper states.
P/C insurers applauded Obama for remaining focused, not so much on insurance, but on the current and likely future causes of systemic risk such as excessive leverage, under-capitalization and insufficient liquidity on the part of financial holding firms.
“By pointing to these concerns, the paper implicitly recognizes that property/casualty insurance companies… have performed exceptionally well throughout this crisis and do not pose a risk to the financial system,” said Charles M. Chamness, president and CEO of the National Association of Mutual Insurance Companies (NAMIC).
In its section on insurance, the Treasury white paper explicitly states that the current crisis did not stem from widespread problems in the insurance industry. “We are pleased that the paper recognizes that AIG was a financial holding company, which contained well-regulated insurance subsidiaries as well as a poorly regulated non-insurance subsidiary that engaged in risky non-insurance activities,” Chamness said.
Chamness cited concern with language in the Treasury report referring to a “new insurance regulatory regime” but said he assumes this means regulatory reforms that “potentially could be undertaken within the existing state-based regulatory system, which the paper leaves undisturbed and fully intact.”
Another insurance company group, the Property Casualty Insurers Association of America (PCI), also said it was pleased that the Administration “focused on the problems of systemic risk and explicitly acknowledged that traditional property/casualty insurance did not cause the crisis.”
“Property/casualty insurers, who have remained well-capitalized and solvent throughout the current fiscal crunch, do not present a systemic risk and did not cause the existing crisis,” said David A. Sampson, president and CEO of PCI. “Therefore, it is heartening that this plan would not add a duplicative layer of federal regulation at this time to an already successful state system of property casualty insurance regulation that has served consumers well.”
Even insurers that support federal regulation of insurance gave the Obama plan a positive review.
“We all agree that our financial services regulatory system must be modernized so that our nation’s economic well-being does not remain prone to the gaps and insufficient oversight that were at the heart of this current economic crisis,” Leigh Ann Pusey, president of the American Insurance Association (AIA), said in a statement.
Echoing others in the industry, Pusey said the property/casualty industry was not at the core of what caused the current crisis and does not pose the same type of systemic risk as other financial services sectors.
However, Pusey added, her group believes that ultimately federal insurance chartering legislation will prove to be the “correct vehicle for achieving the necessary reforms outlined by the Administration.”
State insurance regulators commended Obama for proposing a plan that retains the role of states as regulators of insurance.
“While no one proposal is completely perfect, our initial read of the Administration’s financial overhaul plan seems to reflect what is most important to us: preserving the consumer protections and financial solvency oversight of the historically strong and solid system of state-based insurance regulation,” said Therese M. Vaughan, CEO of the National Association of Insurance Commissioners (NAIC).
She said NAIC likes the propsoal for a council of regulators with functional expertise but urged that state insurance regulators be given a seat in the council.
Testifying yesterday before Congress on behalf of the NAIC, Illinois Insurance Director Michael McRaith addressed what he said is the role of state regulation in any sound approach to systemic risk regulation.
“Insurance companies are more often the conduits or receivers of risk rather than the creators since the assumption of risk, after all, is fundamental to the insurance business,” McRaith told members of the U.S. House Committee on Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. “With respect to systemic risk, insurers also do not originate risk, but most often receive risk — a fact that provides ample motivation to close regulatory gaps and encourage greater financial stability.”
McRaith highlighted the fact that insurers’ exposure to systemic risk typically flows from linkages to the capital markets. Citing AIG as an example, McRaith noted that AIG’s unregulated credit default swap (CDS) transactions impaired the holding company, resulting in a downgrade that threatened policyholders’ confidence in the otherwise stable insurance subsidiaries. AIG’s insurance companies were directly exposed to systemic risk through securities lending partnerships with other financial institutions, he said.
Noting that the insurance industry has fared better than its banking and securities counterparts in the current economic crisis, McRaith told the commitee that insurers’ “high capitalization requirements and low leverage have kept them from incurring the steep losses faced by other financial institutions.” He also cited the state guaranty fund system as an essential backstop protecting policyholders in the event an insurance company were to fail.
“The state-based insurance regulatory system is one of critical checks and balances, without the perils of a single point of failure and omnipotent decision making,” McRaith emphasized. “States have a long history of consumer protection and market stability — the two pillars on which any system of financial stability regulation can, and must, be built.”