Insurers Seeking regulation

Insurance regulation needs a new approach


Posted by Frank Keating, Steve Bartlett and Leigh Ann Pusey/ Star-Ledger Guest Columnists April 24, 2009 5:58AM
Categories: Economy, Policy Watch

AP File Photo/ Michael Manning
Former Oklahoma Gov. Frank KeatingShould the federal government be completely walled off from monitoring a $6.4 trillion industry that does business across state and national borders and affects the lives of nearly all Americans?

That is the question that the nation's policymakers must answer as we all grapple with the fallout from the financial crisis and seek ways to assure it does not happen again. The $6.4 trillion industry is insurance; the folks who assure lifetime financial security and protect the value of everything from the family house to the automobile.

Although the insurance industry is as important to the financial services matrix as the banking industry and the securities industry, there is no federal insurance regulatory office comparable to the Office of the Comptroller of the Currency, which regulates national banks, or the Securities and Exchange Commission, which regulates securities.


Since the 1850s, insurance has been regulated at the state level. While that system has performed reasonably well, today's insurance industry is much more complex than it was in the 19th century. To bring the industry into the 21st century, the government must begin regulating insurance at the federal level. In order to do so, Congress must create a national insurance charter overseen by a new Office of National Insurance.

This idea has broad support.

In testimony before the Senate Banking Committee, Treasury Secretary Tim Geithner hinted that he believes a national insurance charter is a good idea and expects it to be a part of meaningful regulatory reform.

Federal Reserve chairman Ben Bernanke told lawmakers that a national regulator for insurers was a "useful idea." He also noted that regulators did not have effective holding company supervision and that implementing such a structure should be given "serious consideration."

And the Group of Thirty -- an influential, non-profit organization of the world's leading financiers and academics -- recently released a report calling for a federal insurance charter. The report was authored by one of President Obama's key economic advisers, former Federal Reserve chairman Paul Volcker.

An insurance regulator at the national level is needed because insurance markets have evolved and now transcend the current state-based system. Today's financial markets are globally interconnected. Problems in one country or one market sector can pose risks to the entire financial system. State regulatory agencies are simply not equipped to address the macroeconomic problems of today, which affect many nations and require the coordinated efforts of several agencies. Such coordination is exactly what would be expected of the new regulatory body, and it would be perfectly positioned to deploy industry-wide solutions to emerging crises.

Establishment of a national insurance regulatory authority should be comprehensive, but not supplant state insurance regulation. Just as with banks, many insurance companies and their customers may choose to remain under state control. But a national insurance regulatory office would allow the government to monitor insurance markets and identify potential risks to the financial system.

This new regulator, both through its direct responsibilities and through its contacts with other financial regulators in the U.S. and abroad, would be able to monitor the insurance marketplace and identify and address problems before they reach the crisis state. This regulator would function with a broad vision not available to a state regulator, whose focus is necessarily limited to local issues.

However, this is not a call for a costly new Washington bureaucracy. A recent report from the Promontory Financial Group, a consulting firm, suggested that a federal insurance regulatory office could rely on fees paid by regulated companies. Taxpayers would bear no additional costs but would enjoy countless new advantages, like truly personalized policies.

As Congress and the Obama administration look for ways to get our economy back on track, it's imperative that they recognize the important role of insurers in the nation's financial system and in the lives of millions of Americans. In the future, the states will continue to play a vital regulatory role, but a new, federal regulatory framework for the insurance industry is vital. Sensible modernization would ensure that consumers and businesses have the insurance options they need to help revitalize the U.S. economy.

Frank Keating, former governor or Oklahoma, is president and CEO of the American Council of Life Insurers. Steve Bartlett is president and CEO of the Financial Services Roundtable. Leigh Ann Pusey is president and CEO of the American Insurance Association.


My Commentary:

Posted by Zemack on 04/24/09 at 10:23PM
This is incredible! To avert a crisis in the insurance industry, we must adopt the same central planning and regulatory framework for insurers that caused the financial crisis! Yet, everywhere one looks, one sees government interference as the culprit in the banking disaster.

There was the Federal Reserve's housing bubble-expanding low interest rate, inflationary credit expansion policies.

We have the FDIC, which encourages risky, imprudent lending...then, when irresponsible banks fail, punishes sound prudent banks by raising their premiums to cover the failed banks' depositors. This, in the name of "protecting" savers.

There are the GSEs--Fannie, Freddie, and Ginnie Mae--which under intense political pressure bought up massive amounts of sub-prime loans, which were then packaged into CDOs for sale around the world. This allowed outfits like Countrywide to originate-and-sell sub-prime mortgages to its heart's content.

There are the three government licensed and protected rating agencies (Moody's, S&P, and Fitch), which were encouraged to grant investment grade ratings to these securities based upon an implicit government guarantee.

There is the CRA, the political wedge through which the sub-prime cancer was introduced into the nation's credit bloodstream.

There was the rigid mark-to-market accounting rule forced on the industry through the government's control of accounting standards, which drove otherwise solvent banks under.

Then there was (and still is) the whole government network of "affordable housing" policies and programs, such as FHA-insured mortgages and "anti-discrimination" rules which enable economically unjustifiable loans.

These and other market-distorting interventions combined to create a mighty conveyor belt of bad lending and inflating home prices that culminated in the housing bust...the fundamental cause of the current recession. The toxic assets likely being carried on the insurers' books can be traced directly to the financial crisis. And this crisis occurred within the context of a heavily regulated, centrally controlled banking and financial industry beset by massive government interference into the mortgage and housing markets.

Yet these insurance industry representatives want the same for their industry, it seems.

To be sure, legal reforms are needed, especially where it relates to health insurance...a market beset by bad tax policy, thousands of government mandates, and trade barriers to interstate competition. But to place the insurance industry into the same federal regulatory straightjacket that brought us the financial crisis is ludicrous. There must be more behind the call by the authors of this article for federal regulation than rationalizing the state-based system.

Perhaps, as suggested by correspondent jbken and John Bury in his related article here, the insurers are willing to sell their souls for a government bailout. Traditionally, businesses seeking government regulation do so in the expectation that they will be pulling the regulatory strings through political connections, or of being shielded from the rigors of market competition.

But whatever the reason, the unholy rush to expand central political regulation and control of business, coupled with industry's willingness to submit to the "protective" embrace of government officials, can only end badly for America. As can be seen with the banking crisis, government regulation and control opens the door to political interference and influence peddling, and is inherently and irredeemably corrupt. We have seen this pattern before. It is the road to fascism.

The right direction to move is toward decontrol and a free market, where government's role is as envisioned by the Founders...a policeman that protects individual rights. This means the vigorous enforcement of laws against fraud and breech of contract. Otherwise, insurers should be fighting for the right to act upon their own judgement in issuing insurance products based upon competition, customer demands, rational risk assessments, and profit expectations. Badly run companies should be allowed to fail, and strong one's to reap their rewards.

The profit motive within the context of a free market rewards personal responsibility and the long-term perspective, and thus is our best protection against future meltdowns. Centralized control and regulation guarantees more calamities.


Other Commentary:

Posted by jbken on 04/24/09 at 10:35PM
dustybuns & Zemack:

You're both missing the point. The insurance industry wants federal regulation now so they can get bailout money too - and they need it.
Did their investment guys see this coming better than the banks? NO! They have the same junk, it's just that they don't have to tell anybody because state regulation is so weak and they can't tell anybody or else the source of their funds (selling insurance) dries up.

These three are just stooges for the industry and it's no coincidence that the Allstate guy, Tom Wilson, had that NY Times editorial last week begging for federal regulation. It's really the only way to save your jobs at this point.



My Response:

Posted by Zemack on 04/25/09 at 10:24AM

jbken

Actually, I think I do get it. I wrote:

The toxic assets likely being carried on the insurers' books can be traced directly to the financial crisis. And this crisis occurred within the context of a heavily regulated, centrally controlled banking and financial industry beset by massive government interference into the mortgage and housing markets.

Yet these insurance industry representatives want the same for their industry, it seems.

Perhaps, as suggested by correspondent jbken and John Bury in his related article here, the insurers are willing to sell their souls for a government bailout.

The authors point to the financial crisis as a justification for more control and regulation, despite the overwhelming evidence that it was just such central planning that caused the crisis to begin with.





Related article:

Why Insurers Want Federal Regulation Now

Posted by John Bury April 24, 2009 9:44AM
Categories: Insurance
Last week Tom Wilson, CEO of Allstate, had an op-ed piece in the New York Times begging for federal regulation of the insurance industry. Today, in the Star-Ledger (and presumably any paper in the country that had exhausted the Obama dog story angles), three insurance insiders made their case for federal regulation.

This is something I have been pushing for decades, from letters to the Times to this blog. Why the push now from inside the industry? It seems obvious to me. Simple survival.

No fiscally responsible person would voluntarily invest in any insurance product these days. (Though that still leaves a substantial pool of suckers, those are not usually the people who have the big money.) Insurance is essentially the process of paying now for the promise of repayment later. If you can't trust that the company will be there later, you won't buy their product. Insurers need that federal charter as a marketing tool since nobody with any sense sleeps easier knowing that state guaranty funds back up those promises.

Insurance companies are basically investment vehicles. That's how they have historically made their profits. They take in $100. They invest it to get an extra $10 and a year later they pay out $100 in claims. The $10 they get to keep. Works like a charm until that investment part either goes away or turns negative. That it did over the last year but since insurance companies are essentially unregulated, it's not widely known.

Surely many Insurers must have the same toxic assets in their portfolios as those banks that are being bailed out but how are you going to find that out? Will you contact the Montana Insurance Department or whatever state your insurer is domiciled in? How about checking with a credit rating agency?

Banks had the FDIC to reassure their customers that, even if the bank itself was shaky, the federal government had the safety net out. Now, put yourself in the shoes of an annuity salesman the day after Harry Reid blurted this out. What are you going to tell your next sit? That the state of New Jersey has a guaranty trust that will protect them in a worst case scenario. Even the most naive insurance consumer knows enough to be wary when the words "New Jersey" and "trust" are linked.

Insurers desperately need a federal cash pipeline to cover losses they will inevitably incur. State funds are inadequate and, in any case, Guaranty associations obtain funds for their operations and payment of claims through assessments against the solvent insurance companies. That means insurers will need to clean up their own mess unless they get access to the federal government printing presses...and soon