Members of Congress today weighed the implications of the federal government’s regulating the insurance industry.
“The events of the last year have demonstrated that insurance is an important part of our financial markets,” said Rep. Paul E. Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. “The federal government therefore should have a role in regulating the industry.”
However, just how involved the federal government should be in its oversight was a topic of hot debate among the witness panel members and the subcommittee members in today’s hearing.
Bob Hunter, director of insurance at the Consumer Federation of America in Washington, suggested that the federal government step in to manage systemic risk, oversee solvency risks and establish a repository of expertise and data analysis.
However, the federal government can’t handle everything, he argued. An optional federal charter would be incapable of handling systemic risk, as carriers can decide who has oversight.
Rather, a combination of state and federal oversight would handle local consumers’ concerns, while addressing overarching industry issues, Mr. Hunter said.
“We conclude that the split in regulation that best deals with the pros and cons of each level of government is to have the federal government deal with systemic risk, solvency and international issues but to have the states deal with consumer protection, complaints and market conduct issues,” he said.
Solvency, risk management and policyholder protection — the factors that kept carriers from going the way of the banks during the economic downturn — will have to be at the heart of any new federal role in insurance regulation, according to Patricia L. Guinn, managing director of risk and financial services at Towers Perrin of Stamford, Conn.
New regulatory systems will have to preserve the best aspects of the state-based system without being duplicative, she said.
“Regulation at the federal level needs to be carefully structured and designed to supplement and improve the existing regulatory framework, not replace it,” Ms. Guinn said. “Reform should recognize that there is a great body of expertise in the state regulatory system that should be retained and leveraged.”
Ms. Guinn recommended that solvency and policyholder security be handled on a federal level, but the market conduct ball could fall into the state regulators’ court, where it is closer to the customer.
No state regulators were present at the hearing, but congressional members disputed their abilities to manage complex matters, such as carriers’ involvement in securities lending and credit default swaps, particularly as American International Group Inc. of New York became a massive problem last year that had gone unchecked until the last minute.
Rep. Ed Royce, R-Calif., the co-sponsor of the optional-federal-charter bill, argued that the state regulators waited too long to react when
AIG became overleveraged.
“Only when
AIG was on the [brink] of collapsing did the New York state commissioner and governor propose to redirect $20 billion from the surplus of the insurers to the holding company. Fortunately, that was aborted, but that’s the scale of oversight that existed,” Mr. Royce said.
“It’s the overleveraging on top of all the rest of this — the fact that that couldn’t be caught because of the piecemeal patchwork here,” he said. “I think this would have been caught by a world-class regulator with full access to all the information.”
