Members of Congress are being urged to create — at a minimum — a new regulatory body within the federal government to focus on the insurance industry.
“There is some systemic risk in insurance requiring a regulator,” said Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, who was part of a panel of experts testifying today at a Senate Banking Committee hearing on modernizing insurance regulation.
“In order to fully understand and control systemic risk in this very complex industry, the federal government should take over solvency and prudential regulation of insurance as well.”
The CFA, which previously opposed federal regulation of insurance, has revised its policy positions “to learn from the regulatory failures that contributed to the economic meltdown,” Mr. Plunkett said.
While he said the states have done a “pretty good job” of solvency regulation of insurance, he was critical of the National Association of Insurance Commissioners in Washington for agreeing last winter “in secret meetings to fast-track several significant changes to life insurance accounting and reserve practices which would have weakened the financial condition of life insurers and misled the public about the financial strength of some of these insurers.”
NAIC backtracked on the changes, but they were adopted by several regulators in important states with large insurers, he said.
Mr. Plunkett did not identify the states.
While the CFA supports creating an office of national insurance as called for by the Obama administration in its regulatory-reform plan, it opposes giving the proposed group the power to pre-empt state regulations in connection with international treaties.
That could weaken state consumer protections, which states should continue to regulate, Mr. Plunkett said.
A different view was expressed by Hal Scott, a professor at Harvard Law School in Cambridge, Mass., who called for an optional federal charter for insurance.
The state regulatory system costs the life insurance industry alone $5.7 billion annually in additional costs, which are passed on to consumers, he said.
“The current system puts the insurance industry at a competitive disadvantage to other financial services firms offering competing products,” Mr. Scott said.
Federally regulated financial institutions can get nationwide approval of products in a shorter period of time than it takes insurers to receive multistate approval, he said.
To protect consumers, a consumer financial protection agency, proposed by the Obama administration, should have jurisdiction over federally regulated insurers, Mr. Scott said.
Federal regulation should be mandatory for large insurance companies, he said.
“The failures of such firms pose risks to the financial system and taxpayers, as demonstrated by [American International Group Inc. of New York].”
The federal government must require large insurance firms to have sufficient capital as a buffer against their failure and expenditure of taxpayer funds, Mr. Scott said.
But capital requirements for insurance firms must differ from requirements for banks, since insurance firms engage in different activities and incur different risks.
Some members of the Senate Banking Committee were skeptical, however, of the ability of the federal government to regulate the insurance industry adequately.
Ranking Minority Member Richard Shelby, R-Ala., questioned whether the
Federal Reserve Board is the appropriate agency to regulate the industry.
“In my judgment, I think they’ve failed as a regulator of the [bank] holding companies. It has no expertise, no history of insurance regulation,” Mr. Shelby said.
Committee Chairman Christopher Dodd, D-Ala., declared himself “agnostic” on whether the industry should have federal regulation.
But he said policyholders need more certainty. “We need to provide them with peace of mind. We need to protect our policyholders to make sure that our insurance industry is strong and stays strong during this time of economic difficulty,” Mr. Dodd said.
