Wednesday, October 8, 2008
RUSBULDT: Insurance regulation
OP-ED:
Over the last few days, a handful of politicians and insurance company trade associations have incorrectly used the bailout of the American International Group (AIG) as an argument to federally regulate the rest of the insurance industry through an “optional” federal charter (OFC). This misguided proposal would let insurance company CEOs decide where their companies are to be regulated — at the state level or the federal level.
It is naive to believe that if a company such as AIG had been able to choose how they are regulated through an OFC this situation would have been prevented. Experts across the country have called for more vigorous market supervision, "not" a deregulatory proposal such as OFC. Pitting one regulator against another in a contest to be chosen by the regulated company would only lead to a race to the bottom and a lessening of consumer protections.
In case after case, when the federal government oversees the financial services markets problems follow. The commercial banks, investment firms, and international holding companies (like AIG) that are at the center of the nation's current financial crisis are all regulated by the federal government. The S&L mess of the 1980s, which cost billions to clean up, was also "being watched" by the feds.
While the AIG situation is a huge blow to the financial services industry in this country, even a simple analysis of the practices that led to its dire situation shows that state insurance regulation and AIG's insurance subsidiaries, which represent only a third of AIG's business, are not responsible for its collapse. Instead, many of AIG's problems are directly linked to its use of credit default swaps. The bailout of the AIG company shouldn't be used as an excuse for wholesale revamping of insurance regulation. While the water has been muddied on the overall condition of AIG's core insurance businesses, in fact, they are stable, profitable and paying all claims.
State insurance regulators are doing their job and the insurance market, as a whole, is stable. They actively monitor U.S. insurance entities for potential financial trouble and use a variety of tools to help insurers navigate through choppy market waters. The state system also utilizes a very effective safety net through state guaranty funds which protect consumers in the rare case of insurer insolvency.
Despite some assertions to the contrary, the health of AIG's state-regulated insurance businesses proves how effective state commissioners are in regulating the insurance market, especially when it comes to solvency. State regulation isn't perfect and, in some cases, could use targeted reform to modernize the market, but its problems do not include the areas of financial oversight, solvency or consumer protection. If anything, the failure of AIG is fuel to fight against OFC and highlights the strengths of state insurance regulation.
Many of those calling for federal oversight of the insurance market are the big players who want the same level of deregulation, accountability, and consumer protection that put us in this financial crisis to begin with. Consumers, Main Street businesses, and our congressional leaders should say, "thanks, but no thanks."
Robert Rusbuldt is president and CEO of the Independent Insurance Agents & Brokers of America.