August 6th, 2009

Modernizing the U.S. Insurance Regulatory Structure, Part IV: Will Change Happen?

Posted at 8:00 AM ET

Financial Intelligence Team

For two decades, talk of changing the U.S. insurance regulatory structure has swirled about the industry. Although adjustments have been made to achieve a degree of uniformity and cohesion — due in large measure to initiatives prompted by the National Association of Insurance Commissioners (NAIC) — broad reform has not yet succeeded. Will the financial crisis compel Congress to enact sweeping change? Or will the debate on the many variations of change — largely surrounding how much power the Federal Reserve Board can effectively assume — stall the process?

The impetus for change appears to be stronger than ever. The scathing and direct criticism of the existing system in the recent White House report on financial services regulation indicates that reform of current regulation is bound to occur. The Treasury Department has condemned the existing regulatory system’s “lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher cost to consumers.”

Pressured by their constituents to enact protection against the next potential financial crisis, some lawmakers are calling for swift action by the end of 2009. Other Congressional leaders are both skeptical of the details in the White House proposal and related bills under review, and doubt that swift action is feasible. After all, Congress already has on its plate hefty issues like health care reform, energy policy, wars in Iraq and Afghanistan, and a Supreme Court nomination debate.

Many in Congress are also wary of repeating what they see has a too-hasty decision to approve Troubled Asset Relief Program (TARP) last year. Some worry that the Federal Reserve Board’s lack of experience with insurance may make the oversight shift from state to federal a liability instead of a benefit; they worry that the Fed lacks the expertise necessary to be an effective watchdog for the complex new world of financial services. In addition, there have been concerns that the proposals simply lay new regulations atop dysfunctional old ones, creating additional bureaucracy that negates gained effectiveness.

In addition to the time spent arguing these considerations, the push to pass regulatory legislation will be affected by the lobbying efforts on behalf of parties both for and against the proposed changes.

Solution is possible, though. Regulatory reform on such a grand scale has been realized, in part, in Europe. In June, the European Parliament approved Solvency II, which will unify a system of modern and transparent regulation and supervision throughout EU countries. Although an impressive feat of coordination across not merely state differences but national ones, it took many years of dedicated development for the EU to reach this point. In addition, although agreement in theory has been resolved, the next step of implementation is still under consideration.

To some degree, the United States can look to the success of Solvency II as a source of inspiration. In fact, some believe the multi-national cooperation could be the first step toward international insurance standards. Given the momentum in this direction, the current pressure to thwart the next financial crisis and the White House imperative to change the existing regulatory system, some degree of reform seems likely to come about sooner than later. Many argue that the train has already left the station, and the only matters to be debated are the details of the new federal regime.

The century-plus tradition of insurance regulation as a primarily state-controlled mechanism appears destined for obsolescence, at least as respects financial and licensing regulation of insurers (state regulation of consumer issues is likely to remain). Insurers can expect dramatic changes to the manner in which insurance business is done with sharpened oversight and intensified compliance. 

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Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. To the extent that you discuss such statements with your clients, be sure to advise your clients that all such matters should be reviewed with their own qualified advisors in these areas.

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