Insurance remains the largest area of economic activity regulated entirely at the state level, but that may change this year. The massive financial services overhaul that passed the House of Representatives in December has set the stage for a mixed bag of new federal regulations of insurance firms, and some insurers, consumer advocates, and research organizations are proposing various measures intended to create a federal regulator for insurance.
The proposed creation of a new Federal Office of Insurance and federal “systemic regulator” in the new bill stops far short of what most federal regulation proponents envisioned, but it still represents a significant change in the way the federal government interacts with the insurance industry.
Under the bill the Federal Office of Insurance would serve as a repository of expert insurance knowledge in the federal government and play a major role in negotiating international agreements involving insurance. The systemic regulator would provide an additional level of oversight on very large firms that officials determine pose a serious risk to the overall economy.
Leigh Ann Pusey, president of the American Insurance Association, which mostly represents the interests of larger insurers, had a mixed view of the legislation.
Although she pronounced herself “encouraged that the legislation establishes a federal office of insurance,” she expressed concern about a proposed “dissolution fund” that would impose special taxes on all large financial firms to provide for bailouts of any firms that failed.
“To the extent property and casualty insurers are considered in these reforms, the nature of our business and regulatory standards, our existing resolution and guaranty processes, and the general risk our industry poses to the broader financial system has to be recognized,” she said.
Insurers largely deal with their own ills through state-level guarantee funds that, except in New York State, rely on taxing insurers after a major collapse. The new system would require large insurers to remain at risk of these special taxes while also paying new taxes into a special fund backstopping all large financial firms including those outside of insurance industry.
State Lawmakers Skeptical
Concern over the proposed new federal capacity is widespread among state-level regulators of the insurance industry.
The National Council of Insurance Legislators (NCOIL), which represents state legislators on insurance committees, opposed all the insurance-related provisions in the House bill.
“Insurance consumers are currently protected from fraud and abuse by a comprehensive set of state laws and regulations,” said NCOIL President Robert Damron, a Kentucky state legislator. “Enhanced communication and information sharing between state and federal regulators regarding financial market risk is a must.”
The National Association of Insurance Commissioners likewise opposed giving the new Federal Insurance Office any substantial power to work in the international trade sphere where NAIC has long set U.S. policy.
Consumer Groups Supportive
Consumer advocates, by contrast, tend to favor the insurance office.
“While I have a concern about the bill overall, the presence of a strong National Insurance Office is a positive step for consumers and a move in the right direction,” said Steve Pociask, president of the American Consumer Institute.
The Senate probably will take up similar financial overhaul legislation—including insurance provisions—this year.
Eli Lehrer ([email protected]) is a senior fellow of The Heartland Institute and director of its Center on Risk, Regulation, and Markets.