Heartland Offers Comments to Improve Insurance Regulation

Published November 30, 2011

Insurance regulators should be encouraged to continue exploring ways to modernize and harmonize the state-based system of insurance regulation – particularly outdated and counter-productive rate controls that foment the undue build-up of risk in state-run residual market mechanisms – but it would be premature to impose a new federal regulatory authority on an industry still processing the sweeping changes imposed by the Dodd-Frank Act, The Heartland Institute wrote in public comments to the Federal Insurance Office. (Read a PDF of Heartland’s comments at this link.)

The comments, in response to the FIO’s call for proposals to improve insurance regulation, mark a change in the institute’s stance on the question of a potential federal charter for insurers or insurance brokers. While there are possible advantages to granting companies the option of a single national charter, and the idea deserves further study as one of several potential avenues for streamlining and modernizing insurance regulation, the institute contends lawmakers should be cautious before pursuing any wholesale changes to a system that generally has served consumers well.

The Heartland Institute’s comments also touch on a number of other areas, including asserting that standard property and casualty insurance and reinsurance do not present areas of systemic risk; urging the FIO to make non-confidential insurance financial data available to the public electronically; and suggesting the federal office examine the potential risks posed by very large residual market mechanisms like Florida’s Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund.

The following statement from R.J. Lehmann, deputy director of the Center on Finance, Insurance, and Real Estate at The Heartland Institute – a free-market think tank – may be used for attribution. For more comments, refer to the contact information below. To book a Heartland guest on your program, please contact Tammy Nash at [email protected] and 312/377-4000. After regular business hours, contact Jim Lakely at [email protected] and 312/731-9364.

“The Federal Insurance Office was created to correct a long-standing blind spot for insurance expertise within the federal government. It is not a regulator, and it would be inappropriate for it to take on regulatory duties. However, we do think the office can serve a valuable advisory role, both to Congress and the executive branch, and we welcome the opportunity to share our perspective with FIO Director Michael McRaith. “Among the most important points we have emphasized is that property and casualty insurance and reinsurance are not systemically risky, and they are unlikely to become systemically risky in the future. The P&C market has low levels of concentration and interconnectedness, a high degree of substitutability, and little exposure to the kinds of cascading defaults that present bank run-style risks in other areas of financial services. “We also suggest that any federal intervention in insurance markets should be limited and strictly proscribed. Some legislative solutions, such as interstate compacts or the long-proposed National Association of Registered Agents and Brokers, may be appropriate to address specific areas where the state-based system has fallen short. But until the industry has had time to digest the full range of changes that Dodd-Frank is set bring into force – from resolution authority to the Volcker rule to regulation of derivatives to creation of the FIO itself – it would be premature to consider new federal regulatory structures for the industry, particularly those that might impose costly dual regulation.

“As the FIO prepares its first major report for Congress, we would suggest it place a priority on examining the unfortunate consequences of rate suppression, which in some states has resulted in very large concentrations of risk in residual markets and state-run insurance and reinsurance mechanisms. We also believe the office could go a long way toward promoting better transparency in insurance markets if it were to commit to making insurers’ non-confidential statutory financial statements available to the public through a free online service, much as the Securities and Exchange Commission has done with its EDGAR service.”

R.J. Lehmann
Deputy Director
Center on Finance, Insurance, and Real Estate
The Heartland Institute
[email protected]

The Heartland Institute is a 27-year-old national nonprofit organization with offices in Chicago, Illinois; Washington, DC; Austin, Texas; Tallahassee, Florida; and Columbus, Ohio. Its mission is to discover, develop, and promote free-market solutions to social and economic problems. For more information, visit our Web site or call 312/377-4000.