The comfortable ride that Janet Yellen received through the Senate confirmation process as the first woman chairman of the Federal Reserve Board should send a large signal to the insurance industry -- a signal that says Congress finds acceptable “having another pair of eyes,” especially one with the quantitative expertise of the Fed, looking over the shoulders of state regulators.
It also says that legislative adjustments in the current insurance regulatory system to limit the Fed’s involvement in insurance regulation will be difficult to come by, no matter how many lawyers, comment letters, legislative floor speeches, etc., opponents of any federal insurance oversight generate.
The insurance questions asked of Yellen during her November confirmation hearing were the usual ones, they were expected by the chairman-designate, and the answers were scripted.
Confirming this view with your favored member of Congress is a waste of time because the concept involved is this: A federal agency providing political cover to elected officials who are feeling political heat from anxious insurance carriers and agents deeply concerned about a federal takeover of insurance regulation.
The congressman will provide lip service to an anxious insurance industry official, especially when the constituent provides help and contributions to the politician’s political campaigns, but actions to thwart federal regulators from doing their jobs is not in the cards.
It just won’t happen. There is currently only limited political support for federal oversight of insurance, and those who do support it are not going to raise their hand if the question is asked.
However, at the same time, what the Yellen confirmation process showed is that the return to the old days of a cordon sanitaire between the federal government and state insurance regulation is over. Measured federal involvement through a process laid out via the Dodd-Frank Act is not going to be disturbed, and the Fed setting up a system to measure insurance industry financial performance will be encouraged and supported.
One of the reasons is that the federal government was caught completely off guard when AIG got into financial trouble in 2008. It was a complex company and its insurance and non-insurance units were not walled off in such a way as to protect insurance subsidiaries and policyholders, government regulators found.
That represented a clear political decision that had existed through legislation first enacted in 1944, and reiterated and made more explicit through a 1999 law. However, the problems at AIG left first the Bush administration and then the Obama administration in a bind, with few people with insurance regulation on hand to explain how the business operated.
The Fed, too, had few people, if any, around with any experience in dealing with an insurance company. The Fed initially dealt with the issue through a policy initiated in the Volcker era -- throw money at it in order to stabilize the situation, and then develop the systems and designate the people to deal with it. For the Fed, that included hiring outside law firms to advise it.
At the same time it was dealing with AIG, the Bush and Obama administrations also found itself dealing with a global economic crisis, the worst since the Great Depression, and then learned that AIG’s issues were indeed part of the global problem. Added to that, the administrations got little support from members of Congress who were totally focused on scrambling away from a sinking ship and totally unwilling to accept accountability for AIG’s problems.
The Yellen confirmation experience totally reflects the equilibrium that now exists in Washington over insurance regulation.
The executive branch appreciates that members of Congress view AIG as a near-death experience, and will move adroitly to the sidelines if another crisis occurs.Same thing with PC and life insurance regulation. Congress appreciates that it is going to have to give the executive branch a little slack, i.e., some oversight of insurers, in return for the political cover provided by the Federal Reserve Board and the Federal Insurance Office.