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Regulation and Compliance > State Regulation

OFC Seen As Fix For U.S. Insurers' Competitiveness In Global Markets

By Arthur D. Postal

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The structure of state insurance regulation presents “inherent obstacles” to promoting global insurance competitiveness, a reinsurance industry executive and former Federal Reserve Board governor contends.

“Even if these could be removed,” said Roger Ferguson, chairman, member of the executive committee and the head of financial services for Swiss Re America, and a former vice chairman of the Board of Governors of the Fed, “issues such as enforceability and constitutional restraints remain.”

Indeed, added Brad Smith, vice president of international relations for the American Council of Life Insurers–which is a strong supporter of an optional federal charter–the very job description of state insurance regulators and their limited resources inherently restrict their ability to help U.S. insurers open global markets.

Smith also said that insurance regulators who get involved in international insurance issues are “courageous,” because their primary job is regulating insurers, not advocating for overseas competition. Normally, that is left to state trade agencies, he said.

And Alessandro Iuppa, chief government affairs officer for Zurich North America, and a former state regulator who also served as chief U.S. representative for an international insurance regulatory body, also acknowledged the difficulty of state insurance regulators to represent U.S. insurance on international issues.

“For global activity, it is imperative that regulators also have a global perspective,” said Iuppa. “While U.S. regulators, myself included, for many years have been engaged in international matters, it has been and will continue to be difficult if not impossible for state regulators to execute upon agreements that may be reached in [international] meetings.”

These comments were made at a seminar– “Will an optional federal charter for insurers increase international insurance competition?”–held by the American Enterprise Institute last month.

Iuppa, Ferguson and Smith all said some form of optional federal charter was important for improving the international competitiveness of U.S. insurers.

But Thomas Hampton, commissioner of the D.C. Department of Insurance, Securities and Banking, defended state regulation at the seminar.

“Insurance is a unique financial product that focuses on the transfer of pure risk to protect consumers’ property, health, income, businesses and lives,” Hampton said. “The state-based regulatory system for insurance has proven itself adept at meeting its primary goals of consumer protection and marketplace strength,” he added.

Regarding the U.S. role in international insurance regulation, Hampton said the National Association of Insurance Commissioners has an “active role” in international associations of insurance supervisors.

In addition, he said, “this interaction with non-U.S. regulators exposes U.S. regulators to other regulatory practices, which benefits NAIC’s discussions of ways to improve the U.S. regulatory system.”

At the same time, he said, “U.S. regulators are able to influence and, in many cases, lead discussions of global practices at the International Association of Insurance Supervisors, and the Organization for Economic Cooperation and Development.

“NAIC’s active participation in these initiatives greatly contributes to eliminating inefficiencies due to differences in regulatory regimes worldwide, while preserving the fundamental principles of U.S. insurance regulation.”

Looking at another area, Ferguson pointed out that reinsurance, as a global business, provides financial support for global businesses, and because it deals in business-to-business relationships, is not involved in the strong suit of state regulation, consumer protection. Because of that, he added, reinsurance “is the most logical portion of the insurance market poised for reform.”

Hampton acknowledged that and noted that regulation of reinsurance “should be different” than it is for insurance. He added that the NAIC has developed a reinsurance regulatory modernization proposal to deal with that.

In his comments, Iuppa said an OFC is unlikely to impact most insurers. Of the 6,500 U.S. insurance companies licensed in 2004, most operate in three or fewer states, he said. “A rather small number of companies would opt for federal regulation.”

But, he added, “for companies as well as brokers who operate globally and across the country, the existing state regulatory framework can present barriers to market entry, product innovation and introduction, as well as barriers to meeting our clients insurance needs, both national and globally.”

ACLI’s Smith said that because insurance in the U.S. is primarily state-regulated, it is difficult for U.S. insurers to have an advocate as they seek to open up global markets.

He noted that many emerging nations need technical help in creating regulatory systems that foreign global insurers, including U.S. insurers, are comfortable with. The Treasury Department has a unit within its international group that finances this assistance for banking and securities firms, providing millions of dollars in technical assistance, as well as serving as an advocate for U.S. insurers seeking to expand overseas.

But, because insurance is state regulated, Treasury has few employees with expertise on insurance issues. And the Office of the U.S. Trade Representative, which also advocates for U.S. interests in global markets, has a similar problem because other markets are regulated federally.

Smith also said that in trade negotiations, foreign countries demand single-unit access to the U.S. markets as reciprocity for allowing U.S. insurers into their market, citing China as one country that has raised the issue.

He also noted that 26 U.S. states bar insurance companies from doing business in their states if a country has an ownership interest in the insurer–another source of friction with foreign countries.

Moreover, he said, “There is growing frustration in emerging markets about the U.S.’ lack of ability to enact new insurance liberalization laws.”

Hampton acknowledged that structurally state regulators don’t have the authority or resources to deal with global trade issues, and noted that state insurance commissioners might be willing to cede that authority to the federal government while retaining most oversight of U.S. activities.

But panel members, including Ferguson, and Peter Wallison, the moderator of the discussion and co-director of the AEI’s program on financial market deregulation, said such an approach is impractical.

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