The release of the Treasury Blueprint for a Modernized Financial Regulatory Structure has generated a significant amount of reaction from supporters and opponents of an optional federal charter. As expected, the blueprint supports the creation of an OFC for insurance companies. Given the Treasury’s role in financial regulation, this endorsement represents a major victory for OFC supporters. Nonetheless, the Congressional action necessary to create an OFC appears unlikely in the short-term. The debate over the creation of an OFC has been waged for years, and the blueprint alone is unlikely to change the views of those who have been arguing either side of the issue.
In addition to recommending the creation of an OFC, Treasury recommended an intermediate step: the creation of a Federal Office of Insurance Oversight within Treasury “to establish a federal presence in insurance for international and regulatory issues.” On April 17, Rep. Paul Kanjorski, D-Pa., introduced H.R. 5840, The Insurance Information Act of 2008, which would create an Office of Insurance Information to, among other things, establish federal policy on international insurance matters. This proposal merits further consideration and attention by industry, consumers, regulators and other policymakers.
It is well-recognized that financial markets and institutions have become more global. This is true of insurance, as well as banking and securities. As markets and institutions have become more global, regulators and policymakers have been working to develop a regulatory system that reflects this change. Recognizing the inefficiencies of multiple entities regulating a single multinational firm (a concept easily understood by those familiar with state-based insurance regulation), financial regulators have worked on the development of global international standards and attempted to harmonize regulation.
More recently, they have pursued mutual recognition. The Securities and Exchange Commission has signaled its acceptance of non-U.S. firms reporting under International Financial Reporting Standards (IFRS) rather than GAAP. The SEC is also engaged in a dialogue with Australian securities regulators that may lead to mutual recognition of their respective regulatory systems. This is expected to be the beginning of a series of bilateral dialogues leading to mutual recognition.
In this environment, the development of international standards becomes increasingly important. As a corollary, the quality of U.S. participation in these standard-setting processes is also more important. As other countries embrace international standards, recognition of the U.S. regulatory regime will ultimately depend on the U.S.’s consistence with internationally accepted standards.
Cooperation and coordination by regulators across sectors and countries is also motivated by concern about the potential systemic risk presented by large complex global institutions. The recent rescue of Bear Stearns, which had limited operations outside the U.S., raises the question: What if it had been a truly multinational firm with significant operations in other countries? This question is equally relevant to insurance. What if a major global insurance company developed severe financial difficulties? How would regulators in multiple countries handle an insolvency of that magnitude? Coordination and planning are critical.
As international standard-setting and coordination have become more important, the National Association of Insurance Commissioners has worked hard to provide U.S. input. NAIC staff and regulators, particularly Commissioner Al Gross of Virginia, have done an impressive job. The ability of U.S. regulators to effectively impact global developments, however, is constrained by the structure of state regulation. Specifically, there is no clear leader for insurance regulation in the U.S. No single person can articulate a U.S. policy on a global stage.