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.
The first and primary responsibility of state insurance commissioners is to respond to the needs of consumers in their own states, including dealing with their own legislatures to respond to local problems. Second, most commissioners are active at the national level through the NAIC because of its influence on local regulatory policy. Finally, some commissioners are active in international issues, participating in discussions on trade and on regulatory policy. These commissioners often spend a significant amount of time, with the support of NAIC staff, on international issues and are to be commended for their effort. But they cannot speak for all states and all state legislatures.
Many commissioners (perhaps most) are not engaged in international issues. As state-based regulators, this is not surprising. Their priorities lie elsewhere, and it is not reasonable to expect that all commissioners would be equally informed on international developments. But the consensual decision-making process at the NAIC gives equal votes to commissioners who are not engaged, not interested and not informed on global issues. They may also dissent from a majority decision based on philosophical perspectives. And–this is key–that dissent may be acted upon, as I saw first-hand when I served as president of the NAIC.
In short, the U.S. insurance regulatory system is structurally unable to speak and act with one voice, try as it may. This problem is exacerbated by the turnover in leadership at the NAIC, with a new president and possibly a new agenda every year.
The recent discussion over reinsurance collateralization illustrates this problem. Ideally, the U.S. would have bilateral discussions with the European Union over the structure of reinsurance regulation in the two systems, similarities and differences, whether these merit mutual recognition, and the form of that recognition. Instead, the U.S. must first spend its energies reaching consensus among the 50+ members of the NAIC. In the NAIC’s ongoing working group deliberations, the EU becomes simply one more player in the development of an NAIC policy on mutual recognition, providing comment along with the multitude of industry groups.
Compounding the problem is that the commissioners leading the effort have many pressing responsibilities other than reinsurance collateralization. When two key leaders left (Maine Superintendent Al Iuppa and Massachusetts Commissioner Julie Bowler), there was no clear succession plan to pass responsibilities to a new leader who had been prepared for the job.
The Treasury’s proposal to establish an Office of Insurance Oversight is squarely aimed at this problem and merits the consideration of the Congress. The blueprint envisions that the OIO would “have the benefit of consulting with the NAIC and state insurance regulators, who should still be primarily responsible for implementing international regulatory agreements.” This proposal does not eliminate the participation of the NAIC. Indeed, it is likely that the NAIC and state regulators, with their wealth of expertise on insurance regulation, would continue to provide considerable input into international standard-setting, with one key difference. Unlike now, there would be a single office capable of articulating a global policy, considering U.S. interests broadly, and enforcing the policy. In this increasingly global world, that is something the U.S. can no longer live without.
Terri M. Vaughan is Robb B. Kelley Distinguished Professor at Drake University. She is former president of the National Association of Insurance Commissioners. She can be reached at terri.vaughan@DRAKE.EDU