An optional federal charter for regulating the insurance industry would be “a horrendous idea,” New York’s top insurance regulator says.
The current debate over federal regulation of insurance was among many issues that New York Insurance Superintendent Eric Dinallo tackled during an interview with National Underwriter reporters.
While federal regulation of insurance could conceivably work for a line of business such as reinsurance, an optional federal charter would create the same opportunity for regulatory arbitrage as has been witnessed by the banking industry, Dinallo said. There would be a lack of commitment to federal regulation under such a scheme, he explained.
What could work are federal standards in areas such as producer licensing, and product development and registration, and conceivably even solvency standards, he said.
But Dinallo did not agree with the complaint that some insurers or consumers have with state regulation, saying that “these arguments don’t seem so profound.”
The industry has favored federal oversight because of a belief that it would receive better capital treatment from federal authorities than from state regulators, but with the current financial crisis, that is likely to change, Dinallo said. Mutual insurers are not rushing to embrace federal oversight because they are less concerned about capital treatment, he added.
He also discussed how the National Association of Insurance Commissioners, Kansas City, Mo., could be affected by the move toward federal oversight.
He said that the NAIC cannot be given the authority to regulate insurance under a federal regime, as the National Association of Securities Dealers regulates securities, without legislation to allow it to become a quasi-regulatory agency. When asked whether the NAIC would consider such an option if it meant the organization’s survival, he responded, “absolutely.”
Dinallo said that the NAIC’s current effort to establish an office of insurance information is a good one because Congress wants and needs information about insurance.
“I really don’t think it is the camel’s nose under the tent,” he said, referring to an argument in the industry that an OII would be a first step to federal oversight.
He also disputed the argument that state insurance departments could become regional offices of a federal insurance entity. That would not make sense because it would be a massive agency of over 15,000 employees, not counting consultants to state insurance departments, Dinallo said.
And what would happen when the first auto rate complaint landed on new Treasury Secretary Timothy Geithner’s desk? he wondered.
The New York department hopes to receive NAIC accreditation in 2009, Dinallo said. Accreditation is an NAIC that a state insurance department adheres to certain standards, such as solvency oversight.
The department is now seeking certification because a year ago, the New York legislature enacted a risk-based capital statute for property-casualty insurance, a requirement to be considered for NAIC accreditation.
“The federal government oversees markets better but is not necessarily good at consumer issues,” he added.
On the issue of permitted practices in state insurance departments, Dinallo said that it really depended on how you defined “permitted practices.” It makes sense on a case-by-case basis in which a company needs a longer runway, such as the actions New York took with bond insurers and American International Group, New York, he explained.
But to give the whole industry relaxed capital requirements, as was recently proposed by the American Council of Life Insurers, Washington, is not something that he can agree on, he continued. The proposal would put regulators in an awkward place, he said, because the need for easing the requirements wasn’t demonstrated, but if a company does go under, the ACLI could respond, “See, we asked you for relief and didn’t get it.”
What could make sense when the financial markets and economy improves is a New York insurance exchange, Dinallo said. Such an exchange could cover businesses that cover all facets of risk, including all types of reinsurance. It could even encompass credit default swaps, he added.
His department was initially looking at oversight of these financial instruments but is waiting to see what federal legislators will do in that area, Dinallo said.
But the insurance exchange could “federalize reinsurance without making it federal,” he said. Such an exchange could cover risk by a wide range of entities ranging from insurers to a firm like Goldman Sachs, New York, to hedge funds, Dinallo added. It would work best for products that did not involve guarantee funds or consumer products, he said.
A combination of state and federal tax advantages could make it neutral with the tax benefits of working in Bermuda, he added. “It would have to be well circumscribed and not just a dinner bell” for those who wanted tax breaks, Dinallo asserted.
On the issue of credit default swaps, “I never said that CDSs or even naked CDSs were evil;” but “currently, capital is being treated as an investment and not as a guarantee, which they are,” Dinallo continued,
A credit default swap guarantees payment by an entity if another entity cannot meet contractual obligations, and a naked CDS is a guarantee to make payment even though there is not ownership of the security being guaranteed.
CORRECTION: Due to an editing error, the name of Eric Dinallo was misspelled in an earlier version of this article.