A life insurance industry representative and an Illinois insurance director squared off on the need for federal regulation of insurance.
Frank Keating, president of the American Council of Life Insurers, Washington, today argued that life insurers need to be federally regulated because they constitute a systemic risk to the financial system.
Michael McRaith, Illinois director of insurance, countered that, if there are federal initiatives, such as initiatives for system risk, then there should be a “state/federal partnership,” rather than a purely federally run system.
McRaith said state insurance regulators support federal initiatives to identify and manage national and global systemic risk.
But, McRaith said, any such partnership must include a “primary role for states in insurance regulation,” with a systemic regulator such as the Federal Reserve Board “integrating but not displacing” state-based regulation of insurance.”
“Consumer access to state-based, local regulatory officials will remain the bulwark of consumer protection,” McRaith added.
McRaith also talked about the optional federal charter approach, which life insurers have proposed in the past as a potential vehicle for establishing a federal insurance regulatory system.
An OFC system would let insurers choose between state and federal regulation.
An OFC approach would lead to a system in which the insurer would choose the regulator with the “lightest touch,” McRaith said.
McRaith said an ability to choose between a state and federal regulator would lead to “regulatory arbitrage” and failures.
Keating did not talk about an OFC proposal. He talked about a “federal insurance regulatory authority” without defining whether the authority would be a separate agency or through an existing federal regulatory entity.
“We urge Congress to recognize the systemic importance of our industry to the economy and to the retirement and financial security of millions of consumers and tailor reform and stabilization initiatives accordingly,” Keating said. “Failure to do so runs the very real risk of doing grave harm to both…. If there are insurance firms that are deemed systemically significant, the question arises as to how the federal systemic risk regulator will be able to coordinate effectively with multiple state insurance regulators?
“How will federal policy decisions be effectively coordinated with state regulators who need not adhere to those policy decisions and who may differ among themselves regarding the standards under which insurance companies should be regulated?”
Moreover, Keating said, state insurance regulators do not have the authority to set U.S. policy on insurance regulation or negotiate and enter into treaties and other agreements that address global financial regulatory issues.
“To be clear, any reforms to functional insurance regulation should start and end with the states,” McRaith said.
“Federal assistance may be necessary if targeted to streamline insurance regulator interaction and coordination with other functional regulators, but that initiative should not supplant or misplace the state regulatory system,” McRaith said.
“The insurance industry, even in these difficult times, has withstood the collapse that echo through other financial sectors,” McRaith said.
“Vigilant, engaged and effective prudential supervision by the states” has fostered “insurance marketplace stability, and we urge caution in any federal initiative that may jeopardize the state-based platform for such oversight,” McRaith said.
But Keating argued that “crisis-related decisions at the federal level too often produced significant adverse effects on life insurers.
“These decisions occurred with little or no understanding of their effects on life insurers due to the absence of a federal insurance regulatory authority,” Keating said.