WASHINGTON BUREAU — President Obama today presented a package of financial services regulatory reform principles that could pave the way for an expanded federal role in insurance oversight.
The white paper, which deals with many sectors of the financial services industry, including mortgage lending, hedge funds and credit default swaps as well as insurance, suggests strategies for eliminating regulatory gaps and ending incentives for companies and individuals to assume excessive risk.
The changes are necessary because weaknesses in regulation contributed to the current financial crisis, Obama said.
In recent years, “where there were gaps in the rules, regulators lacked the authority to take action,” Obama said. “Where there were overlaps, regulators lacked accountability for their inaction…. An absence of oversight engendered systematic, and systemic, abuse.”
The white paper, Financial Regulatory Reform — A New Foundation: Rebuilding Financial Supervision and Regulation, was released under the aegis of the Treasury Department.
Some of the white paper sections that could affect insurers focus on matters such as systemic risk and regulatory agency realignment.
Outside the area of insurance regulation, for example, administration officials are proposing that the Office of Thrift Supervision be dismantled, and that the government offer just one federal banking charter, to be regulated by a strengthened federal supervisor.
Barney Frank, chairman of the House Financial Services Committee, plans to start a series of hearings on the white paper next week, a representative says. Frank hopes to mark up a bill at the end of July.
Insurance Regulatory Principles
In the main insurance section, the Treasury Department says it supports the following principles for insurance regulation.
1. Effective systemic risk regulation with respect to insurance.
The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry. However, if additional insurance regulation would help to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.
2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies.
Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position for all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.
3. Meaningful and consistent consumer protection for insurance products and practices.
While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance. Further, any changes to the insurance regulatory system that would weaken or undermine important consumer protections are unacceptable.
4. Increased national uniformity through either a federal charter or effective action by the states.
Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states. Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.
5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business.
As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy. Any new regulatory regime must address the current gaps in insurance holding company regulation.
6. International coordination.
Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.