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Regulation and Compliance > State Regulation

The Contender

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When you write, edit and publish news for a living, it feels great to get a scoop, and yesterday, that’s exactly what National Underwriter did. Going off of confidential intelligence given to him by sources he has spent years cultivating, our Washington bureau chief, Arthur D. Postal, broke the story that the Federal Insurance Office’s as-yet-to-be-appointed director is almost certainly going to be Illinois’ director of insurance, MichaelMcRaith. Reuters ran the same news a few hours later, which was then picked up by various other outlets. But make no mistake: National Underwriter was there first.

But enough chest-thumping. That McRaith seems the likeliest choice for the FIO job is not such surprising news, really. McRaith has been pegged by National Underwriter as the likeliest contender for the top FIO spot for some time. He would come to the job well equipped for it. After a distinguished legal career, he made a name for himself in the world of insurance regulation, focusing his attentions especially on thorny issues such as credit scoring.

For those vested in seeing a FIO that remains a largely advisory office, McRaith seems like a welcome choice, having an extensive background in state regulation, and with the NAIC, where is currently serving as that group’s Secretary/Treasurer. (By the way, National Underwriter ran an investigative series on the NAIC last November for which might win the Jesse H. Neal award in business journalism for best series of linked articles. We’ll know for sure this time next week.) As a result, the logic follows, he would be unenthusiastic about expanding federal regulation of insurance at the expense of the current state-based regime. I am not so certain of that, however.

When I put McRaith’s NAIC background against the FIO opportunity, it seemed like an odd match. Was this a defection from the NAIC? Was this the NAIC getting one of their own into a federal agency poised to expand federal insurance oversight at the potential cost of state regulation?

When I asked fellow editor Phil Gusman of National Underwriter Property & Casualty about this, he could not speculate as to larger motives, he could just tell me what he knew of McRaith. Nobody could run a meeting like him, he could run rings around insurers at will, and he was sharp as a tack.

In NAIC meetings, McRaith became known for his ability to maneuver testifying insurers into admitting what were, in all reality, embarassing market positions or practices. In one anecdote passed along to me, McRaith did an especially good job of calling rating agencies onto the carpet in the wake of the AIG collapse, essentially getting the agencies themselves to say that the solution to rating agencies’ shortcomings were for people to buy more products from rating agencies. (Kind of reminds me of the inverse logic of being safe around a tiger by keeping it well fed. If it has no more room in its stomach, it cannot eat you…until the day that it does.)

With this in mind, to give McRaith the top job at the FIO would be a most interesting choice. Why else have a skilled orator who can run verbal rings around insurers, if not to have a strong way to corral them when the federal government deems it necessary? It just does not seem like the choice for an office that intends to let insurance regulation continue as it always has.

This summer, the FIO is expected to release its initial report on the state of insurance regulation, and sources tell National Underwriter that the findings are likely to make the case for stronger federal regulation. With that in mind, if McRaith gets the FIO job, I would venture that it signals the Feds’ intent to make the FIO more than just a hollow office content with publishing studies and issuing meaningless recommendations. The FIO might very well be on its way to end of the salad days of state-based insurance regulation. I doubt that we will ever see the state insurance offices ever go away, of course, but at the moment, it is the NAIC that has the de facto role of issuing model regulations for the rest of the country to follow. The FIO may not be so flexible in the long run, and I suspect that McRaith’s first few public meetings as FIO director will be a good indicator of just how serious the FIO is prepared to be.

If I was the NAIC, I would be ready, willing and able to collaborate with the FIO. The limitations of state-based regulation–especially when it comes to limiting the damage from systemically risky insurers–have been made plain. The state-based system has been long-decried by insurers that would much prefer to live under a single large regime than 50 small ones held together by a trade group that has some pretty clear conflicts of interest when it comes to public transparency, lobbying and governance. Besides, the NAIC is already locking horns with the Financial Stability Oversight Committee over implementation of Dodd-Frank, so digging on multiple fronts at a time when the case for federal regulation has never been stronger might not make a lot of sense if the NAIC wants to preserve what it has left. Resistance, as they say, is futile.


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