So Much for Oversight

For the last several years, we have lived in a world where the economic stakes for a major insurance failure have become too large to ignore. When AIG imploded in September 2008, kicking off a global financial meltdown that in turn has become the Great Recession, it revealed to all the risks we run by pairing a diverse and yet intertwined financial services industry with a porous, patchwork system of regulatory powers to oversee the whole thing. I have repeatedly called out the National Association of Insurance Commissioners for its relentless support of a state-based regulatory model that does not do nearly enough to protect consumers, and which is the ultimate go-along, get-along game, with regulators taking their cues from the regulated, many of whom they once worked for and intend to work for once again when they leave their governance post.

Some of my colleagues have chided me for this, especially when I say that the NAIC’s failure to oversee insurance companies holistically helped to contribute to AIG’s catastrophe. The NAIC is just there to overlook insurance, I am told. True, but a lot of insurance companies are more than insurance companies, and it does no good to regulate one half of them if the other half is going buck wild and creating risks that threaten the entire operation and those who do business with it. Saying your mission is only to look at insurance and washing your hands of the AIG fiasco is like being the lookout on the Titanic and saying that your job was only to look for other ships, not icebergs.

With this in mind, I draw your attention to a press release I received from the American Insurance Association yesterday. The AIA, of course, is a powerful voice for insurance lobbying, and unsurprisingly, it applauded Oklahoma’s signing of a “self-audit privilege bill” that essentially hands over to insurers the responsibility of determining for themselves if they are in regulatory compliance or not. This is like letting my nine-year-old son determine whether his room is really clean.

What’s worse, the rule allows for insurers to report to the state board of insurance if they are not in compliance with regulations, but confidentially. In what way does it serve the consumer for insurers to have the privilege of keeping their compliance shortcomings concealed from the public? This is the recipe for a no-transparency environment in which nothing good can happen. Indeed, there is something to be said for the industry’s own financial acumen, and when you look at the age-old struggle between insurers and regulators to set appropriate reserves, you do feel for insurers who are hamstrung by overly zealous regulations. But for Oklahoma to simply wash its hands of regulatory responsibility in this manner is more than a gimme to the industry, and more than a suggestion that lobbying efforts have been successful in that state. It is simply irresponsible.

I mentioned this on my Facebook feed, and kicked off an interesting conversation about the nature of government regulation. One friend of mine noted that it was strange that people would get upset over this if they didn’t live in Oklahoma. It was like getting upset over Oregon’s gun laws if you lived in North Carolina. Except that the comparison doesn’t really hold up.

There is a systemic nature to insurance that makes the regulation of any given company only as strong as the weakest link in the chain. And with this new self-auditing rule, Oklahoma has become a weak link, indeed. Why not re-domicile in Oklahoma and take advantage of what appears to be a regulatory environment that consists of little more than pinkie swears that everybody will maintain best practices and that nobody will get too aggressive with unsound financial strategies?