Has anyone in the insurance industry ever heard about a conflict of interest? Does anyone remember 2008 and 2009?
The recent dust-up between federal officials and state insurance regulators over use of captive insurance companies by insurers to reinsure perceived excess reserves has exposed the anachronism inherent in state insurance regulation.
In recent appearances, state and federal officials and interested parties have debated a variety of contentious issues, including agent licensing, enhanced capital reserves for large financial institutions, the use of balance sheet captives by insurers to reinsure long-tail guarantees on annuities, flood insurance, terrorism risk insurance, capital standards.
At a hearing on efforts to streamline agency licensing, for example, a rigidly objective Congressional Research Service official said one-stop licensing instead of the current state-by-state system would certainly enhance competition.
But, he added, “that there are insurance legislators out there in the country that do not trust the federal government that much.”
Their concern, he said, was that it would turn out to be like the 1987 legislation that pre-empted risk retention groups from state regulation, and, therefore, robbed the states of revenues.
Similar concerns were raised about the captive issue. Ben Nelson, NAIC CEO, recently warned the Federal Insurance Office (FIO) to “stay in their own lane,” and not get involved in statutory accounting principle issues, the turf of state regulators.
He was talking about creation by a FIO unit of a group to monitor the use of captives to reinsure long-tail liabilities. Tom Leonardi, Connecticut insurance commissioner, raised the same concerns.
What Leonardi did not mention is that Connecticut is now chartering and overseeing captive insurers, joining a number of states, including Montana, Vermont and Washington, D.C. in seeking this business.
In another appearance, Monica J. Lindeen, Montana’s securities and insurance commissioner and an NAIC vice president, acknowledged that states are “cash-strapped.”