A recent paper on insurance supervision by a Wharton School professor suggests that the industry’s current state-based regulatory system is out of date, is “focused on the wrong problems,” and that the federal government needs to play a stronger role in overseeing an industry that is becoming increasingly globalized.
The report was published in the Jan. 22 issue of The New York Times.
It was written with the naïve belief that Congress may use it soon for prompt action in determining how the industry should be regulated going forward. But it should be scrutinized by everyone in the insurance industry as raising the issues that Congress will ultimately deal with when it returns to the middle from its current dysfunctional state.
The report was prompted by the Federal Insurance Office’s (FIO) recent report on insurance regulation that calls for greater federal oversight of insurance regulation.
It also comes amidst signs that the Financial Stability Oversight Council is examining whether Berkshire Hathaway, which has a number of insurance units, should be designated as systemically significant and therefore overseen by the Federal Reserve Board.
The report in the Times was produced by David Zaring, an assistant professor of legal studies at the Wharton School of Business. He said the FIO report “set down a marker” for the kinds of reforms “that will be part of the conversation when Congress takes the matter up.”
Let me make clear that Congress is not going to “take the matter up” anytime soon. Members of Congress at the moment are jockeying to raise the campaign funds needed to win control of the next Congress, and are focusing on doing everything they can to ingratiate themselves to an industry that has been in motion since the Sept. 2008 collapse of American International Group, faces a host of operating problems and rightly believes that any changes in industry oversight are not imminent.
But while members of Congress at the moment are focused on who will control the next Congress, by no means are the issues not on the minds of a lot of industry officials.
For example, several state-insurance regulators in November visited President Obama, who was reeling from the flawed rollout of the health-insurance exchanges, making clear that uppermost in the minds is the minds of state regulators is remaining relevant in the aftermath of the collapse of American International Group (AIG).
Changing the subject from the health exchange crisis that prompted the meeting, the regulators secured from the president a commitment that he would tell Treasury Secretary Lew to consider a role for states in any talks aimed at establishing international-insurance standards.
At the same time, designation of Berkshire Hathaway as systemically significant is also a long-term issue. If designated, it will not be for a while. The FSOC is being very deliberate in weighing whether a nonbank financial company would pose a threat to the financial system if it collapsed,
But the Zaring report articulates the regulatory problems that surfaced when it was it was necessary for the federal government to invest billions to bail out AIG in September of 2008. The report said that the “collapse of AIG, along with the failure of a host of its bond insurers, suggests that the insurance industry was not necessarily a stable, staid keeper of our rainy day funds.”
And despite current efforts by some to rewrite history, other insurance companies sought federal aid during the 2008-09 economic downturn.