State Regulation of Insurance is Bad Business

[veritas]

Interesting argument to be read, penned by an R:

The Forgotten Financial Sector

By ED ROYCE * APRIL 16, 2008


Treasury Secretary Henry Paulson recently released a proposal that he hoped would jump-start a debate about how to improve federal oversight of the financial services industry. While part of his proposal was aimed at the current economic turmoil, most of the plan focuses on bringing our regulatory model into the 21st century.

Today, the House Financial Services Committee will join that debate with hearings on how to overhaul insurance regulation. Now is as good a time as any to begin this discussion. Along with our overactive trial bar and anticompetitive corporate tax rate, excessive regulation is the major factor deterring companies from listing on U.S. stock exchanges.

Nowhere is over-regulation more apparent than in the insurance industry.

Because of a Supreme Court decision nearly 140 years ago, the states have sole regulatory authority of insurance. What has resulted since is a bureaucratic cluster of 51 different regulators (every state, plus the District of Columbia) overseeing their individual jurisdictions, punishing American consumers and insurance providers alike.

Take, for instance, product development. A company looking to introduce a new product throughout the country has to get approval from every regulator. All have their own approval process, so the national rollout of a new product often takes months, if not years. It should come as no surprise that the last major personal line, property/casualty product to be introduced nationwide was homeowners' insurance in 1959.

Additionally, while the federal government's price controls collapsed in failure when President Richard Nixon tried them in the 1970s, they live on in state capitols throughout the country. With the exception of Illinois, every state subjects property and casualty insurance products to varying degrees of government price controls. This prevents companies from setting actuarially sound rates, and reduces the number of products available to their customers.

Above and beyond the bureaucratic delays, today's fragmented regulatory model means that there is limited insurance expertise at the federal level. Whether it is in response to a financial shock like the one we have seen in the municipal bond insurance sector, or in formulating tax policy or negotiating free trade agreements, there is no formal representation for insurance carriers or their policyholders within the federal government. At least the banking and securities industries have a seat at the table, via the Federal Reserve and the Securities and Exchange Commission, when these issues are debated.

Mr. Paulson called for the creation of an optional federal charter (OFC) for property/casualty and life insurers, reinsurers, and insurance agents and brokers. This option is geared toward more efficient, not simply additional, regulation. By providing an alternative to the state-based oversight, an OFC would establish a national regulator for the industry and diminish the ability for state regulators to manipulate the market.

As a result, American consumers would be on the receiving end of a more effective system. The nonprofit American Consumer Institute recently found that the cost of excessive regulation at the state level is $13.7 billion annually – paid for by insurance buyers through higher premiums. A central tenet of an OFC would be consumer protection. Policyholders will benefit from an increased number of products at lower rates. They will also benefit from more centralized regulation geared toward protecting buyers against bad actors, and toward making sure companies have the ability to meet their claim obligations.

While the inclusion of an OFC for insurance in the Treasury's report was a major step in the right direction, we are still lagging behind Europe in the insurance arena. The European Union is close to passing a directive, known as Solvency II, which would overhaul the insurance regulatory structure in 27 countries. Solvency II offers a real chance to harmonize Europe's regulatory authority.

Unfortunately, the completion of Solvency II could spell trouble for U.S. insurers. Because Congress has failed to establish a regulatory equivalent here in the U.S., many of our companies may face significant burdens overseas. A regulator representing the entire EU will be reluctant to grant access to their market when the company in question is overseen by a nonsovereign state regulator. This will force U.S. companies to set up shop within the EU, or risk not being granted access to the broader market. Our tangled bureaucracy will continue to threaten the ability of American firms to operate overseas.

There are many interested parties around the world hoping the Paulson report will help convince Congress to move our insurance regulatory model forward. If we fail to do so, our insurance providers will continue operating at a competitive disadvantage. And their customers will continue to pay the price of excessive regulation.

Mr. Royce (R., Calif.) is a member of the House Financial Services Committee and a co-author of the National Insurance Act.

The Forgotten Financial Sector - WSJ.com


This Op-Ed addresses P&C only, but it makes a valid point concerning the nonsense about state regulatory gooblydegook being a good thing. It's definitely slanted in favor of insurance and leaves out their culpability but it debunks some of the stupider rhetoric about how insurers should be able to sell across state lines instead of federalizing the regs.