As the new administration and Congress prepare to grapple with the continuing economic crisis, clearly we are entering a period of immense regulatory change for the financial services industry in which reregulation, rather than deregulation, is almost certain to be the result. Issues the insurance industry should be on the lookout for include the addition of a federal layer of insurance supervision, federal oversight of systemic risk and the possibility of overregulation.
Responding to global pressures to converge accounting rules and increase transparency and regulatory cooperation, critics of the present system in the U.S. squarely pin the blame for the current market turmoil on antiquated regulatory models whose gaps have left risky financial instruments such as credit default swaps unregulated and whose rules have prevented regulators from viewing the entire financial picture of a company. And while the U.S. financial services industry is preparing to undergo an unprecedented review, with regulatory reform likely to take center stage immediately, the insurance industry stands at a particularly unique juncture as the notion of state-based regulation gets positioned for a rewrite.
There has been considerable debate on federal oversight of the insurance industry for more than a decade. But given the recent federal bailout package, the equity stakes the Treasury has taken in companies and the rising global recession, perhaps at no time since state-based insurance regulation came to the fore in the late 1800s have the arguments for a federal oversight role been more pointed. What's more, the framework for such a plan is already in place.
In the spring U.S. Treasury Secretary Henry Paulson unveiled a blueprint that called for a prudential "systemic risk" financial regulator, the merging of agencies such as the Office of the Comptroller of the Currency and the Office of Thrift Supervision, and an optional federal charter for insurers. The OFC would allow insurers, reinsurers, agents and brokers to opt to be regulated under a federal regulator or to remain under the existing state-based system of supervision. Paulson's OFC plan closely mirrored the National Insurance Act, whose lead sponsor was Republican Sen. John Sununu of New Hampshire, who recently lost his reelection bid.
Expected to champion future discussions for the new regulatory regime is Democrat Senate Banking Committee Chairman Chris Dodd of Connecticut, who is on record as saying that neither he nor the committee have reached a decision on whether the responsibility for supervision should lie with a single regulator or with multiple agencies. That leaves a lot up for question.
Of particular concern for insurers is the possibility of overregulation, or adding layers of federal regulation atop existing state mandates. Some have expressed concern that the "optional" in OFC will no longer be an option; rather, federal oversight would be a mandate that adds to the regulatory burden.
Those who fear the strike of a weighty regulatory gavel on insurers should take solace in knowing that there are just as many calls for sound improvements in oversight. President-elect Barack Obama, for one, has indicated that the answer to the current financial crisis is not heavy-handed regulation, rather a restoration of a sense of balance that keeps the American entrepreneurial spirit alive.
Beyond the U.S., up for question also is whether a global systemic risk mechanism would be in order. The first step might have been seen at the recent Group of 20 summit in Washington, where economic leaders agreed to take immediate action to establish supervisory colleges that would include all major cross-border financial institutions.
One thing is certain: The question of new regulatory mandates for the insurance industry is not one of "if" -- as events unfold under a new Congress and presidential administration in 2009, the industry cannot be at the table too early or too often.