Regulatory Reform: Insurance as an Afterthought

The Obama administration has neither the energy nor the inclination to budge the state regulators from their position of authority; however, a similar deference toward banking regulators on the part of the administration affirmed in principle the ability of financial institutions to choose their regulator in some circumstances.

President Obama's presentation of financial reform proposals yesterday felt anti-climactic from the perspective of an insurance industry observer. While the financial crisis unfolded as a banking and securities debacle, the spectacular failure of AIG seemed to implicate the insurance industry, legitimately or otherwise, for better or worse. And yet, with the publication of the Treasury Department's reform proposal white paper, it seems as if the Obama administration is treating the insurance industry as an afterthought, while it focuses its limited resources on more pressing objectives.In his opening statement before the Senate Banking Committee this morning, Treasury Secretary Geitner made clear that the Department had limited bandwidth:

"Let me be clear, our plan does not address every problem in our financial system. That is not our intent. It does not propose reforms that, while desirable, would not move us towards achieving those core objectives and creating a more stable system.

A story in today's Washington Post referring to the reform proposals bluntly states that, "problems in the insurance industry were deemed by officials to be peripheral to the financial crisis." The article, entitled "Core Reforms Held Firm As Much Else Fell Away," goes on to state that a proposal for a federal regulator for insurance companies was "shelved."

The ACLI might take issue with that characterization, as the organization's president and CEO Frank Keating said yesterday that the President's plan was a step toward "a modern efficient and consumer-oriented regulatory system," by which he meant a system that included optional federal charter (OFC).

The ACLI's advocacy of OFC, reinvigorated by the financial crisis, has been derided in some quarters as an opportunistic shoe-horning of a tired proposal into circumstances that suggest other remedies. OFC, critics argue, calls for deregulation when better regulation may be warranted, it attempts to fix a system that is not broken, and it invites regulatory arbitrage.

Among the critics of OFC, the National Association of Mutual Insurance Companies (NAMIC) has advanced an interpretation of the Treasury white paper more in line with the Washington Post article cited above. "Since the paper does not propose assigning regulatory authority to the ONI [Office of National Insurance], we believe that 'any new insurance regulatory regime' refers to regulatory reforms that potentially could be undertaken within the existing state-based regulatory system, which the paper leaves undisturbed and fully intact," NAMIC president and CEO Charles M. Chamness said yesterday.

The Big "I" (Independent Insurance Agents & Brokers of America) similarly chose to interpret the government's vague recommendations for insurance in a way that suits the interest of its independent distributor membership. "We are pleased that the Obama administration's proposal retains the current state regulatory system and does not directly call for the creation of a federal regulator," commented the organization's president and CEO Robert Rusbuldt.

All three organizations make valid points but, ultimately, all are likely to be disappointed by the actions of a government too busy with the other financial sectors to focus its efforts on insurance reform. The Obama administration has neither the energy nor the inclination to budge the state regulators from their position of authority, and the National Association of Insurance Commissioners is already showing its approval of the administration's reticence. However, a similar deference toward banking regulators on the part of the administration affirmed in principle the ability of financial institutions to choose their regulator in some circumstances. I interpret that deference as a potential opening for OFC in the future, whatever the current role of the proposed Office of National Insurance might turn out to be.

For those opposed to OFC, danger may also lurk in the proposed Consumer Financial Protection Agency, which could influence how OFC proposals might be evaluated as a consumer-friendly measure. As Datamonitor's Jonathan Steiman argued in an I&T story earlier this year:

"The IIABA's reasons for opposing the development of an effective federal regulator are simple: a federally regulated insurance commission would accelerate the amount of premiums sold direct over the Internet or through call centers," Steiman claims. "This is good for both insurers and consumers, but terrible for agents and brokers."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio