Score a round for the National Association of Insurance Commissioners (NAIC) for their knockdown of optional federal charter (OFC) proponents writing in the Wall Street Journal. Federal legislators John Sununu, Tim Johnson, Melissa Bean and Ed Royce led with the chin by arguing for OFC based on the demise of AIG in "Insurance Companies Need a Federal Regulator," on the Journal's editorial page, Tuesday, Sept. 23. Sandy Praeger, president of the NAIC and Kansas Insurance Commissioner, delivered a devastating counterpunch in the Journal's letters to the editor on Friday.There are sound arguments (I do not say conclusive ones) for OFC, and the authors made some of them. For example, they wrote: "the state-based system drives up the price of insurance, because it is costly to comply with 50 different sets of regulations." However, given the meretricious pretext of the article, the threat scenario it presents ends up being an exercise in question-begging. It says:
Unless Congress provides an alternative to the state-based regulatory model, it is likely that the federal government (i.e., American taxpayers) will be forced to pay for more bailouts in the future.
One hopes readers familiar with the insurance industry would have responded, "But why?" AIG has long been seen as sui generis; and in any case, what exactly does its failure have to do with the viability of state regulation? As Commissioner Praeger wrote :
...AIG is not an insurance company, it is a federally-regulated holding company under the jurisdiction of a federal regulator...And its problems arose under the watch of a federal regulator.
Sununu, et al., buried the acknowledgement deep in their piece that "AIG policyholders are, of course, secure," without elaborating. Of course they were! But why, exactly?
While insurance companies are exposed to the credit crisis as institutional investors, their fortunes stand in stark contrast to their industry peers because of the conservative regulation to which they have been subject under the state-based regulatory regime - as Commissioner Praeger insist.
The legislators' piece argues that, "The preservation of our pre-eminence in the global markets depends on a modern regulatory structure that can handle the complexity of today's businesses." Seems reasonable; so far so good. But it adds, "And OFC will provide a safer, more cost-effective regulatory environment for our economy and for our consumers." Well, this is not a very strong argument to make at a moment when federal regulators have presided over an unprecedented financial disaster while state regulators are in a position to hold their heads high.
From within the world of insurance technology, OFC has appeal: it would eliminate the very onerous and costly task of compliance with multiple state regulations. It would also tilt the competitive playing field in favor of companies with scale. Whether that's just show business in a free market or whether it would be accompanied by damage to consumers is not something I care to argue about here. What is clear is that the companies that would benefit from OFC have influence with the authors of the Journal's editorial piece. By associating the collapse of AIG with the question of OFC, they were practically begging Commissioner Praeger to make the following point:
On Capitol Hill, proponents of federal insurance regulation are supported by large insurers who seek the same level of oversight as the investment and commercial banks that are at the heart of ... the broader market turmoil. Unfortunately, these special interest groups seem intent on reducing insurance regulatory oversight - which has, time and again, proved to provide appropriate consumer protection - for their own economic ends. That's how we got into this mess.While insurance companies are exposed to the credit crisis as institutional investors, their fortunes stand in stark contrast to their industry peers because of the conservative regulation to which they have been subject under the state-based regulatory regime, as NAIC president Sandy Praeger argues,
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