What an odd time to be tampering with the regulatory apparatus of the insurance industry, one of the more stable sectors in all of teetering finance.
Doesn’t the U.S. Treasury Department have enough to worry about without upending the modestly successful system of state regulation that has been around for six decades?
There’s no systemic problem with the safety and soundness of insurers. And consumers have been generally well-served by state-mandated price controls and efforts to keep policy forms clear and fair.
While a strong argument can be made that federal oversight is a better regulatory model for an insurance industry that operates in a global economy, Treasury Secretary Henry M. Paulson Jr. is going about it all wrong. He’s proposing a watered-down federal system that would shortchange consumers and risk a severe and unnecessary backlash.
Under Paulson’s plan, property and casualty insurers like The Hartford and Travelers and big life insurers like ING would be free to ditch state regulation — and much of the price and policy form oversight that goes with it — in favor of a federal charter and looser regulation.
They’d get to choose their system: state or federal. Are your state regulators too tough on you? Just sign up for a federal charter. Are your state regulators easy? Stay put.
Property/casualty giant State Farm, a giddy supporter of the federal regulation option, says the insurance industry is “ideally suited to rely on competitive market forces to determine the prices and terms of products it offers the public.”
Whoa there! Let’s not forget that insurers have special advantages over other companies that actually do operate in free markets.
Consumers and businesses are often required to buy their products. If you want to drive, you need auto insurance. If you want a home mortgage, you need homeowners insurance. Companies must buy workers compensation coverage. Insurers, on the other hand, are free to reject a prospective customer for a host of reasons. And insurance policies are often exceptionally complex and difficult to compare without active regulatory assistance.
And what other price-competitive industries have an explicit blanket exemption from federal antitrust laws?
It’s no surprise consumer advocates overwhelmingly oppose Paulson’s optional federal insurance regulation. They fear insurers will flee states with the toughest, most pro-consumer rules and regs. Some say Paulsen would be setting up a bidding war for market share between the federal and state regulators — the one with the gentlest regulation would win the most companies.
Connecticut Attorney General Richard Blumenthal vowed to fight any effort to preempt or reduce state authority in the insurance sector. “The federal government’s abject failure in banking industry oversight should prompt skepticism about proposals for federally chartered insurance companies,” Blumenthal said in a written statement.
While he’s right to object, his reasoning is a little cockeyed. Federal banking regulation hasn’t always been the culprit. In the savings & loan crisis of the late 1980s, for example, the door for the worst abuse was opened by lax state laws in California, Arizona, Texas and Florida.
It’s not such a crazy idea to look for appropriate ways to modernize insurance regulation in an increasingly global economy. Forcing national and international companies to comply with the idiosyncrasies of 50 state insurance departments is not very efficient.
But Paulson is grasping at straws with his “federal regulation lite” for insurers. Fortunately, a good deal of his sweeping financial overhaul package — including the optional federal charter — isn’t likely to win congressional approval. Good thing.
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