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Life Health > Life Insurance > Term Insurance

One Forward, Two Back?

By Marlene Y. Satter

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This past March the Department of the Treasury released its Blueprint for a Modernized Financial Regulatory Structure, which sets forth an argument for the need for change, followed by an examination of the financial industry and its regulation as it is now and a proposal for some rather radical modifications–a few of which have state insurance regulators bristling.

The document cites five major forces affecting the financial services industry: globalization of capital markets, the rapid advance of technology, the growth of difficult-to-understand sophisticated products, the institutionalization of capital markets, and the convergence of financial services providers and financial products. It also points toward gaps in regulation and regulatory agency coverage, the age of the current system (“much of it created over 70 years ago”), and the need to prevent and anticipate financial crises. The document notes that “no single regulator possesses all the information and authority necessary to monitor systemic risk” or the potential for events associated with financial insitutions to adversely affect “the real economy.”

Further cited are jurisdictional disputes “between and among the functional regulators” of converging financial services providers and their products; these are accused of “hindering the introduction of new products, slowing innovation, and compelling migration of financial services and products to more adaptive foreign markets.” Lastly, the document mentions duplication of efforts across regulators as yet another reason to change the system.

Changes that Treasury proposes for the insurance industry begin with an Optional Federal Charter (OFC) in the near term, which would exempt those companies choosing it from the jurisdiction of states, although some continued compliance with other state laws would still be required.

It also recommends that an Office of National Insurance (ONI) be established. This would be an entity within Treasury to regulate “those engaged in the business of insurance pursuant to an OFC.” It would be headed by the Commissioner of National Insurance, and would have power to regulate, supervise, enforce, and rehabilitate national insurers and agencies.

In addition, Treasury recommends the establishment by Congress of an Office of Insurance Oversight (OIO), to become the lead regulatory voice for international insurance regulatory policy (“in consultation with the NAIC”). In effect, the OIO would oversee the National Association of Insurance Commissioners (NAIC) and state insurance regulators by making sure they applied U.S. international insurance policy goals uniformly. The OIO would also advise the Secretary of the Treasury on major domestic and international policy issues. Eventually, says the document, OIO would be folded into the OFC structure once Congress has passed sufficient regulatory reform.

When the document was issued, the NAIC responded that regulators were “glad that someone at the federal level is finally paying attention to the financial crisis facing our nation.” However, the response also warned that any change should not put Wall Street ahead of Main Street, citing numerous examples of federal efforts that fell short of preventing not only the current crisis but the atmosphere that allowed it to come into being. Stating that the Treasury document marginalizes the efforts of state insurance regulators, it adds, “we need look no farther than Hurricane Katrina to see how well federal solutions serve the nation” and further says that, for the insurance segment of the financial services industry, the proposed actions look “more like a solution in search of a problem.” Further, NAIC asserts that the “solution” is “needlessly complex” and appears to preempt state oversight rather than providing more teeth to those already working to protect consumers.

Marlene Y. Satter, a freelance business writer who can be reached at [email protected].

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