State v Federal Regulation of Insurance in the US

S&P said that speakers on both the federal and state levels have made their case for the best way for the two regulatory levels to co-exist. Two prominent proponents, one for state regulatory system and one for more federal involvement, recently made their case at Standard & Poor's 30th Annual Insurance Conference: Ben Nelson, Chief Executive of NAIC, representing the 50 separate state insurance regulators, and Michael T. McRaith, Director of the Federal Insurance Office (FIO). The case for federal regulation On the federal side, Mr McRaith referenced the FIO's December 2013 report, How To Modernize And Improve The System Of Insurance Regulation In The United States, as a blueprint for how the two systems could work together. "For a long time," he said, "we've had a framework of either federal or state regulation. But that frame is a relic."hideThe issue now, he said, "...is where the federal government should be to complement the states." He added that one of his biggest concerns about the present system is that there is a lack of uniformity about insurance practices across state lines. Mr McRaith also argued for a better coordinated approach among the states in developing capital standards for reinsurance captives, standards that should be risk-based, not geographically-based. But he added: "It should be the states that develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance." Some insurers, he noted, appear to be exploiting inconsistencies in transparency and capital standards in different states. He said that one of the worries that US insurance companies have had in recent years is the movement toward an international regulatory framework and capital standards. "Right now only a dozen or so US insurance companies might be affected," said Mr McRaith. But he emphasised that international standards are not legally binding on US companies and that the implementation of any of them will ultimately be a matter of state or federal regulatory approval. At the same time, however, he acknowledged that EU and US authorities are coordinating efforts to remove regulatory uncertainty globally in order to level the playing field and establish a common framework for the regulatory evaluation of insurance companies. But he added: "None of this will happen immediately." The case for state regulation Mr Nelson said he is sceptical of any greater involvement by the federal government in insurance regulation. He acknowledged that some federal presence is necessary for the forms of insurance that he contends the private market cannot adequately handle, such as terrorism, flood, or crop insurance. "But to provide more federal regulation? No. And there is no appetite in either party now to increase the role of the federal government in this. The last thing we want is more responsibility shifted to the federal government when the private market can do it more efficiently," he said. He said he was also worried that any large-scale federal regulatory regime could move insurance companies toward a system designed instead for banks, especially with regard to higher capital requirements. The few insurance companies already designated as systemically important financial institutions (SIFI) are already under Federal Reserve supervision, as are some depository institutions held by non-SIFI insurers. "I have never met someone who understands insurance regulation who thinks that insurance is systemically risky," he added. Mr Nelson said he was sceptical of the prospects of bringing US insurance companies under capital guidelines currently being developed, partly because the NAIC has had little direct representation in the talks that helped devise them. The key, he said, is not equivalence in regulation on both sides of the Atlantic, which, in any case, would be complicated by the different European and US accounting systems, but mutual recognition. The European and US state systems are also philosophically different, Mr Nelson argued. "Our system is not based on protecting the entity, but based on protecting the policy holder." And because policy holder protections have proven strong, he believes that the industry is freer to take risks, though not recklessly so, with innovative new products and procedures that overregulation could potentially strangle.

State v Federal Regulation of Insurance in the US

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