Proposal for federal insurance regulation comes round again

Mar.31, 2008 in Market Outlook

Federal insurance regulation proposed again

Move may help biggest insurers, but isn’t urgent, analyst says

By Alistair Barr, MarketWatch

Last Update: 8:13 PM ET Mar 31, 2008

SAN FRANCISCO (MarketWatch) - The idea of regulating the insurance industry on a
federal rather than state level has emerged again, this time as part of the U.S.
Treasury’s response to the financial crisis.

However, some say the insurance industry should be left out of the proposals
because most of the industry hasn’t been hit that hard by the credit crisis.

“Federal regulation is one of those perennial insurance fixes that probably needs
to be done but isn’t necessarily earth-shatteringly urgent,” Paul Newsome, an
analyst at Sandler O’Neill, said in an interview. “The insurance industry is not
in a financial crisis at all. In some sense, it’s as healthy as it’s ever been.”

Bond insurers, including Ambac Financial (ABK), MBIA Inc. (MBI) and Security
Capital Assurance (SCA), have been hit hard by the mortgage meltdown. American
International Group (AIG), one of the world’s largest insurers, has also taken
some large losses based on the market value of credit derivative exposures.

But the main underwriting businesses of most insurers haven’t been hit hard by
the credit crisis so far, Newsome and others noted.

“The federal government needs to remodel their financial regulatory house, but
they need to leave the insurance ‘room’ alone!” said Sandy Praeger, president of
the National Association of Insurance Commissioners, which represents state
insurance regulators. “For our sector it looks more like a solution in search of
a problem.”

The U.S. Treasury said on Monday that a federal insurance regulator should be set
up and overseen by an Office of National Insurance within the Treasury.

As an intermediate step, Congress should also establish a federal Office of
Insurance Oversight within Treasury to establish a federal presence in insurance
for international and regulatory issues.

“These reforms would provide more effective, efficient, and consistent regulation
for national insurers and would enhance product choice and innovation,” the
Treasury said.

Such steps would let insurers chose whether they want to be regulated at federal
or state level. Currently, the industry is only regulated on a state-by-state
basis, Newsome explained.

“Big insurers would likely benefit because there may be uniform codes for filing
policy forms and getting licensed,” the analyst said. “If you’re a life insurer
and want to change a feature on a policy, you have to go to 50 different states
at the moment. Every state gets to approve policies individually. This change
would cut costs and allow for more consistency of coverage.”

But some types of coverage, such as liability insurance, suit state-by-state
regulation because policies have exclusions based on different state laws,
Newsome added.

Another argument against federal regulation is that it would just bring another
layer of bureaucracy, the analyst said.

“States might be able to enforce all their rules and so will a Federal
regulator,” Newsome explained. “Insurers would then have to file in 51
jurisdictions rather than 50, making insurance even more costly.”

The American Insurance Association, a lobbying group for some big companies in
the industry, supports federal regulation.

“Providing insurers with the option of a single regulator for insurance will
benefit consumers and will be more efficient, effective and rational given the
‘increasing tension’ a state-based regulatory system creates,” Marc Racicot,
president of the AIA, said in a statement.

Still, others said the current proposal for a federal insurance regulator
wouldn’t protect policyholders.

The current plan would prohibit national regulatory standards for insurance rates
and policy terms, policyholder attorneys William Passannante and Mark Keenan of
Anderson Kill & Olick said.

“State insurance regulation is structured around areas such as insurance company
licensing, broker and agent licensing, product regulation, market conduct and
financial regulation,” they explained in an emailed comment.

“While these functions are not adequately addressed from the insurance consumer
standpoint at the state level, it is difficult to imagine that toothless and
‘optional’ federal regulation, as an alternative to the current state-based
regime will help. In its current guise, it may well hurt,” the email concluded.

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