Douglas Richmond on When It Comes to Insurance Regulation, Is Uncle Sam the New Sheriff in Town?

Douglas Richmond on When It Comes to Insurance Regulation, Is Uncle Sam the New Sheriff in Town?

Insurance regulation has historically been left to the states. There has long been occasional noise about replacing state regulation with a federal system.   Now, the noise over possible federal regulation of insurance is building to a crescendo as a result of H.R. 5840, the Insurance Information Act of 2008; and the Department of the Treasury’s recent publication of proposed sweeping reforms of the financial services industry in its Blueprint for a Modernized Financial Regulatory Structure.

H.R. 5840 would establish within the Treasury Department an “Office of Insurance Information” to (a) receive, analyze, collect and disseminate publicly-available data and information and issue reports on all lines of insurance except health insurance; (b) establish federal policy on international insurance matters; and (c) advise the Secretary of the Treasury on major domestic and international insurance issues. The Act would preempt any state law or regulation to the extent that is inconsistent with federal policy on international insurance matters. In the Blueprint, Treasury proposes the creation of an “Optional Federal Charter” to provide for a system of federal chartering, licensing, regulation and supervision of insurers, reinsurers, and insurance intermediaries. Industry players who decline national regulation would continue to be regulated at the state level. States would not have jurisdiction over insurers opting for a federal charter, except that insurers would still be subject to some state laws. Treasury also recommends the creation of an “Office of National Insurance” to regulate those who engage in the business of insurance pursuant to an OFC.

The current push for federal regulation should be viewed skeptically. First, the current insurance regulatory scheme is functioning well. Second, how will federal involvement in insurance optimize its regulation or competitiveness? Third, the United States is arguably the world’s most competitive insurance market. What evidence is there that foreign insurers are unable to compete or participate effectively in the Unites States market? Similarly, how is it that the current regulatory structure is impairing domestic insurers’ abilities to compete overseas? Fourth, the OFC scheme risks regulatory arbitrage and gaps in oversight. Fifth, how and what level will the ONI be funded? Who will staff it?    To be sure, the current system of state insurance regulation is imperfect. But there is nothing about the current structure that is so flawed as to justify a redundant federal regulatory regime. And if the state regulatory scheme, while solid, is not optimal, why is the solution not simply the improvement of the state scheme? 

Of course, any move toward federal insurance regulation is not going to happen immediately. Regardless, there is as yet no compelling reason to modify the existing state insurance regulatory scheme to accommodate a redundant federal one.

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