LETTER FROM THE CEO
Our
policymakers are asking important questions during today's global
financial turmoil. How did we get here? How do we prevent a
recurrence? What regulatory system is most likely to prevent
future systemic risk failures? Those are critical questions, but
they would be making a mistake if they tinker with the strengths
of our current state-based system of insurance regulation.
Two
important lessons we've learned are that regulatory policy can be
flawed and regulators can make mistakes. A parade of regulators
and policymakers have acknowledged errors. Former Federal Reserve
Chairman Alan Greenspan, citing his own reliance on "the
self-interest of lending institutions to protect shareholders
equity," admitted to being in "a state of shocked disbelief." The
bottom line is that regulators are human and they make errors in
judgment. That's why any structure intended to prevent the next
systemic meltdown must be built with this fallibility in mind.
In
this turbulent financial sea, the state-based system of insurance
regulation has been a relative island of calm. It has experienced
its own stresses, to be sure. But it has not recorded the kind of
failures as has the banking sector. As Congress considers
regulatory reform, lawmakers should consider pondering how the
structure of our current state-based system helps counteract the
fallibility of regulators. Like all regulators, we make mistakes.
But our structure makes it more likely we will catch them early,
and it counteracts problems of regulatory capture and forbearance.
Some
have suggested we create a federal insurance regulator, reflecting
the industry's significance. However, given the importance of
insurance in Americans' economic security, we require the checks
and balances and multiple eyes as well as the healthy tension that
exists in our successful state-based system of insurance
regulation.
While
no one proposal is completely perfect, our initial read of the
Administration's financial overhaul plan seems to reflect what is
most important to us: preserving the consumer protections and
financial solvency oversight of the historically strong and solid
system of state-based insurance regulation. We will continue
to work with Congress and the Administration to underscore the
benefits of the current insurance regulatory system.
- Dr. Therese M. (Terri) Vaughan, CEO of the National
Association of Insurance Commissioners
NAIC MEMBERS URGE CONGRESS TO
RECOGNIZE THE SUCCESS OF STATE-BASED REGULATION
During
a recent trip to Washington, D.C., 41 state insurance regulators
presented a united message to Congress: "maintain the solid
infrastructure of the existing state-based insurance regulatory
system." In meetings about proposed insurance reform, NAIC CEO Dr.
Therese M. (Terri) Vaughan and NAIC President Roger Sevigny
emphasized the successes of the state regulatory framework and its
consistency during the recent financial crisis.
This year's meeting with lawmakers
came at a crucial time, as Congress continues to craft responses
to deal with the financial crisis that began last year.
Specifically, NAIC leaders spoke about changes and modernization
efforts that provide federal assistance to the state regulatory
system under necessary circumstances, but they cautioned against
shifting all regulatory responsibilities from the state to federal
government. Commissioners also spoke with individual members of
Congress about building upon the successful model of the current
state-based regulatory system as any framework for any reform.
Additionally, the NAIC advocated
"broad standards for health insurance regulation rather than
prescriptive rules," thus providing flexibility and not
limiting the ability of state regulators to identify local and
regional market conditions.
PROPOSED ROYCE-BEAN BILL WOULD LET
‘FOX GUARD HENHOUSE’
The
NAIC strongly believes that legislation introduced by U.S.
Representatives Ed Royce (R-CA) and Melissa Bean (D-IL), which
would provide for an optional federal charter for insurers and
insurance producers, strips the states of insurance oversight
authority and denies consumers of the time-tested protections that
state regulatory power provides. Immediately following the
introduction of the bill on April 2, NAIC President Roger Sevigny
said the Royce-Bean bill is deregulation, not reform.
The
bill also proposes measures to regulate the country's financial
system that lawmakers have previously acknowledged does not work.
It would authorize the formation of a separate guaranty fund for
federally regulated insurers, along with a requirement that
federal insurance offices be established in all 50 states. It
doesn't recognize that a more comprehensive national system is
already in place through the state-based insurance regulatory
structure.
If
adopted, the Royce-Bean bill would allow self-regulatory industry
groups to carry out nearly any function of the so-called national
insurance regulator - effectively handing the keys of supervision
to those being supervised. Akin to letting the proverbial fox
guard the henhouse, this bill essentially would dismantle existing
state-based consumer protections.
Throughout
the current financial turmoil, the American people have called for
strengthened regulatory systems, not the abdication of control to
those being regulated. Indeed, Treasury Secretary Timothy Geithner
and key Congressional leaders have recommended the elimination of
such charter shopping, where the regulated picks its regulator, in
financial-reform efforts.
The
business of insurance hasn't posed systemic risk to our nation's
economy. Oversight of state insurance solvency has kept insurance
companies stable and protected policyholders from the worst of the
financial meltdown. And state regulators continue to provide a
local response to consumer issues without cost to federal
taxpayers.
While
reforms are needed, the NAIC believes federal and state regulators
should work together to continue to protect consumers and promote
financial stability. Areas exist that might need federal
assistance, but that help should streamline the established
state-based regulatory framework, not supplant it with a new
federal bureaucracy.
NAIC TESTIFIES ON SYSTEMIC RISK
IN INSURANCE
Illinois
Insurance Director Michael McRaith testified June 16 on behalf of
the NAIC to address the role of systemic risk in insurance,
focusing on the inherently compatible role of state regulation in
any sound approach to systemic risk regulation.
In
his testimony to the U.S. House Committee on Financial Services
Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises, McRaith highlighted the fact that insurers'
exposure to systemic risk typically flows from linkages to the
capital markets.
Noting
that the insurance industry has fared better than its banking and
securities counterparts in the current economic crisis, McRaith
testified, "Insurers' high capitalization requirements and low
leverage have kept them from incurring the steep losses faced by
other financial institutions." He cited the state guaranty fund
system as an essential backstop to protect insurance policyholders
in the event an insurance company were to fail.
NAIC NAMES FIRST DISTINGUISHED SCHOLAR
IN INSURANCE REGULATION
Mary A. Weiss, Ph.D., has
been selected as the NAIC’s first Distinguished
Scholar in Insurance Regulation. This appointment signals an
increasing commitment toward enhancing research capabilities in
insurance regulation.
Dr.
Weiss has been the Deaver Professor of Risk, Insurance and Health
Care Management at Temple University since 2001. She will play a
key role in the Center for Insurance Policy and Regulation,
leading the NAIC’s ongoing effort to understand the impact of the
current financial turmoil on the insurance industry and its
implications for insurance regulation. In addition to engaging
other scholars in ongoing research efforts, Dr. Weiss will give
presentations and seminars to NAIC members and the industry. She
also will establish and manage a research program and host an
Insurance Regulation symposium.
During
her career, Dr. Weiss has conducted exhaustive research about
property-liability insurance, reinsurance and auto insurance,
among other areas. In addition to serving as editor of Risk
Management and Insurance Review, she has been the
Associate Editor of the Journal of Risk and Insurance
since 1998. Weiss holds a Ph.D. and Master of Science degree in
risk and insurance from the University of Pennsylvania.
