Insurance regulation best left to the state
Over the last few days, proponents of a new regulatory regime for the insurance industry have called for an optional federal charter for big insurance companies. Any rational citizen is scratching their head and saying, “What?” Are we to believe that a company such as AIG being able to choose how they are regulated through an “optional” regulatory system would have prevented this situation? Are we to believe that, despite experts across the country calling for more vigorous market supervision, a deregulatory proposal such as OFC is the answer? Are we to believe that pitting one regulator against another in a contest to be chosen by the regulated company would do anything but lead to a race to the bottom and lessen consumer protections?
While the problems with AIG is indeed a huge shock, even a cursory analysis of the practices that led to its dire situation shows that state insurance regulation and AIG’s insurance subsidiaries bear no responsibility for its problems. Instead, AIG’s problems are related to its pervasive use of credit default swaps. AIG’s core insurance business isn't to blame for its problems and this situation shouldn't be used as an excuse for wholesale deregulation of big insurance companies. In fact, AIG’s state-regulated insurance entities are stable, profitable and paying all claims.
State insurance regulators actively monitor insurance entities for potential financial trouble and have many different tools to help insurers navigate adverse market developments. In addition, the state system utilizes a very effective safety net, the state guaranty fund mechanism, to protect consumers in the rare case of insurer insolvency. The health of AIG’s state regulated insurance businesses proves how effective state commissioners are in regulating the insurance market.
While state regulation isn’t without its problems and it does need targeted reform, these problems do not include the areas of financial oversight, solvency or consumer protection. If anything, the failure of AIG highlights the strengths of state insurance regulation and should mute, not amplify, the call for optional deregulation of big companies.
Robert Pierce, CEO
Michigan Association of Insurance Agents
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