State Insurance Regulation: For Whom the Bell Tolls

The 51 state regulators of our creaking insurance system should listen closely to the noise coming out of Washington, and particularly the House Financial Services Committee hearing today. The bell may not toll their demise, but they are being relegated to a pew in the back of the church.

Treasury Secretary Timothy Geithner is proposing “a vast expansion of federal authority over the financial system,” that’s likely to give major insurers their long-sought-after dream of an optional federal charter.

The big insurers are tired of dealing with 51 different jurisdictions (50 states and the District of Columbia) every time they roll out a new product or a variation on an old product, all of which have to be poked, prodded and approved by each jurisdiction. With the help of both Republicans and Democrats, they’ve been seeking a way to pre-empt state authority for years.

State regulators have done nothing to help their cause. They are loosely aligned within the National Association of Insurance Commissioners (NAIC), which is, or isn’t, an actual regulatory group depending on who you ask. Insurance brokers themselves joke that NAIC stands for “No Action is Contemplated,” and the commissioners didn’t help themselves when they barred state legislators from their meetings three years ago.

Ironically, the open wound that hurt the most had nothing to do with insurance. Giant insurer American International Group (AIG) got into trouble not because of its insurance lines, but because of its financial products unit, which invested in more than $2.7 trillion of credit default swaps. This unit’s financial products were regulated by the Office of Thrift Supervision, which governs savings and loans.

But perceived problems trump real ones, and thanks to those AIG bonuses, the nation, lawmakers and even Geithner are out for blood. “It’s in the interest of the economy to move as fast as you can,” Geithner told the committee.

Another likely advocate of federal insurance regulation is his presumed deputy, Neal Wolin. As reported by BNET Financial, when Wolin was general counsel of Hartford Financial, one of the largest U.S. property and life insurers, he testified before Congress in support of federal authority.

One caveat. Everyone, even Geithner, agrees that insurers and other financial institutions shouldn’t be able to go “regulator shopping,” as AIG did when it chose to be governed by the toothless OTS rather than an insurance commissioner. If they do come under federal control, that is where they will have to stay.