Movement for Federal Controls of Insurance Industry Misguided

by L.A.S.
The federal government has seized on the problems with one segment of one company, AIG, as a pretext for more government control of the whole insurance industry. The truth is that the insurance division of AIG, American General, was doing just fine (and BTW was under state regulation). The problems were in the division that was already supposedly being supervised by the federals, the Financial Products Corp., which indulged in risky equities investment.
However, neither do I see any value in creating an optional federal charter, called an OFC. The OFC would give insurance companies the option of being regulated at the state or at the federal level. One must acknowledge that in some states, it is possible for the insurance commissioner's office to be much too cozy with the industry, and refrain from too close scrutiny of financial records or safety.
I have mixed feelings about this proposal, I admit. I have already opined on the frustration of not being able to buy certain riders or products in one state that are easily available in another state, simply because the insurance commissioner's office of one state decided to allow that product.
The Financial Regulatory Reform report strongly recommends the creation of an Office of National Insurance (ONI). One of the jobs proposed for this ONI is the identification of insurance companies that should be supervised as Tier 1 Financial Holding Companies (FHCs). A Tier 1 FHC is defined as a holding company “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if [they] failed.” They would come under the supervision of the Federal Reserve who would supposedly hold them to a higher standard and do everything to prevent these companies from failing.
Insurers are expressing concern that the Fed would not be working in harness with an actual insurance regulator. This is in contrast with the rest of the financial services industry which has a federal regulator in the SEC. The Fed would not concern itself with solvency, but rather with the company's impact on the overall economy.
The Fed already has many critics of its authority. Does it really serve anyone's best interest to allow it to insert itself into another segment of the finance industry, when it already seems stretched to the limit in trying to monitor the banking industry?
Besides the creation of the ONI and an expansion of the Fed, the report is also spurring talk of creation of a Consumer Financial Protection Agency (CFPA). This agency is supposedly going to represent consumer interests at the administrative level regarding credit, mortgage and title insurance coverage. Whether it will also monitor the insurance industry in spite of intense lobbying against it, is anyone's guess at the moment.
Again, I have mixed feelings about this new agency. Much depends on exactly who will be appointed to serve in this agency and whether they will just be another shill for the industry. The devil is always in the details.
On the one hand, it has the potential to finally bring the credit industry to heel and cap interest rates on credit cards and other abuses. Have you never wondered why your credit card bills are always addressed to processing stations in Delaware and Dakota? That is because those states have no cap on credit card interest rates or any other meaningful regulation. It would also give consumers the option to buy new plain-vanilla insurance products and provide transparent pricing.
On the other hand, adding another layer of bureaucracy because the regulators we have, failed to do their job, is hardly cost-efficient. It is hardly an example of good government. Although if the Congress writes the bill so as to streamline (make that read 'fire') ineffective federal agencies like the SEC or FINRA (the SEC's enforcement arm) or the Federal Reserve itself, then that would be a net gain for consumer rights and for the bean-counters.
If any or all of the existing agencies had been doing their job, and regulating the finance and investment community, we might have averted the bloodbath of last summer and fall. How did earlier administrations allow the annulment of the Glass-Steagall rules? Rules that had prevented a recurrence of the errors and wild ways of the heady 1920's?
And then there is the really scary problem that is not addressed by any legislation anywhere, and that is that most of the people working for the federal government just cannot understand the complicated financial instruments now being used and marketed across the globe. What if Congress convened a hearing or an investigation into bank failures, and the crooks got off because our representatives really don't know a bundled mortgage from a certificate of deposit? Or an ARM from their leg??
Sorry to joke, but tragically, the American public does not generally have senators and representatives who can fathom the technical jargon of the industry. It is not that they are dumb; they are just in the dark. As are we all.