McCarty Makes the Case for State Regulation
By: Travis Miller
Recent concerns in the financial markets, including those affecting AIG, have intensified debate over the relative merits and drawbacks of state-based insurance regulation or federal regulation. Florida Commissioner Kevin McCarty quickly added his thoughts to the discussion, noting his opinion that insurance regulation has been successful at the state level and should remain as a state regulatory function.
“I am very concerned and deeply troubled by U.S. Treasury Secretary Henry Paulson’s comments . . . as well as by comments from various trade associations suggesting that the current AIG saga reinforces the need for a federal office to regulate insurance companies.
“Mr. Paulson has done a heroic job of stabilizing the financial markets in recent weeks; however, the facts of the matter regarding the AIG crisis clearly highlight that the state-based system of insurance regulation employed in the United States has actually worked in this case – as it has in the past and will in the future – to lessen the systemic impact of financial distress in the world financial markets.
“In fact, despite the staggering $85 billion price tag for the AIG bailout, the current plan put in place by Treasury would never have worked at all had it not been for the fact that the state-based system of insurance regulation ensured that the insurance operating companies at the very core of AIG’s operations – not its current problems – were solvent and financially strong entities, fully capable of paying policyholder claims. As such, these operating companies have significant market value, as ongoing concerns, when they are sold to repay the Treasury investment. Without the diligent oversight of state insurance regulators, the bailout price tag would have been much, much higher.
McCarty echoed the sentiments of an NAIC release pointing out:
• American International Group Inc. is a financial holding company that owns 71 U.S.-based insurance entities. Those entities all are financially sound and fully able to pay claims presented by policyholders and claimants.
• The problems that arose occurred as a result of business decisions made by a non-insurance part of this massive conglomerate; these entities were regulated either by a U.S. federal regulator, the Office of Thrift Supervision, for the U.S. financial holding company, or by an “integrated financial regulator,” in the case of the non-U.S. entity. Simply put, the non-insurance entities wrote more risk than they could fund when the financial markets soured over the last year. The insurance companies were not involved in these business decisions; and, as a result of this important difference, the assets of the insurance companies – under the supervision of state insurance regulators – remain intact and almost completely unaffected.
• Even throughout the AIG financial holding company’s liquidity crisis, consumers remained protected by state insurance regulatory rules that prevented the parent company from simply raiding capital from its profitable and well-capitalized insurance subsidiaries.
“Undoubtedly, careful study of what went wrong and how to prevent it from happening again will continue for decades. A critical review exercise must be undertaken with dispassionate objectivity.
“Currently there is a sentiment developing that an approach that views all parts of these complicated firms as one single entity with a common source of capital would be preferred to the current system of functional regulation.
“Notice, though, that under the proposed system, the hundreds of thousands of policyholders who rely on AIG insurance companies would have been at significant risk as all of the insurance assets would have been co-mingled to pay for the damage created by the non-insurance entities.
“With clear objectivity, the study of the current AIG crisis will, I am sure, demonstrate that the state-based system of insurance regulation provides for a framework in which insurance companies operate in a financially prudent manner and in which policyholders can rely on the promises made in the insurance contracts they buy.
“The needs, demographics and business environments of each state are different. That is, insurance is largely a local market as it pertains to policyholders and the promises they purchase.
Being able to closely watch and understand the unique characteristics in each state is why the regulation of insurance companies should remain where it is; residing in a competent state-based system that is continually evolving and modernizing to reflect changing conditions.”