Obama Administration Outlines Regulatory Plans for Insurance and Financial Markets
By: Travis Miller
President Obama recently unveiled his administration’s white paper on modernizing the regulation of financial markets, including the insurance industry. The white paper, entitled Financial Regulatory Reform: A New Foundation can be found in the Insurance section of our website (www.radeylaw.com) under the Resources tab.
The President commented that the unraveling of financial institutions and a lack of adequate regulatory structures to prevent abuse and excess was one of the most significant factors in the country’s economic downturn. The President contends that the current outdated regulatory system was simply overwhelmed by the speed, scope and sophistication of today’s global economy.
In announcing his administration’s plans, the President noted that regulators in some cases lacked authority to take action due to gaps in regulatory systems. In other cases, regulatory systems overlapped and resulted in a lack of accountability among regulators. The
President points out that while many regulators were responsible for overseeing individual firms, no one was responsible for protecting the overall system. His administration intends to eliminate the gaps that allowed large firms to present financial risk to the economy while increasing the accountability of regulatory authorities by streamlining the oversight process.
The President proposes that new authority be given to the Federal Reserve to regulate bank holding companies and other large firms that pose a threat to the economy. The administration also will create an oversight council to coordinate regulation across markets and share information. The proposal also will call for an agency charged with protecting consumers.
The Obama administration’s plans for updating regulatory systems include components directed to the insurance industry. To enhance oversight of the insurance sector, the administration proposes to create an Office of National Insurance within the Treasury. The Office of National Insurance will be charged with gathering information, developing expertise, negotiating international agreements, and coordinating policy in the insurance sector. The Treasury will support proposals to modernize the overall regulatory structure and improve insurance regulation with six basic principles in mind:
- Effective systemic risk regulation with respect to insurance–The administration intends to address risks to the financial system posed by various companies, including insurers.
- Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies–The administration intends to focus on risk management, including management of liquidity and duration risk.
- Meaningful and consistent consumer protection for insurance products and practices–The white paper in several instances points to state variations in regulations and consumer protections. The administration contends that it will not accept regulatory changes that weaken or undermine consumer protections, but instead will seek to implement new regulations that enhance protections for consumers.
- Increased national uniformity through either a federal charter or effective action by the states–The administration contends that state-based regulation has led to fragmented, inconsistent and ineffective regulation. The new scheme will seek to increase consistency in the regulatory treatment of insurance, including strong capital standards and consumer protections.
- Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business–Repeating its theme that significant gaps exist in the regulatory system, the administration intends to decrease the threat associated with holding company activities outside of the insurance business.
- International coordination–The Treasury would increase the international competitiveness of U.S. insurers through a unified approach to international transactions, which in turn would expand opportunities for the insurance industry to export its services abroad.
Proponents of a federal charter have been encouraged by the President’s statements suggesting movement toward increased uniformity. At the same time, proponents of the state-based regulatory system have pointed to comments from the President suggesting that regulatory reforms can take place within the current framework. In any event, it is clear following the recent economic downturn and troubles of high profile companies that regulatory changes are ahead for the financial services sector as a whole, and the insurance industry will be part of these changes.