July 19, 2010
Dodd-Frank: The Not Quite Yet Federalization of Insurance Regulation
Posted by David Zaring

Insurance, often to the consternation of the largest firms, is regulated by the states, with a consumer protection and litigation ethos (different from the disclose, disclose ethos of securities regulation and the safe and sound ethos of banking regulation, if you want to be broad brush about it).  The states often tout the stability of the insurance industry as a reason not to change things.  In this view, it is not New York that was to blame for the collapse of AIG - its ordinary insurance operations were quite stable - but the regulatory gap in which its financial products subsidiary operated, which was basically making bets about the creditworthiness of corporate debt.

Dodd-Frank does a wee bit of federalization of insurance, and it is worth being clear on exactly how much.  It creates a Federal Insurance Office, sites it in Treasury, and puts its director on the council of financial regulators that are supposed to coordinate regulatory policy in the future, albeit in a nonvoting capacity.  The office would make recommendations about who in the insurance industry warrants labeling as "systemically significant."  And it must otherwise monitor the industry, and advise the secretary on international and domestic insurance issues (the international issues means that the FIO will be participating, presumably, in the efforts to harmonize international insurance rules; Congress also gave Treasury the power to enter into international insurance agreements in the future).  The office has subpoena powers to assist in this information gathering, has the power to preempt state insurance rules that violate international agreements or discriminate against foreign insurers.

On the other hand, the innovation isn't earth shattering in other ways.  The FIO director would be a career civil servant, rather than a political appointee.  The office is not permitted to examine health, long term care, and crop insurance.  There's an explicit provision in Dodd-Frank preserving the regulatory authority of states over their insurers.

So what appears to be going on here is a sense that insurance regulators are protecting local businesses, in addition to a realization that insurance companies can be systemically significant.  The FIO is designed to keep the government apprised of the latter possibility, while international competition and coordination is being encouraged with a view to addressing the former problem.  It is interesting because, in my view, it represents a hope that the idiosyncracies of state regulation of insurance will fade away with globalization, coordination, and the light touch of a brand new federal regulator with some powers over an old industry.

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