As a claims adjuster, you are on the front lines every day as you guide insurance consumers through many a trying time. You play a unique role in the insurance industry, as you must balance the competing—and often conflicting—interests and opinions of insureds, insurers and myriad experts.
In these times of financial uncertainty, your job is likely more challenging than ever before. The current instability in the financial markets is a concern from the front offices of Wall Street to the front porches of Main Street. With good reason, consumers across the country are questioning the safety and soundness of their investments, their insurance and even their bank accounts.
In times like these, the first questions on everyone’s mind—and rightly so—are often: Who’s to blame? What went wrong? What should be done to fix it?
The opinions are many and truly workable solutions are few. Capitol Hill proponents of a national insurance regulator—along with a few trade associations—didn’t lose any time in exploiting AIG’s federal bailout to justify stripping the states of their regulatory authority over the business of insurance.
An examination of the facts will clearly show that these folks have gotten it wrong and are letting their desire to have an optional federal charter get in the way of making a common sense recommendation to address the problem.
AIG: What are the Facts?
- Although American International Group, Inc. (AIG) generally is known to the public as the world’s largest insurer, in truth it is a financial services conglomerate.
- AIG is a financial holding company that owns 71 U.S.-based insurance entities and 176 other financial services companies throughout the world. These include banks, securities firms and non-U.S. insurers, along with other related businesses like premium finance companies.
- The 71 state-regulated insurance entities are not the problem. They are all financially sound, or, in insurance regulatory terms, solvent, and fully able to pay claims presented by policyholders and claimants.
- The problem lies with the AIG financial holding company that is subject to federal regulatory oversight by the U.S. Office of Thrift Supervision (OTS). The AIG financial holding company took on more risk than it could handle when investing in collateralized debt instruments, such as credit derivative swaps on mortgage-backed securities. It is important to note thatthese types of investments are financial products, not state-regulated insurance products. When the U.S. housing markets experienced a downturn, these risky investments lost lots of money for the AIG financial holding company.
- Even if there had been an optional federal charter for insurers, and some or all ofthe 71 U.S. based AIG insurance entities had selected to be regulated bythe federal insurance regulator, the problem at the AIG parent company level would not have been prevented.
- State insurance regulators are proud of the important work they do every day to protect America’s insurance consumers by using conservative accounting and investment rules. It is this conservative approach to investments that keeps insurers from investing inordinate sums in risky investments, such as the mortgage-based securities, which is what caused difficulties for the AIG financial holding company.
- Even throughout the AIG financial holding company’s liquidity crisis, consumers remained protected by insurance regulatory rules that prevented the parent company from simply raiding capital from its profitable and well-capitalized insurance subsidiaries. A coordinated effort by the nation’s insurance regulators ensured that no policyholder assets were used for anypart of this transaction.
- State insurance regulators have authority over intercompany transactions with the AIG insurers. They are closely monitoring any proposed transactions to ensure they will not threaten the ability of the insurers to paypolicyholder claims.
- Insurance regulators from every state, especially those regulators whooversee a large number of AIG insurance subsidiaries, have been involved in every step of this process, with the primary focus of safeguarding the assets of the insurers so that they are available for the protection of policyholders and claimants.
AIG: What is the Solution?
Let’s start with what is not the solution. There is no reason to believe that anoptional federal charter for insurers would have done anything to address this problem. Remember, AIG is a federally regulated financial holding company that took on excessive risk and is suffering the consequences of itspoor judgment. Because this financial holding company is not an insurer, it would not have been regulated by a federal insurance regulator if there were one.
The solution lies not in adding more regulation by either the states or the federal government, but in making the markets for these risky securities more transparent so that buyers know about the underlying elements of each bundled security they are purchasing.
There are ways to create the necessary transparency for these transactions. One way is to create a transaction platform where market participants, as well as state and federal regulators, have access to view the disclosures and the transaction details so that the markets become transparent rather than opaque. Transparent information about the transaction details will keep everyone honest, while allowing all parties to make a reasonable profit from the transactions placed through the platform.
Illuminating the markets is the best way to keep all market participants, and all market regulators, informed with the most accurate information available to make the best financial decisions. Remember, the reason for the financial difficulties was the lack of understanding, due to a lack of transparency, by the AIG financial holding company regarding the financial instruments they had purchased.
State insurance regulators also suggest that federal banking regulators look to state insurance regulation regarding, among other things, restrictions on derivative activities, limits on high concentrations in investment types, and appropriate minimum capital and surplus requirements.
Policyholder Protection is Top Priority
Having served as the front line of U.S. insurance regulation for more than 150 years, state insurance regulators have a record of consumer protection and industry oversight that is second to none. The NAIC’s opinion is that optional regulatory regimes lead to regulatory arbitrage and gaps in oversight. They are not good for anyone, least of all consumers. The states have no interest in competing in a race to the bottom that leaves residents confused and the hands of state government tied.
Insurance is a unique and complex product that is fundamentally different from other financial services, such as banking and securities. However, ever since the adoption of the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA), Congress has considered several proposals to federalize insurance regulation either by creating an Optional of Federal Charter (OFC) for chartering insurance companies or by requiring the states to adopt uniform insurance regulations.
Such proposals include the Insurance Consumer Protection Act of 2003 (ICPA), the National Insurance Act (NIA), and the State Modernization and Regulatory Transparency Act (the SMART Act). In addition, in March 2008, the U.S. Department of the Treasury weighed in favor of federalizing insurance regulation in its “Blueprint for a Modernized Financial Regulatory Structure.”
H.R. 5840: Office of Insurance Information
While state insurance regulators disagree with the Treasury’s ultimate solution for insurance regulation—namely, an optional federal charter—the report’s recommendation for increased knowledge and expertise in insurance at the federal level is a good one.
For that reason, the NAIC has offered its support of H.R. 5840, which would establish an Office of Insurance Information within the Department of the Treasury to gather data and advise the Treasury Secretary on key international and domestic insurance issues.
The bill enhances the ability of the states to send and receive confidential data with the federal government. It also ensures that the states will be able to protect prudential regulations in international insurance agreements. Most notably, H.R. 5840 specifies that it is does not establish supervisory or regulatory authority by the Office or the Treasury over the business of insurance.
Institutional knowledge of insurance issues at the federal level is fitting in this age of global competition and global challenges. This federal knowledge, of course, should be partnered with the state insurance regulatory system and institutional knowledge that has existed and operated effectively.
State insurance regulators continue to believe that the federal government should not be in the business of regulating insurance, and will continue to unequivocally reject any effort to use this or other legislation as a justification for further federal involvement. However, a willingness to work constructively on the targeted issues addressed by this legislation should not be construed as implicit acceptance of federal intervention.
State insurance regulators are strong advocates for consumers, but also strive to provide a stable, efficient regulatory environment for insurers, reinsurers, producers and other industry participants. They work collectively through the NAIC to streamline oversight, stimulate competition and eliminate redundancies between the jurisdictions. These efforts constantly are evolving, and the scrutiny of Congress to assist in finding ways to better serve consumers and the industry is welcomed.
Insurance regulation must be reformed and improved. While those efforts should always start at the state level, regulators have asked Congress to work collaboratively to appropriately target efforts to strengthen the existing state system where areas necessitating federal assistance are identified constantly.
Evolution
State insurance regulators understand that protecting America’s insurance consumers is our first responsibility. They also understand that commercial insurance markets have changed, and that modernization of state insurance standards and procedures is needed to facilitate more streamlined, harmonized, and efficient regulatory compliance for insurers and producers.
The NAIC and its members—representing the citizens, taxpayers, and governments of all 50 states, the District of Columbia and the five U.S. territories—will continue to share its collective expertise with Congress on insurance issues having a national and global impact.
State insurance regulators look forward to coordinating efforts to help enhance the stability of the nation’s financial markets, minimize disruption to our economy and—above all—ensure that every American’s financial future is protected.
Sandy Praeger is the Kansas Insurance Commissioner, and is responsible for regulating all insurance sold in Kansas and overseeing the nearly 1,700 insurance companies and 85,000 agents licensed to do business in the state. She also serves as the 2008 president of the National Association of Insurance Commissioners (NAIC).