Yesterday, the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing entitled “How Should the Federal Government Oversee Insurance?” The following witnesses testified at the hearing:

  • Baird Webel, Specialist in Financial Economics, Congressional Research Service
  • Patricia Guinn, Managing Director, Global Risk and Financial Services Business, Towers Perrin
  • J. Robert Hunter, Director of Insurance, Consumer Federation of America
  • Martin F. Grace, James S. Kemper Professor, Department of Risk Management and Insurance, Georgia State University
  • Scott Harrington, Alan B. Miller Professor, Wharton School, University of Pennsylvania

In his opening remarks, Subcommittee Chairman Paul Kanjorski (D-PA) urged Congress to “address insurance activities as it creates a new legislative regime to monitor systemic risks and unwind failing non-depository institutions.” “Insurance is complex,” said Kanjorski, “and it is time for the Federal government to appreciate its importance. … We must therefore consider whether to regulate these elements of the industry nationally.”

Representative Scott Garrett (R-NJ), Ranking Member of the Subcommittee, cautioned against broad federal regulation of the insurance industry. “A certain level or regulation is appropriate,” stated Garrett, “but many of the reforms being talked about now will reduce market discipline and increase moral hazard.” Garret distinguished insurance companies from banks, arguing that “they are not nearly as interconnected with the rest of the financial services sector and the economy as a whole.”

Mr. Webel outlined the options reviewed in the Congressional Research Service’s Options for Insurance Regulatory Reform:

  1. Doing nothing;
  2. Creating a federal Office of Insurance Reform;
  3. Harmonizing state laws via federal preemption;
  4. Creating a federal systemic risk regulator;
  5. Creating a federal solvency regulator;
  6. Establishing a federal insurance charter;
  7. Reforming the Complete Financial Services regulatory system.

Webel noted that “Most of these options have been present in some form in proposals that predate the current crisis.”

Ms. Guinn noted that “U.S. insurers, in general, are weathering the financial crisis in a stronger position than the banking industry,” pointing to more effective risk management and an “existing regulatory framework that concentrates primarily on solvency and policyholder protection.” She encouraged any federal regulation to build on these strengths. She also argued that the current regulatory structure is outdated and can “inadvertently encourage regulatory and capital arbitrage.” She encouraged an expansion of federal regulatory oversight, but cautioned against applying “a regulatory regimen designed for banks” to the insurance industry. “Regulation at the federal level needs to be carefully structured and designed to supplement the existing regulatory framework, not replace it.”

Speaking on behalf of the Consumer Federation of America, Mr. Hunter stated that “there is systemic risk in insurance, requiring a federal systemic risk regulator.” Hunter opposed an optional federal charter, and advocated letting the states continue to handle consumer protection regulation. He argued for regulation prohibiting collusion in the pricing of property/casualty insurance, endorsing the Insurance Industry Competition Act of 2009. Hunter also called for additional regulation “allowing the FTC to study insurance and assist the states in identifying consumer protection issues that have national ramifications.”

Prof. Grace also opposed an optional federal charter, stating that it “is based on a view of the world that had changed significantly in the last two years.” He argued that federal regulation “can succeed and be economically viable in the area of removing the costs of conflicting state laws and reducing the effect of systemic risk on all financial markets.” He specifically advocated the transfer of solvency and market regulation to the federal level. He concluded his testimony by expressing his pessimism about the future of state regulation, adding that “states have absolutely no ability or incentive to be proactive.”

Prof. Harrington opposed the creation of a systemic risk regulator. He argued that market discipline could be “undermined with an attendant increase in moral hazard,” that adverse consequences for competition between insurers are likely, and that there is no guarantee risk would be effectively reduced. He also opposed regulating the insurance industry similarly to the banking industry, claiming that “systemic risk is much greater in banking than in insurance.” He concluded by arguing that any federal intervention should be “designed to encourage, or at least not undermine, market discipline.”