Revisiting insurance regulatory reform in a post-crisis world

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the conventional wisdom was that insurers had largely escaped the slew of new federal rules. Even as AIG was held out as the poster child for bad behavior during the financial crisis, no provision of Dodd-Frank was specifically designed to reform insurance regulation. The business of insurance was explicitly carved out from the purview of the new Consumer Financial Protection Bureau. The new Federal Insurance Office (FIO), housed within the Treasury Department, was given no domestic regulatory authority and no power to enforce existing rules. 

Yet today, nearly five years later, it is increasingly clear that Dodd-Frank has transformed the regulation of insurance in ways that have been profound, unanticipated and still not fully understood. 

{mosads}Most strikingly, even as Dodd-Frank affirmed lawmakers’ commitment to state-based oversight, it effectively created a federal insurance regulator: the Federal Reserve. Dodd-Frank called for all so-called systemically important financial institutions (SIFIs) to be regulated by the Fed – a group that now includes three insurance giants. In addition, the Fed gained regulatory authority over all companies organized as thrift holding companies, which includes many large, well-known insurance companies. Taken together, these changes mean that the Federal Reserve now oversees about one-third of the life insurance industry and one-quarter of the property and casualty industry, according to research by the Bipartisan Policy Center (BPC). In other words, the Fed plays a significant role in regulating insurance for roughly one in four cars on the road and one in three people with life insurance. 

Of course, the business of insurance and the business of banking are different in fundamental ways. Banking, is about mitigating risk and avoiding concentration in certain activities. Insurance is about agglomerating risk and managing it; finding safety and soundness in actuarial tables and the law of large numbers. Managing the failure of a bank is about acting quickly, preserving franchise value and avoiding runs by short-term creditors (those who have deposit accounts). Managing the failure of an insurance company is about taking a long-run perspective as liabilities slowly run off the books. 

These different business models demand different regulatory policies, and they raise a number of important questions: Can the bank regulators tasked with implementing Dodd-Frank transform themselves into insurance regulators? Is the business of insurance, or are individual insurance companies, systemically important? Does the current insurance regulatory structure serve the interests of consumers, and does it strike the right balance between financial stability and economic growth and efficiency? How could the state regulatory system be improved? What should be the federal role in insurance regulation? Who speaks for the United States in global insurance negotiations, and who should? And are there ways to improve aspects of Dodd-Frank that just don’t work well for insurance companies? 

There is good reason to believe we can find bipartisan solutions. Legislation by Sens. Sherrod Brown (D-Ohio), Mike Johanns (R-Neb.), and Susan Collins (R-Maine) received unanimous support in Congress last December and amended Dodd-Frank to grant the Federal Reserve explicit authority to treat insurance companies differently from banks. This was an important step to recalibrate our regulations and avoid the trap of one-size-fits-all rules. 

But there is still more work to do. We must better understand how the Fed is exercising this authority and adapting to this new regulatory mission. Under questioning before the Senate Banking Committee earlier this week, Fed Chair Janet Yellen reported that the Fed has “acquired expertise” by hiring insurance experts and consulting with state insurance regulators and FIO. It remains unclear, however, just how many insurance experts the Fed has hired, or how much authority they have been given, to supervise insurance institutions that hold trillions of dollars in assets and the financial security of millions of policyholders in their hands. We need a clear-eyed assessment of whether the Fed is up to the task and fresh ideas to improve oversight. 

In addition, there has not been federal, FDIC-style deposit insurance to backstop the collapse of a major insurer. States have fully regulated insurance companies, including for safety and soundness and consumer protection, as well as managing their failures. However, in Congress’ desire to end the “too-big-to-fail” problem, Dodd-Frank granted the FDIC sweeping authority to govern the failures of large, complex banks and SIFI institutions. As a result, the FDIC is now potentially in charge of the failure resolution of several major insurance companies. We need to examine whether the FDIC’s resolution regime, which was designed for failed banks, can be adapted to resolve these failed insurers, or whether it makes more sense to rely on the current state-based insurance resolution system. 

We also need to consider whether an optional federal insurance charter makes sense in a post-Dodd Frank world. Prior to the financial crisis, major bipartisan legislation was proposed in both the House and Senate that would create a federal insurance charter and regulator. The Obama administration was open to this idea, but it was ultimately not incorporated into Dodd-Frank. Given the unexpectedly prominent role that the Fed and FDIC now play, the time is ripe to revisit this idea. 

We are co-chairing a new task force at the Bipartisan Policy Center to explore these and other important topics. By examining the facts, we hope to come up with concrete recommendations that can improve insurance regulation at the state, federal and international levels. The insurance market is a vital component of the economy. We need smart and meaningful reforms to ensure that it stays that way.  

McCartney is the former Nebraska State Insurance Commissioner and president of the National Association of Insurance Commissioners (NAIC). Litan (@BobLitan), a financial regulatory expert, is former director of research at the Kauffman Foundation and Bloomberg Government. Both serve as co-chairs of the Bipartisan Policy Center’s Insurance Task Force.