Insurance in the United States is, of course, historically and currently regulated not by the federal government but by the individual states. However, the 50 state insurance commissioners have for decades coordinated their activities through the National Association of Insurance Commissioners (NAIC), an organization of their own creation and support. Why not make the NAIC an arm of the federal government and give the U.S. President the right to appoint its leadership (just as he appoints the head of the Treasury and the Federal Reserve). We could call the head the national insurance commissioner. The NAIC would thus become the federal regulatory arm for insurance, and the 50 state insurance departments would be its field organization. We would thus no longer need high-level insurance commissioners for each state (maybe there could be a deputy commissioner for each region of the country), and we could save a lot of money by consolidating many functions which are duplicated in the 50 individual state insurance departments. The money saved could be used to fund any additional staff required in Washington (the NAIC already has some staff there, by the way) and for strengthening the oversight functions which are sparse and beleagured in many states. With this approach, we would have federal regulation, but with a local touch. And we wouldn’t have increased the size of government vis-a-vis the private sector – only made the governmental function more effective by uniting its fragmented energies.
No new taxes would be needed to fund this approach. States typically aren’t spending on regulation all the premium taxes they collect from insurance companies anyway. In fact, states typically spend only a fraction of the premium taxes they collect on the operation of their insurance departments. The majority of those funds go into the general revenues of the states.
While we’re at it, as part of this change, why don’t we require premium taxes to be disclosed on each policy? I sure wouldn’t like it if sales taxes were not disclosed on the receipts from my retail purchases. Would you prefer that sales taxes be buried in the price of the products you buy and not be disclosed to you? Premium taxes are levied on all forms of insurance written but are not disclosed to the consumers and businesses who are ultimately paying the tax. But I digress.
I like the idea of nationalizing the NAIC (i.e. having single federal-state system) better than an optional federal charter for a couple of reasons. First, one regulatory system for insurance will be cheaper than two. Second, one regulatory system will be fairer than two. Critics of the optional federal charter are right when they say it creates the environment for regulatory arbitrage, where insurers will choose the regulator they assume will be most supportive of their interests. That won’t always be in the interests of policyholders for whom the regulatory function exists in the first place. Sports teams don’t get to pick their referees.
So what’s wrong with state regulation and why shouldn’t we stick with that? Well, I do concede that the devil we know is sometimes more desirable than the devil we don’t. And I don’t believe federal regulators will individually be better than state regulators. I do believe, however, that state regulation is an anachronism in our time. It is one of the few commercial activities that is still regulated this 18th-century way, depriving insurance of the scale advantages enjoyed by almost all other financial services, not to mention manufacturing and other industries. Its most destructive effect is to retard productivity and innovation by essentially requiring that there be 50 different ways to do something. Having worked in both banking technology and insurance technology I can tell you that banking automation (including debit cards, ATM’s, credit cards, etc.) wouldn’t be where it is today if there were 50 different sets of rules about how to process a deposit or withdrawal. So, even if the quality of regulation did not improve with nationalizing the function, the road to greater productivity and innovation, and therefore lower prices and better products, would be paved. Do auto insurance buyers in Ohio have needs so different from drivers in Indiana that each requires its own separate regulatory agency? Do policyholders in those two states know they are paying for this redundancy?
There is yet another rather glaring and current argument for national and against state regulation: AIG. Now the argument that proponents of state regulation have made regarding AIG has been that the insurance subsidiaries of AIG are all in good shape, and indeed that seems to be the case. But if the doctor says that all the body parts he was caring for were in good shape when some other body part caused the patient’s death, what good is that? We need a regulatory function of sufficient size and scope to oversee the size and scope of companies that it’s regulating.
So, there you have it. No more 50-state regulation. No more talk of optional federal chartering. Just convert the NAIC from its advisory status to having full regulatory status as an extension of the executive branch of the federal government. No, it wouldn’t be painless. And it wouldn’t be easy. But it would be logical. And practical.
Tags: AIG, federal, premium tax, regulation, state
March 24, 2009 at 4:37 am |
Mike, theory is a wonderful thing (Communism works perfectly in theory). The problems that will arise with nationalizing insurance is epitomized in a new law proposed to remove the McCarren-Ferguson antitrust exemption. On a broader perspective, I don’t think ascribing to the federal government the ability to do things better thatn the various states is bourne out by the performance of federal entities in recent crises.
In typical political fashion the cure doesn’t address the disease. (See: http://www.property-casualty.com/News/2009/3/Pages/Bill-To-Repeal-Insurance-Antitrust-Exemption-Scored-By-Trade-Units.aspx). From the national Underwriter.
This is not to say that there is not a need to address some matters at the national level, but rather to say that addressing some of the problems does not means fundamentally changing the extire regulatory environment.
March 24, 2009 at 5:06 am |
Don, thanks for your comment. Actually, I never thought Communism worked well in theory (confiscation of private property, government control of the means of production, elimination of individual incentive, etc.). As for the recently proposed law to remove the antitrust exemption in McCarran-Ferguson while retaining state regulation, I agree with you completely that it is ill-conceived legislation. It sounds punitive and as if it were born out of the public’s outrage about AIG bonuses – not very constructive. I also agree with your point about the federal regulators being no “better” at regulation than state regulators, and tried to say so. I am in no way suggesting that federal regulation of insurance would have prevented the financial meltdown we face (though it likely would not have allowed the $52T market in credit default swaps to be completely unregulated). For me, the disease is lack of sufficient productivity and innovation in the insurance industry brought on largely by an antiquated regulatory system which ceased being applied to almost every other form of commerce decades ago. When people begin to say to banks and securities firms, “I wish you served me as efficiently as my insurance company does,” then I will consider the disease cured.
March 25, 2009 at 6:50 pm |
By the way, McKinsey now says state regulation is not enough. See Business Insurance article or write McKinsey for Improving Property and Casualty Insurance Regulation in the U.S. at insurance@mckinsey.com.
March 27, 2009 at 12:26 pm |
Mike, I completely support the idea of consolidating and rationalizing (which sounds so much less sinister than nationalizing) insurance regulation at the Federal level. In fact, I nominate you as the first National Insurance Commissioner. That way you could actually learn first hand just how good an idea this is. Please let me know if you would like me to share the idea with my friends from here in Chicago who are temporarily working in Washington.
March 27, 2009 at 12:35 pm |
Stephen, I’m torn between being encouraged that you like the idea but discouraged that you would wish upon me such a fate.
March 27, 2009 at 12:50 pm |
Stephen, as to your point about “consolidating and rationalizing” you are quite right. I used “nationalize” loosely, and because it’s being thrown about so much these days. Normally, “nationalize” refers to government taking over something that is privately-owned. In this case, the government would be taking over something that is already governmental – an action not worthy of sinister connotations, of course, because there’s no loss of private property. You are also right to imply that “federalize” would be the more precise term to use because the word “federal” itself implies a blend of national and state powers.