On June 17, 2009, the Department of the Treasury released its “white paper” detailing proposals for comprehensive reform of financial industry regulation, entitled “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation.” The entire report can be found here. Among the reforms advocated by the Treasury Department is the creation of an Office of National Insurance within the Department. Treasury, which would “gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector.”
The ONI would be responsible for “monitoring” all aspects of the insurance industry, but would have no regulatory authority or oversight. This may come as a disappointment to advocates of an optional federal charter for the regulation of the insurance industry, as it leaves in place the current state-controlled regulatory scheme. According to media reports, the Obama administration does not want to push for federal regulation at this time, given the deep divisions within the insurance industry over the need for such regulation, and the consequent political fight that undoubtedly would develop.
However, the text of the white paper indicates that the Treasury Department may not be thrilled with the current regulatory paradigm, and may intend to use the ONI to push for better regulation of insurance. For example, the white paper takes this swipe at state regulation:
For over 135 years, insurance has been primarily regulated by the states, which has led to a lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher costs to consumers.
Treasury then states that it will support proposals to “modernize and improve our system of insurance regulation” based on six principles:
- Effective systemic risk regulation with respect to insurance;
- Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies;
- Meaningful and consistent consumer protection for insurance products and practices [a federal bad faith and unfair claims handling practices act?];
- Increased national uniformity through either a federal charter or effective action by the states;
- Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business [e.g., AIG’s Financial Products Division, responsible for selling the credit default swaps that sank AIG];
- International coordination.
Moreover, the white paper notes that the European Union recently passed legislation that will require a foreign insurance company operating in its member states to be subject to supervision in the company’s home country comparable to the supervision required in the EU. Treasury proposed that the ONI will work with other nations to meet this requirement.
Thus, it appears that Treasury intends to take a much more active role in the oversight of the insurance industry, and will use the ONI as a means to push for further regulatory reforms, up to and including a possible eventual federal charter. Rumors of the death of federal regulation of insurance may be greatly exaggerated.