|by Darrell Delamaide, USA TODAY|
How's that for efficiency?
The Dodd-Frank financial reform act established the FIO to coordinate federal government policy on the insurance industry, which currently is regulated exclusively by the states.
Dodd-Frank made it clear that the new office does not have any regulatory authority itself, but mandated the FIO to produce a report "not later than 18 months" after enactment of Dodd-Frank on what might be needed to modernize insurance regulation.
Dodd-Frank was enacted
Not surprisingly, this new office in the
"The need for uniformity and the realities of globally active, diversified financial firms compel the conclusion that federal involvement of some kind in insurance regulation is necessary," the report said. "Regulation at the federal level would improve uniformity, efficiency, and consistency."
Well, compulsion is in the eye of the beholder and the case has yet to be made that federal regulation is efficient.
After all, it was federal regulators like the Federal Reserve that allowed numerous abuses in mortgage lending, from liar loans to robo-signing, that led to the financial crisis.
It was federal regulators like the
The new FIO report warns that state regulators are "more prone" to regulatory "capture" – when the influence of the regulated industry is so strong it effectively controls the supervisory agency — even though federal agencies like the
It was the failure of federal regulators, after all, to monitor, detect or head off the financial crisis that necessitated the 848-page Dodd-Frank law in the first place, as legislators tried to fill the gaps in regulatory tools and set standards for enforcement.
And now those agencies are blowing deadlines prescribed in the law to implement these new rules, with the bulk of regulations mandated by the law now months or years overdue.
Do we really need efficiency like this in insurance regulation?
After all, people lost billions in the financial crisis from the malfeasance of banks and securities firms regulated by federal agencies, but no one lost any money on insurance policies regulated by the states.
The biggest argument the FIO report could muster infavor of a federal insurance regulator was the need to bail out
"AIG's near-collapse revealed that, despite having several functional regulators, a single regulator did not exercise the responsibility for understanding and supervising the enterprise as a whole," the FIO report said.
That may be true, but the problem with AIG was not in its insurance activity but in its speculative dealing in credit default swaps through a unit nominally supervised by the now-defunct federal regulator, the
It is far from clear how the "hybrid" solution proposed by the FIO – to overlay a federal insurance regulator on top of continued supervision by state agencies – would solve that problem. In fact, it would lead almost inevitably to blurred lines of responsibility and the "regulatory arbitrage" – playing one regulator off against the other – that the FIO says it wants to eliminate.
Besides, there is already a solution for the giant, globally active insurance firms that have expanded into other types of financial trading and speculation.
On a global basis through the Financial Stability Board and in the U.S. through the Federal Reserve, giant firms like AIG,
The FIO argues that the current system of state regulation of insurance is inefficient and excessively costly because big nationwide insurers, as well as their foreign competitors like Axa of
If that means that someone in my state is making sure the insurance policy I buy is fairly priced and has the reserves behind it to guarantee my benefits, then I might prefer a few extra pennies on my premium for that type of "inefficiency" rather than the "efficiency" demonstrated by federal regulators.
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