OAKLAND, Calif., Sept. 14, 2009—As the public debate over health care reform heats up and property insurers prepare for peak hurricane season, the state of the country’s insurance regulation system remains a critical, though less-publicized, issue. Could a federal-based model prove more efficient than the current state-run system, or would increased government oversight simply produce excessive regulatory actions and more pressure from interest groups? Adeptly avoiding partisan attacks, a new Independent Policy Report from the Independent Institute provides a measured analysis of recent proposals for such revisions.
In Alternative Frameworks for Insurance Regulation in the United States (September 2009), economists and Independent Institute research fellows Martin F. Grace and Robert W. Klein analyze the benefits and deficiencies of legislation proposals that counter state-run regulation of the insurance industry. In their study, Grace and Klein, co-directors of Georgia State University’s Center for Risk Management and Insurance Research, review proposals such as an optional federal charter (OFC), the State Modernization and Regulatory Transparency (SMART) Act, and a single-state regulatory system, while assessing the implications for regulatory and market efficiency.
For the past 150 years, the authors write, the states have regulated the insurance industry, repeatedly opposing policies designed to create more federal intervention. Although the industry once supported the states in this resistance, their support has waned, with numerous insurers now backing the creation of an OFC, first seen in 2007’s proposed National Insurance Act. An OFC would enact a single uniform set of laws and regulations nationwide by “[preempting] state regulation for insurers and agents regulated by the federal government.” It would also modify antitrust law for insurers. As Grace and Klein note, an OFC would eliminate rate regulation—of great interest to property-casualty insurers—and employ a more principles-based approach. They add, however, that “the bifurcation of solvency oversight and insolvency guarantees between different government authorities invites moral hazard on the part of financial regulators.”
The authors also consider legislative proposals that have drawn less attention since the introduction of an OFC, including the SMART Act of 2004, which would “establish minimum standards that would govern various aspects of state insurance regulation.” Unlike an OFC, SMART would avoid the establishment of a federal regulator, bypassing “policy swings that would undermine market efficiency and harm consumers.” While SMART could be difficult to administer, monitor, and enforce, policies from the proposal could be incorporated into an OFC bill.
Finally, Grace and Klein highlight the advantages of a single-state regulatory system, in which an insurer could choose any state as its regulator. “An insurer would be subject to a single regulator and one set of rules,” they write, “[and also] make use of the existing state insurance regulatory agencies and avoid the need for creating a new federal bureaucracy.” Additionally, this approach would promote valuable deregulatory competition among states, with insurers selecting states with the least burdensome regulatory systems. In turn, consumers will follow.
As Grace and Klein state, “Both practical considerations and politics will encumber efforts to rationalize insurance regulation. What we are likely to see are smaller incremental changes at both the state and federal level that have been the industry’s historical legacy.” While acknowledging these difficulties, Alternative Frameworks for Insurance Regulation in the United States offers a thoughtful, engaging deliberation of policy proposals likely to become more prominent as the debate over insurance options and costs gains momentum.
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