Insurance

The Committee releases a comment letter to the International Association of Insurance Supervisors (IAIS) regarding global systemically important insurers

Posted by jgrygiel on July 31, 2012   |   Comments Off

Re: Public Consultation Document, “Global Systemically Important Insurers: Proposed Assessment Methodology.”

The Committee on Capital Markets Regulation (Committee) appreciates the opportunity to comment on the International Association of Insurance Supervisors’ Public Consultation Document, “Global Systemically Important Insurers: Proposed Assessment Methodology.”

Below are responses the Committee submitted to individual paragraphs in the IAIS Proposed Methodology (Appendix A).

Q-1. Introduction – General Comments.

The Committee on Capital Markets Regulation (Committee) appreciates the opportunity to comment on the International Association of Insurance Supervisors’ (IAIS) Public Consultation Document regarding Global Systemically Important Insurers: Proposed Assessment Methodology (Proposed Methodology).

Since 2005, the Committee, composed of 33 members, has been dedicated to improving the regulation of U.S. capital markets. Our research has provided an independent and empirical foundation for public policy. In May 2009, the Committee released a comprehensive report entitled The Global Financial Crisis: A Plan for Regulatory Reform, which contains fifty-seven recommendations for making the U.S. financial regulatory structure more integrated, more effective, and more protective of investors in the wake of the financial crisis of 2008. Since then, the Committee has continued to make recommendations for regulatory reform of major areas of the U.S. financial system.

The Committee has been active in commenting on proposed regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and in particular, commented last December on the Financial Stability Oversight Council’s (FSOC) proposed rule regarding its Authority to Require Supervision and Regulation of Certain Nonbank Companies under § 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The FSOC’s proposed rules have since been finalized, and a number of the comments the Committee makes below are similar to those we made in response to FSOC’s proposal. Continue Reading…

Tagged , , ,

The Committee responds to the Federal Insurance Office request for comment on the Report to Congress on How to Modernize and Improve the System of Insurance Regulation in the United States

Posted by jgrygiel on December 16, 2011   |   Comments Off

Re: Public Input on the Report to Congress on How to Modernize and Improve the System of Insurance Regulation in the United States

Dear Mr. McRaith:

The Committee on Capital Markets Regulation (Committee) appreciates the opportunity to comment on the Federal Insurance Office’s (FIO) notice and request for comment on the Report to Congress on How to Modernize and Improve the System of Insurance Regulation in the United States.[1]

Since 2005, the Committee, composed of 32 members, has been dedicated to improving the regulation of U.S. capital markets. Our research has provided an independent and empirical foundation for public policy. In May 2009, the Committee released a comprehensive report entitled The Global Financial Crisis: A Plan for Regulatory Reform, which contains fifty-seven recommendations for making the U.S. financial regulatory structure more integrated, more effective, and more protective of investors in the wake of the financial crisis of 2008.[2] Since then, the Committee has continued to make recommendations for regulatory reform of major areas of the U.S. financial system.

We believe that any attempt to modernize and improve insurance regulation should be based on an optional federal charter system with federal preemption. This position is consistent with past positions of the Committee in support of a streamlining and simplification of our overall regulatory structure.[3] The idea of a federal charter has gained traction in recent years, including for example in the proposed National Insurance Act of 2006[4] that was re-introduced in Congress several times since. We believe such a federal charter system would offer numerous benefits in efficiency and cost by streamlining existing regulation and replacing it with a uniform regulatory framework. It would also encourage competition at a single, national level, encourage new entries in the insurance market, and reduce the speed to market for new products under the uniform standards of a single regulator.[5] As the FIO conducts its study, it should do so from the perspective of an optional federal charter as the ultimate goal.

A federal charter would reduce costs by reducing the number of licensing and compliance regimes insurers face, and allowing insurers to achieve economies of scale. Federal preemption is a critical element of any such proposal. While a single federal system poses immense potential benefits, a two-tiered system, where both federal and 51 separate state rules may apply, would increase regulatory complexity and would be a significantly worse outcome than the current system. A single consolidated regulator would also be able to deal more efficiently with other financial regulators, including regulators of banks and security firms, both in the U.S. and abroad, and “would give [U.S. insurers] a common regulatory regime more in line with their [international] competitors….”[6]

Opponents of an optional federal charter often cite inherent differences in insurance products attributable to geographic or cultural differences across states (for example, how to price property insurance in a flood-prone state, or insurance for theft in a state with high crime). To the extent that the FIO determines a federal insurance system should continue to address such differences through regulation, the FIO should consider whether a structure like that of the Federal Reserve, with a central Board of Governors and regional Federal Reserve Districts, might effectively address these concerns. We caution against a regime where the central federal regulator fully delegates certain of its responsibilities to the states, however, as such an arrangement could create uncertainty around ultimate federal preemption.

Other opponents of a federal charter have objected to federal preemption with respect to consumer protection-related issues. They argue that state regulators may be more responsive to local complaints because there are political consequences if they are not responsive.[7] There is a need for strong consumer protection to address issues including deceptive advertising, unfair policy terms, and discriminatory or unfair treatment of policyholders.[8] However, the new federal insurance regulator would be in the best position to assume these consumer protection responsibilities. As the single regulator promulgating and interpreting rules for the insurance industry, it would be well-positioned to address issues about how insurance products are sold and potential unfairness to policyholders. Furthermore, insurers would face a single set of consumer protection rules, resulting in efficiencies and cost savings.

We believe the federal consumer protection role should be given to the new federal insurance regulator rather than to the Bureau of Consumer Protection (CFPB). Unlike the case in banking regulation, where consumer protection played a secondary role to safety and soundness concerns, consumer protection is the major focus of insurance regulation. The concern with safety and soundness in insurance regulation is not principally to protect against systemic risk but rather to make sure insurance companies can honor their obligations to policyholders.

In determining the ideal structure for a federal insurance regulator, the FIO should consider existing state insurance regimes to determine what has worked well at the state level, and also what features have needed improvement. We also note that certain features of a state insurance system may not be appropriate at the federal level and vice versa. For example, multimember insurance commissions are absent among the states, which suggests a structure like that of the Federal Reserve may not work at the federal level. However, they may be more necessary at the federal level to achieve political balance.[9]

Thank you for considering our comments. Please do not hesitate to contact us at
(617) 384-5364 if we can be of any further assistance.

Respectfully submitted,

R. Glenn Hubbard, Co-chair

John L. Thornton, Co-chair

Hal S. Scott, Director

[1] Public Input on the Report to Congress on How to Modernize and Improve the System of Insurance Regulation in the United States, 76 Fed. Reg. 64,174 (proposed Oct. 17, 2011) [hereinafter Request for Comment].

[2] Comm. On Capital Mkts. Reg., The Global Financial Crisis: A Plan For Regulatory Reform (May 2009), http://www.capmktsreg.org/research.html [hereinafter the May 2009 Report].

[3] See Comm. On Capital Mkts. Reg,, Recommendations for Reorganizing the U.S. Financial Regulatory Structure (Jan, 14, 2009) ), http://www.capmktsreg.org/research.html; and the May 2009 Report.

[4] S. 2509, 109th Cong. § 2 (2006).

[5] Michael Bloomberg and Charles Schumer, “Sustaining New York’s and the US’ Global Financial Services Leadership” 117 (Jan. 2007), www.nyc.gov/html/om/pdf/ny_report_final.pdf [hereinafter the Bloomberg-Schumer Report.].

[6] Bloomberg Schumer Report at 117.

[7] Hal S. Scott, Prepared Written Testimony before the Committee on Banking, Housing and Urban Affairs, U.S. Senate 7 (July 28, 2009), http://www.capmktsreg.org/testimony.html [hereinafter Written Testimony].

[8] Henry M. Paulson et al., The Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure 131 (Mar. 2008), http://www.treasury.gov/press-center/press-releases/Pages/20083311051120043.aspx.

[9] Hal Scott, “Optional Federal Chartering of Insurance: Design of a Regulatory Structure,” Harvard Law School Public Law Research, Paper No. 07-05 (March, 2007), pp. 13-14.

Tagged ,

Hal S. Scott testifies before the Senate Committee on Banking, Housing and Urban Affairs on regulatory modernization as it relates to the insurance industry.

Posted by jgrygiel on July 28, 2009   |   Comments Off

PREPARED WRITTEN TESTIMONY OF

HAL S. SCOTT

NOMURA PROFESSOR OF INTERNATIONAL FINANCIAL SYSTEMS AT HARVARD LAW SCHOOL AND DIRECTOR OF THE COMMITTEE ON CAPITAL MARKETS REGULATION

BEFORE THE

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS UNITED STATES SENATE

JULY 28, 2009

Thank you, Chairman Dodd, Ranking Member Shelby, and members of the Committee for permitting me to testify before you today on regulatory modernization as it relates to the insurance industry.

As the Committee knows, the insurance industry represents an important place in the U.S. framework of financial regulation.  As of the first quarter of 2009, the total assets of U.S. life and property-casualty insurers were $5.7 trillion, quite significant when compared with total assets of U.S. commercial banks of $13.9 trillion.[1] Despite being a national (indeed international) industry within the financial sector whose size can be measured in the trillions, insurance—unlike the banking or securities sector—is regulated almost exclusively by each of the 50 states instead of the Federal Government.

This structure comes from a bygone era and, in the wake of the ongoing global financial crisis, must be reconsidered and changed.  I believe reform, at least initially, should come by way of establishing an optional federal charter (OFC).

My testimony is organized in three parts.[2] Part I addresses the case against the status quo and the need for an OFC.  Part II outlines how an OFC regime should be structured, and Part III introduces some additional issues to consider in reforming insurance regulation in the United States. Continue Reading…

Tagged , , ,

Committee comment on the Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions

Posted by jgrygiel on November 21, 2007   |   Comments Off

Re: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions (Docket: TREAS-DO-2007-0018)

Dear Ms. Smith:

On behalf of the Committee on Capital Markets Regulation (“Committee”), I am pleased to submit this letter in response to the Department’s request for comments on its Review of the Regulatory Structure Associated with Financial Institutions, 72 Fed. Reg. 58,939 (Oct. 17, 2007).

Over the past decade, many countries have moved towards a more consolidated structure for financial supervision. This trend poses special challenges for the United States, which has traditionally maintained a highly fragmented network of financial regulation. As compared to other leading economies, such as the United Kingdom, Germany and Japan, our system of financial regulation is becoming increasingly anomalous, and the Treasury Department is to be commended for undertaking its current review.

This comment covers two separate points. First, we identify a number of important potential benefits of consolidated financial oversight that are distinct from, and could be achieved in the absence of, the merger of specific supervisory units. Second, we offer several recommendations regarding the manner in which regulatory reform could be staged in the United States with a view towards moving initially on those features of consolidated oversight that could be implemented in the relatively near term in the absence of consolidation of existing supervisory bodies. As a second stage of reform, we recommend that the Department consider the large number of existing proposals for supervisory consolidation, and suggest that the Department expand its analysis to include pension regulation and various financial matters currently under the jurisdiction of the Department of Housing and Urban Development.

I. Benefits of Consolidated Oversight of Financial Supervision Apart From Consolidation of Supervisory Functions

In discussing the British Financial Services Authority (“FSA”) and other recent examples of consolidated financial oversight, observers quite often focus on the most visible manifestation of these reforms—the merger of banking (including thrifts and credit unions), securities, and insurance supervision into a combined agency or group of agencies. To be sure, such combinations do offer potential economies of scale and scope, and also could benefit financial firms by providing a single source of regulatory contact. However, consolidation also raises difficult issues, most importantly perhaps the banking supervisory role of the Federal Reserve. It is important to note that the consolidation of supervisory functions (licensing, examination, enforcement, and standard setting) is not necessarily the most significant feature of these recent financial reforms in other jurisdictions. Indeed, in a number of countries, consolidated supervisory agencies maintain separate supervisory divisions along traditional lines, and only consolidate certain administrative and policy-making functions.

In our view, the most important benefits of consolidated financial oversight are analytically distinct from the combination of supervisory functions. For the United States, we believe it is particularly important that the Treasury Department focus its attention on the broader benefits of consolidated oversight and to consider explicitly the extent to which these benefits might be achieved in the United States without, or at least in advance of, consolidation of supervisory functions. A number of factors argue for this approach. To begin with, the scale of the U.S. financial services industry is so vast that a wholesale consolidation of regulatory functions would potentially create a massive organization, with perhaps more than 43,000 employees compared to the 2,500 to 3,000 employed in the FSA. Moreover, full-blown consolidation of regulatory functions in the United States would raise complicated issues of how to retain the expertise of long-standing organizations with focused regulatory missions, and would encounter potential political opposition from various interest groups The Treasury Department does not need to resolve the vexing issues associated with supervisory consolidation before achieving benefits of consolidated oversight that are both more important and more easily implemented.

One obvious advantage of consolidated financial oversight that has nothing to do with supervisory consolidation is the benefit that the country would derive from having one governmental body with a view of the entire financial services sector. The unfolding crisis of the subprime lending market offers a good example of a supervisory problem that touches upon bank lending policies (OCC, OTS, FDIC and Federal Reserve), oversight of credit rating agencies and capital markets (SEC), and even the policing of home mortgage originations (HUD). No single regulatory agency had a full view of the process and there was no obvious mechanism for coordinating oversight, even though problems of subprime lending were identified many years ago and many individual agencies were focused on aspects of that problem.

Another possible benefit of consolidated oversight is the ability to take a more objective perspective on the costs and benefits of regulatory requirements. Although cost-benefit analysis has been a feature of administrative oversight in the United States for many years, financial regulators have not always given the subject as much attention as it deserves. Moreover, even when a regulatory body attempts to perform cost-benefit analysis, the agency cannot help but be influenced by long-standing practices within its sector, whether that be special concern for the interest of consumers or an inclination to tilt towards industry interests. One of the great advantages of consolidated financial oversight is the existence of an organizational unit, both above the fray of daily oversight and somewhat less tied to traditional ways of doing business, to offer a more objective assessment of costs and benefits. One of the great virtues of the FSA is that it has employed precisely this perspective in its development of a risk-based approach to regulation, an approach that sometimes counsels for a lighter touch but also occasionally recommends greater intervention into market practices. Within the American system of government, one could imagine grafting this function into our regulatory system by having a consolidated oversight body offering independent cost-benefit analysis of major regulatory initiatives at the agency level or testifying before Congress on pending legislation or in the annual appropriation process.

An oversight body with a broad perspective on the financial services industry could also play a number of related roles in improving the quality of financial regulation in the United States. Take for example the issues of appropriate allocation of resources. One of the advantages of the FSA is the ability to redeploy staffing and budgetary resources as the supervisory challenges evolve. Even without full consolidation of supervisory function, an oversight body could advise the President and Congress on staffing and personnel needs, recommending for example when resources should be shifted from one sector to another. By providing a venue where supervisory personnel from various sectors could come together to address cross-sectoral concerns, such an oversight body might help facilitate the exchange of cross-industry knowledge and heighten the awareness of alternative regulatory approaches. This education function was a crucial feature of the early years of the FSA and helped establish the agency’s reputation for a pragmatic and cosmopolitan regulatory style. In the U.S. context, one might also envision an oversight body playing a coordinating role to ensure that government- sponsored research into pending policy issues (currently conducted on a piecemeal basis within many different organizations) was addressing the most important topics with an appropriately broad perspective. This would be of value by improving our systems of consumer protection and enhancing the prudential side of financial regulation. The President’s Working Group on Financial Markets (“PWG”) has already taken an important step in this direction through the “Agreement Among PWG and U.S. Agency Principals on Principles and Guidelines Regarding Private Pools of Capital” issued on February 22, 2007. This Agreement formulated broad principles that were to be adopted across different regulatory agencies.

Yet another valuable role of a consolidated regulatory oversight body is the capacity to identify and resolve regulatory gaps. With our current system of fragmented regulatory authority, the risk always exists that some new financial product will not fall squarely within the jurisdiction of any single agency. Sometimes industry participants exploit definitional ambiguities to escape regulatory requirements, while in other cases disgruntled customers attempt to recharacterize products in order to initiate litigation with novel theories for legal relief. As history has repeatedly shown, these regulatory gaps often mean that the new product will either escape oversight until a problem arises or engender years of jurisdictional squabbles that delay product introduction until the courts or often Congress intervene to police jurisdictional boundaries. An important function of a consolidated oversight body is to identify new financial products and negotiate jurisdictional disputes before problems arise or regulatory paralysis sets in.

In addition, the regulatory oversight body could serve as the principal point of contact with foreign consolidated regulatory authorities. This would enhance the ability of the U.S. to speak with one voice abroad on important principles of supervision and regulation, and give foreign authorities a counterpart. A step in this direction has already been made through the various regulatory dialogues.

II. Developing a Plan for Implementing Organizational Reform

The gist of the foregoing analysis is that many of the most important benefits of consolidated financial oversight are distinct from the matter of consolidating supervisory functions. Accordingly, we recommend as a first phase of organizational reform the Treasury Department explore the broader and arguably more important benefits of consolidated oversight that can be obtained in the absence of supervisory consolidation. On this dimension, we propose that the PWG represents a promising platform upon which a more robust consolidated oversight body could be built. Supplemented with a permanent staff (drawn in part with personnel secunded from existing regulatory agencies but also including a core of permanent employees), the PWG is well situated to pursue the oversight functions outlined above: taking a global perspective of the financial services industry, developing an unbiased perspective on risk-based oversight of the financial services industry with due consideration of cost-benefit analysis, providing both Congress and the Executive impartial analysis of the efficacy of regulatory reform proposals, identifying jurisdictional gaps and negotiating divisions of responsibility among existing regulatory bodies, and in various other respects ensuring that the financial supervision in the United States moves forward in a sensible manner in keeping with best regulatory practices around the world.

We envision that any new federal insurance chartering agency would be subject to consolidated oversight in the same manner as other federal agencies supervising banking and securities. But state supervision of insurance will remain for insurance companies that do not choose a federal charter, and at present there is no federal charter option. We envision that at some level state supervision of insurance would also be subject to consolidated oversight at the federal level.

As an important second stage, the Department should consider important issues of organizational reform of supervisory units. Much has been written already about the potential value of consolidating federal banking agencies, combining the SEC and CFTC functions, and adding a federal insurance charter. We will not review the issues here. Also of potential value could be the combination of federal insurance programs for financial institutions, bringing together the FDIC, SIPC, PBGC and potentially a new federal indemnity fund for federally chartered insurance companies. Also relevant to consider in the area of supervisory functions is the need to include the pension regulatory functions now housed in the Department of Labor and Internal Revenue Service as well as the mortgage lending and GSE oversight functions located in the Department of Housing and Urban Development.

But, to revert to the principal message of this comment, an essential first step for regulatory reform is to establish in the near term a consolidated oversight body to grab the low- hanging fruit of organizational reform that can be achieved in advance of any supervisory consolidation. Not only does this approach offer the promise of relatively quick benefit for the U.S. economy, but it also creates an expert body that could take on as its first task the development of a sensible and well-considered plan for supervisory consolidation for implementation in the second phase.

* * *

On behalf of the Committee on Capital Market Regulation, I would again like to commend the Department for taking on the important topic of regulatory reform. The Committee looks forward to working with the Department on this issue and providing whatever assistance we can in this initiative.

Sincerely yours,

Hal S. Scott, Director

Tagged ,