Chicago — When Treasury Secretary Henry Paulson released his blueprint for a financial regulatory overhaul in March, reaction from stakeholders in all parts of the insurance industry was fast, furious and rather predictable. Proponents of an optional federal charter (OFC) for insurers, hailed the report as just the right regulatory, while OFC opponents slammed the report as opportunistic, saying the blueprint was using the mortgage crisis as cover to revive a stalled agenda. Now, as the dust settles, two new reports have taken stock of the report and its implications for the insurance industry.
One report by Needham, Mass,-based TowerGroup, titled “Paulson’s Blueprint for Insurance: A Rallying Cry for the Optional Federal Charter?,” finds that to remain competitive both domestically and abroad, the U.S. insurance industry ultimately needs to move toward a single set of regulations, as called for by the Paulson plan.
The report deems the current, state-based system “inefficient and, in some cases, ineffective in ensuring the solvency of insurers, protecting consumers and fostering a competitive marketplace, and that a regulatory structure such as the one called for in the blueprint would bring benefits to both consumers and insurance carriers.”
“The insurance marketplace is becoming increasingly global,” says David West, research area director of the TowerGroup Insurance Practice. “The U.S. market will grow increasingly uncompetitive if regulation is not more consistent with the regulatory approach taken by other nations in the global market. The most beneficial aspect of the Treasury’s proposal for both insurance consumers and insurance carriers is that it would foster a more competitive environment. This will result in more rapid and efficient product development and the removal of unnecessary price controls that exist within the current state-level approval process.”
A report from New York-based Fitch Ratings notes many of the same strengths. “A more uniform regulatory environment would spur product innovation by removing multiple approval barriers that delay widespread introduction of new products, and result in expense savings for multistate insurers by eliminating duplicate compliance costs,” it states. “Given the innate competitiveness of the insurance business, these cost savings would likely translate into more attractive pricing for policyholders, rather than excess profitability.”
However, Fitch remains neutral about passage of an OFC. “Fitch believes increased federal regulation of the insurance industry is inevitable in the long term,” the report states. “Still, Fitch does not expect passage of any OFC legislation in the near term due to continued strong opposition from several influential constituencies, election-year uncertainties and continued divisiveness in Washington.”
Sources: TowerGroup, Fitch Ratings
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