By Senator John Sununu (R-NH), Senator Tim Johnson (D-SD),
Representative Melissa Bean (D-IL) and Representative Ed Royce (R-CA)
Wall Street Journal
September 23, 2008
Never before has the Federal Reserve felt compelled to commit tens of billions of taxpayer dollars to shore up a company it does not regulate .
But now that the Fed is doing just that with its $85 billion bailout of the American International Group (AIG), it's time for Congress to reform how insurance companies are regulated.
AIG, like almost all insurance companies operating within the U.S., doesn't fall under the purview of a single regulatory agency. It is regulated, not by the federal government, but by state governments across the country.
Why? Because insurance regulation has been left to the states. As far back as 1868, in Paul v. Virginia, the Supreme Court favored regulating insurance state by state. Paul was later overturned, but in 1945 Congress passed a law making insurance regulation a state issue.
The move last Tuesday night by the Fed is a clear sign that the status quo is no longer a pragmatic -- or responsible -- option. Letting this 19th-century regulatory model govern a 21st-century global marketplace poses obvious and increasing risks to the health of the insurance industry, American taxpayers and our capital markets. Congress needs to address this matter before the government is forced to bail out another failed insurance company.
Over the past two years, we have warned against potential, systemic blind spots in the state-based regulatory model. Because each state is responsible only for its individual jurisdiction, no state can keep tabs on insurance companies that cross state or international boundaries. Consequently, the impact insurers can have on our capital markets and national economy is almost entirely overlooked.
Just look at AIG. New York regulators apparently did all they could to prevent the company's failure. But only 12 of AIG's 209 subsidiaries fall under New York's jurisdiction. The remaining subsidiaries report to other regulators.
To overcome this problem, last year we introduced bipartisan legislation in the House and the Senate to establish an optional federal charter (OFC) for insurance companies.
An OFC would address many of the problems found in the current, state-based system. It would remove regulatory blind spots. And it would establish a world-class regulator within the federal government capable of properly overseeing insurers operating in the global marketplace.
At the end of 2007, for example, AIG had over $1 trillion in assets. By comparison, only three of our 50 states had GDPs larger than $1 trillion last year. Clearly, some insurers have become too complex and too interconnected world-wide for the limited resources of state regulators to handle.
What's more, the state-based system drives up the price of insurance, because it is costly to comply with 50 different sets of regulations .
But the stakes are much higher than more expensive premiums. Unless Congress provides an alternative to the state-based regulatory model, it is likely that the federal government (i.e., American taxpayers) will be forced to pay for more bailouts in the future.
That isn't a reasonable model for protecting the integrity of our financial system. Individual AIG policy holders are, of course, secure. But financial markets may question the ability of regulators to protect against insurers that could fail and pose a systemic risk. Considering the impact the Fed thought a faltering AIG might have had on capital markets, who can blame them?
The preservation of our pre-eminence in the global markets depends on a modern regulatory structure that can handle the complexity of today's businesses. An OFC will provide a safer, more cost-effective regulatory environment for our economy and for our consumers.
Today's financial crisis demands that we respond with reforms to prevent the same mistakes from being made again. We must find ways to fundamentally improve the regulatory structure of our financial system. Creating an optional federal charter for insurance companies is something that we need and need now.