New York Life Insurance Compliance Lawyer & Attorney : Currin Law Office : Annuity Compliance & Insurance Regulation

In a recent ( 11/18/08) column by Michael Skapinker in the Financial Times, he discusses the tension between executive management,  who often have personal stakes in short term outcomes, and shareholders/employees/pensioners, the latter two in particular have longer term stakes in the financial well-being of the institution.   The column is titled "Every fool knows it is a job for government."    What struck me was the complete absence of any discussion of the interest of depositors, borrowers or other consumers of the services the institutions offer.   Much of the discussion relates to financial institutions and it seems to be the assumption that consumers of most financial services can move from one institution to another pretty easily.   Of course that ability to move from one provider to another is a basic tenet of the free market.  

No other financial institution has as long-term commitments to their customers  as insurers and life insurers in particular.  It is often not economically rational to move between insurers:  note all the replacement regulations designed to make this as clear as possible to consumers.  This long-term relationship is obviously not news to anyone in the life insurance industry.  But it  it continues to shock me, as more and more people seem to take federal regulation of insurance as a given in the fairly near future, that the articles dealing with the direction of regulation do not make a distinction between the short-term relationships that many financial institutions have with their customers and  the long term relationships that are important in life insurance and annuities.  

It is likely that corporate governance will again be raised as an important component of the new financial services regulatory landscape.  And  corporate governance is important, but corporate boards have a duty to shareholders, and as Michael Skapinker points out in his column, shareholders are increasingly transitory and are likely to have short-term interests too.  That is why for life insurers, regulation through the boardroom may not be as effective as it may be for other insititutions.  

Insurance consumers will always be more difficult to protect because of the long time horizons and the nature of the guarantees involved.    As we watch Insurers apply to become thrifts,  the lines among financial institutions continue to become more and more blurred.  The danger is that in the eyes of inexperienced insurance regulators, the lines between the consumers of financial services will also be blurred, and if insurance companies are not regulated in a way that safeguards their customers, not "just" their shareholders, employees and pensioners, insurance regulation will not be effective insurance regulation.  

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Having recently attended the AICP conference in Atlanta, I was struck by how accessible state regulators, including a number of commissioners, were despite all the turmoil on Wall Street and the economic situation generally.   While the national and international market turbulence was clearly on everyone's mind and was reflected in almost all of the conference sessions, the state regulators never lost their focus on insurance and how the developing economic situations impacted insurance consumers and insurance companies.  I was struck by the fact that each of the commissioners brought interesting ideas on all of the issues discussed there.  Of course,  too many chefs can be a problem in a kitchen, but sometimes there is great value to the expertise and insights that different people bring to the table.  I think now is one of those times.  

When I was in my room, I watched news coverage on how the federal government put mind boggling amounts of money into the hands of a single federal regulator and I realized that I felt much more confident in a regulatory system that provides for the input of many.  I have seen quick action by state regulators when necessary and yet I am not asked to trust any one individual with the future of the industry.   While changes to the regulatory landscape seem certain, I am hopeful that whatever the ultimate outcome is it does not add the regulation of insurance to the plate of the Secretary of the Treasury.  I want the occupant of that office to be focused on spending our money wisely and monitoring the now partly nationalized, federally-regulated, banks!  I want the folks I listened to and talked to in Atlanta - the state commissioners and their staffs - who focus on insurance and insurance in the context of the wider economy, to bring their expertise to bear.  

We all know there are challenges with state regulation, but watching the federal regulators at work has not given me any confidence that they would do a better job:  not for consumers, not for the regulated financial institutions, and not for the economy as a whole .   

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Today the NYSID has issued a press release aimed at AIG insurance company policy holders. Specifically it  warns policyholders  not to  make hasty decisions with respect to their AIG policies and it "reminds" producers of their obligations in replacement situations.  FAQs follow the introductory discussion.  

The press release also reiterates much of what has been in NAIC releases over the last few days regarding the strength of state-regulated insurers compared to federally-regulated financial institutions including, of course, the non-insurance AIG parent company.   While I think much of this is likely falling on deaf ears, perhaps some will take in the message.  It may end up being one of this industry's great ironies that after all these years of the ACLI and others calling for insurers to have optional federal charters as banks do because, the argument goes, that regulatory paradigm works it may be the  failure, insolvencies and bailouts of  federally-regulated entities that will ultimately lead to federal regulation of insurance as well.  

It would be impossible to represent as many life insurers in state regulatory matters as we do here without knowing that state regulation has significant  and costly inefficiencies.  But right now, of all times in history, to promote federal regulation as a better answer to the industry's problems -- in the midst of  this chaos and financial devastation --  leaves me questioning whether I am reading the same articles and hearing the same information that the people arguing for federal regulation are.  

As I write this I remember that little boy from the fairy tale who calls out during the parade to say that the emperor has no clothes!  While there is more than one "little boy" calling out in this story, it remains to be seen whether any one will listen at all.  

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A conference is being held at the American Enterprise Institute tomorrow (7/9/08) on the "Future of Insurance Regulation." Coincidentally, the US House Financial Services Subcommittee on Capital Markets and Insurance is also meeting tomorrow  to mark-up proposals of H.R. 5840, the Insurance Information Act, which would establish an Office of Insurance Information within Treasury, "NARAB II", a national system to process non-resident producer licensing, and the Increasing Insurance Coverage Options for Consumers Act.  

Of course I follow the discussions of federal vs. state regulation of insurance, but one of my frustrations with what I often read and hear is the assertion that federal regulation represents efficiency, with the optional nature of a proposed federal charter representing competition among regulators. State regulation on the other hand is generally presented as immovable and irretrievably mired in inefficiency and insensitivity to competitive demands.   This appears to be the dominant theme at the AEI conference, yet it seems simplistic to me in several ways.   One of them is that when we make such a comparison, we are looking at a system that has yet to be fully conceived versus one that has a very long and complicated history.  Who among us can't dream?  The challenges obviously arise when systems are implemented and develop and are presented with difficult decisions and must draft regulations and deal with real life on both a day-to-day basis and in crisis.  Then inefficiencies and bureaucracies begin to take hold and grow.  I have not yet read or seen any reason why a federal agency would not completely dominate an alternative state system and simultaneously grow to become large and inefficient. 

But there is another option that has been proposed by some that I hear much less about, but which I find very interesting.  This option is called the Single-License Approach to Regulating Insurance and it is discussed in a paper authored by Henry N. Butler, Executive Director of the Searle Center on Law, Regulation and Economic Growth at Northwestern University School of Law and  Larry E. Ribstein, the Mildred van Voorhis Jones Chair in Law at University of Illinois College of Law.  The paper  is available for download at no charge from the Social Science Research Network. 

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