As 2008 draws to a close, so does the world as we know it – at least in terms of insurance regulation. In 2009, the “price” of the public investment in the financial industry will come due and there will be fundamental change to past approaches in oversight.
After a career in the property casualty insurance industry, my mental model draws a sharp distinction between finance and insurance. Certainly, I have never considered investment banking and commercial lines underwriting as siblings – very distant cousins, perhaps, but not in the same immediate family. Like the parents who assume bad debts accumulated by a wayward child, the federal government has stepped in and is about to administer some discipline.
Looking forward, do not expect the public, or members of Congress, to recognize a distinction between Bear Stearns and AIG. Do not expect the patience to understand that the credit default swaps weren’t “real insurance” and that the departments selling these products were not part of the “core” insurance operations. I expect that federal regulatory reform will be at the financial services level, not separate schemes for banking and insurance. The term optional federal charter will lose the “optional” part.
Yes, individual states will object. They have a large vested interest. Yes, there will be much debate and many speeches about federal versus local rights. But, at the end of the day, state governments will have more immediate issues as tax revenue disappears and their attention is drawn to other areas. The path of least resistance will be a dual regulation scheme. Expect a federal scheme to be placed on top of the state process.
Good parenting begins at home. To plan for this now, insurers should anticipate and investment of senior leadership time and energy on crafting a reasonable and effective response to the financial crisis for insurance. Influencing lawmakers from the highest levels will be essential. Industry lobbying and trade groups must guide media discussion by communicating the differences between insurance and other financial institutions. Comparisons on solvency and investment portfolio structures should be made. Information system vendors should enhance and/or build tools which will allow their clients to respond quickly to new regulations. Finally, insurers should review and improve, where necessary, their capabilities in data mastery (see the Celent report Insurance Data Mastery Strategies http://www.celent.com/PressReleases/20081126/DataMasteryStrategy.asp ).
With one notable exception, insurance companies did not require a bailout because the industry is so tightly regulated. In 2009, there will be the opportunity to improve this oversight. As in effective parenting, positive reinforcement and good guidance are better tools than the rod.