Financial reform – impact on insurers

Most insurers were relieved to hear the received wisdom on financial reform – the industry dodged a bullet, as it wasn’t subject to the same scrutiny as banks. With good reason – p/c insurers weathered the financial storm well (excepting AIG’s foray into non-regulated, non-insurance products).

Milliman, however, has a more nuanced view. Its take:

First, the law creates a Federal Office of Insurance. For now, the duties are benign, but in 18 months, it must report on the competence of the current state-based system. My aside – the law is telling a bureaucracy to determine whether it needs to expand its own mandate. Any bets where that will end up?

Milliman then hashes through the pros and cons of state-based regulation. I won’t repeat them here, as Milliman is concise.

Second, the feds now have the ability to make a data call – asking for information on a one-off basis. Non-insurance people will find this trivial. Insurance people know how hard it is to create an entirely new database and design reports off it. This also gives insurance-bashing politicians – that is, all politicians – a club to wield and information to misunderstand.

Third, the law cleans up rules on reinsurers. Currently, some states make it difficult for reinsurers to prove their robustness. A company that can’t show this enters the market at a disadvantage. Fixing this is good.

Fourth, the law makes it easier for non-admitted insurers to do business. These are companies that specialize in business that is hard to underwrite well, and probably a good idea.

Finally, Milliman points out that the federal office will help U.S. companies compete abroad. I’ve mentioned before that European regulators gasp at the idea of dealing with 50 state insurance departments. I’ve even seen obstacles to the insurance commissioners simply dealing with foreign governments, as the U.S. Constitution bans treaty negotiations by anybody but the feds. Foreign insurers have overcome the obstacles to getting established here, but U.S. companies will need federal help to move abroad successfully – especially reinsurers.

Again, I merely summarize here. The article is brief and clear and worth your time if you are interested in the topic.

 

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