1150 Seventeenth Street, N.W., Washington, D.C. 20036
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The Obama administration has proposed a far-reaching set of new regulations for the financial industry, including a federal systemic risk regulator with new powers to designate and regulate any financial firm that is deemed to be "systemically important." The new agency will also have the authority to liquidate or rescue
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any financial firm that is in danger of failing. If adopted by Congress, the administration's plan could take the regulation of the largest insurers--and their resolution in the case of financial difficulty--out of the hands of state regulators. Is this change in insurance regulation warranted by the financial crisis that we are now experiencing, and will designating certain large insurance companies as "systemically important" place smaller companies at a competitive disadvantage? These and other questions will be addressed at this conference, jointly sponsored by AEI and the Competitive Enterprise Institute.
| 9:45 a.m. |
Registration |
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| 10:00 | Introduction: | Eli Lehrer, Competitive Enterprise Institute |
| Peter J. Wallison, AEI |
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| 10:15 | Panelists: |
Eli Lehrer, Competitive Enterprise Institute |
| Lawrence Mirel, Wiley Rein | ||
| Sean Shaw, Office of the Insurance Consumer Advocate of Florida | ||
| J. Stephen Zielezienski, American Insurance Association |
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| Moderator: | Peter J. Wallison, AEI |
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| 12:00 p.m. |
Adjournment |
WASHINGTON, MAY 7, 2009--In late March, Treasury Secretary Tim Geithner presented the Obama administration's proposal for a systemic risk regulator to Congress. At an April 30 conference at the American Enterprise Institute, a panel discussed what the administration's proposal would mean for insurance regulation, asking whether insurance even needs systemic risk regulation. No panelist answered the question affirmatively, although several believed that there is room for reform in how insurance companies are regulated.
Currently, the insurance industry has no federal regulation; each state regulates the elements of the insurance companies under its jurisdiction. All the panelists had an opinion on how a federal systemic regulator would and should change the current state-based system. Lawrence Mirel, a former insurance regulator who is now a partner at Wiley Rein, admitted there is "no good, logical reason that insurance is regulated at the state level, except that is has been." J. Stephen Zielezienski, senior vice president and general counsel of the American Insurance Association, argued that "the crisis has revealed the limitations of fragmented state regulation." However, Sean Shaw, the insurance consumer advocate of Florida, said that the state system should stay intact because insurance is different in each state. The differentiation that state-level regulation allows is necessary because "Montana doesn't have a hurricane problem."
If the government identifies certain firms as systemically important, that could lead to serious competition problems. If a company is designated as systemically important, that means it is too big to fail, AEI's Peter J. Wallison explained. This tacit promise of a bailout would make these designated companies more attractive to lenders and investors. This, in effect, would exacerbate the problem of systemic risk by enlarging companies that are already too big to fail. While Zielezienski agreed with Wallison, he also suggested that companies might not actually want to be designated as systemically important: "They view it as a signal to shareholders that they are a systemic risk and their stock price goes down."
Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, argued that any federal insurance regulator would need to be able to control rates. Without that authority, the regulator would be "worse than useless" in meeting its regulatory goals. Zielezienski suggested that instead of hard regulation at the federal level, something analogous to an "air traffic controller" might be more effective. Such a regulator would be more of a coordinating agency, monitoring the situation and alerting the federal government when a crisis is looming.
If AIG had not failed, there would be no conversation about systemic risk regulation for insurance companies. Lehrer argued that because "other insurance companies are involved with everything AIG was involved with," many people believe that the failure of AIG proves the need for systemic regulation of insurance firms. However, Lehrer did not believe that such systemic regulation is necessary. Mirel also expressed skepticism that, aside from AIG, there actually were any insurance companies whose failure would pose systemic risk.
There was a strong consensus that if not done carefully, the administration's proposal could lead to an overregulated insurance industry. Mirel pointed out that not very many insurance companies are currently in trouble and that banks, which are more heavily regulated, have been having more severe problems. Shaw, who is wary of the way regulation becomes politicized, believed that federal insurance regulation would hurt business, and Zielezienski asserted that, "The worst-case scenario is to have this overbearing systemic risk uber-regulator that basically meddles and layers itself on top of the existing system."
--ALEX WEIN
- Video, audio, and event materials.
- Read Peter J. Wallison's Financial Services Outlook on the role of the Federal Reserve in systemic risk regulation.
Eli Lehrer is a senior fellow and the director of the Center for Risk, Regulation, and Markets at the Competitive Enterprise Institute, where he oversees the institute's studies of insurance and credit markets. Previously, Mr. Lehrer worked as speechwriter to Senate Majority Leader Bill Frist (R-Tenn.). He has previously worked as a manager in the Unisys Corporation’s homeland security practice, senior editor of The American Enterprise magazine, and a fellow at the Heritage Foundation. He has spoken at Yale and George Washington Universities. Mr. Lehrer's work has appeared in the New York Times, the Washington Post, USA Today, the Washington Times, The Weekly Standard, National Review, The Public Interest, Salon.com, and dozens of other publications.
Peter J. Wallison holds the Arthur F. Burns Chair in Financial Policy Studies at AEI, where he codirects the Institute's program on financial market deregulation. He previously practiced banking, corporate, and financial law at Gibson, Dunn & Crutcher in Washington, D.C., and New York. From June 1981 to January 1985, Mr. Wallison was general counsel of the U.S. Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry. He also served as general counsel to the Depository Institutions Deregulation Committee and participated in the Treasury Department’s efforts to deal with the debt held by less-developed countries. During 1986 and 1987, Mr. Wallison was White House counsel to President Ronald Reagan. Between 1972 and 1976, Mr. Wallison served first as special assistant to Governor Nelson A. Rockefeller and, subsequently, as counsel to Mr. Rockefeller when he was vice president of the United States.
