State-based insurance regulation has performed admirably through the U.S. economic crisis, and the turmoil in the financial markets should not be seen as a reason for implementing federal regulation of property-casualty insurance, a NAMIC report has concluded.

The study, "Financial Oversight Failure Highlights Effectiveness of Insurance Regulation," argued that while the current crisis has exposed some gaps in the financial regulatory system, the regulation of insurance by the states has been an exception and has "proven stable and reliable such that insurance companies are today able to provide their individual and commercial insureds with needed protection even in a time of terrible strain."

Chuck Chamness, NAMIC president and chief executive officer, said in a statement, "While not perfect, the insurance financial regulatory system has provided a source of comparative stability during the financial crisis."

He added, "Certainly there are areas of financial services regulation that are in need of reform, but applying new federal rules and standards to the property-casualty insurance industry in reaction to the current crisis would needlessly disrupt and debilitate the one financial service regulatory system that is not broken."

The NAMIC report came out yesterday as the Government Accountability Office released a report on financial services regulation stating in part that Congress could consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity.

NAMIC said the state-based insurance regulatory structure has come under fire because of a couple of widely held misconceptions.

Firstly, the report explained, while the financially troubled American International Group (AIG) is commonly called an "insurance company," it is really a diverse financial services holding company, and was not harmed by the insurance end of its business. The NAMIC report stated, "AIG's non-insurance operations grievously harmed its balance sheet; its insurance company holdings are sound and well capitalized."

The second misconception, it said, is that credit default swaps (CDS) are a type of insurance. The report explained that the swaps, "like many other financial products that hedge risk, are not insurance products under established law and are neither managed nor regulated as insurance. Derivatives and CDS failures are thus not caused by or related to insurance regulation."

The report noted, "Most experts agree that the current financial crisis is the result of a housing market 'bubble,' the effects of which were exacerbated by a proliferation of largely unregulated hedging mechanisms, especially derivatives such as credit default swaps."

It goes on to note that while CDS have been described by some as insurance, they are, in fact, separate risk management products and "lack the core legal elements and business characteristics that are a prerequisite to homeowners and other property-casualty insurance products. The vast majority of CDS clearly lack insurable interest and are initiated by speculators who have no exposure to the underlying debt instrument whose credit default risk the CDS could be used to hedge."

The NAMIC report added that a role for federal authorities in insurance regulation could be an Office of Insurance Information (OII) that would help Congress understand and monitor the current regulatory structure.

The report stated, "For instance, an OII could help federal policymakers monitor systemic risk throughout the financial services industry by providing a central repository to gather and analyze information already collected by state insurance regulators such as insurer investment activity, capital adequacy and loss exposure."