A GAO study on the benefits of state insurance regulation is important because it serves as an objective counterbalance to an upcoming report that will likely not be objective: a study of insurance regulatory modernization by the Federal Insurance Office (FIO). This study was mandated by Congress in the section of the Dodd-Frank bill that created the FIO. The questions that FIO published as it solicited input for this study belied a clear bias toward federalization of insurance regulation, raising concern that the forthcoming report already has a preordained conclusion.

The GAO report found that the financial crisis “generally had a limited effect on the insurance industry and policyholders,” with the exception of certain annuity products in the life insurance industry and the financial and mortgage guaranty lines of insurance in the P/C industry. In addition, the report notes that “industry business practices and existing regulatory restrictions on insurers' investment and underwriting activities helped to limit the effects of the crisis on the insurance industry.”

“The GAO report and its resulting message would have benefited further by including one key point,” said PIA National Senior Vice President Patricia A. Borowski. “It should have included a comparison of how the insurance industry and state insurance regulators (with NAIC) performed during the financial crisis, versus the performance of the other sectors of financial services, banking and securities.”

“The conclusion is obvious from the assessments made in this report—as compared to the other GAO reports that assess the performance of banking, investment and capital markets during the same time period—that the insurance sector did well,” Borowski said.

As additional protections are considered in the effort to avert another crisis, regulators should take their cues from the state-based oversight already in place in the insurance sector and its overall success in protecting the financial stability of the insurance industry and policyholders. In contrast, using federal regulatory systems that failed so spectacularly as a template for the insurance industry would makes little sense.

Related: Read “Healthcare Back in the Ring“

NAIC's issues with FIO

Meanwhile, a contretemps has developed pitting the National Assn. of Insurance Commissioners (NAIC) against the fledgling Federal Insurance Office (FIO).

Ever since the FIO's creation, Director Michael McRaith—while acknowledging repeatedly that the statute creating the agency specifically prohibits it from acting in any manner as an insurance regulator—has given the impression that he may be chafing under this restriction. Asked at a congressional hearing about the scope of activities of the FIO, McRaith stated that “the range and depth of our portfolio is still being defined.” Of course, that portfolio has already been defined in the Dodd-Frank bill, which established clear parameters on the FIO's activities.

Asked to assure that the impending FIO study of insurance regulation will not be biased in favor of federal regulation, McRaith did not answer directly, instead pointing to the provision of the Dodd-Frank law that mandated the study and saying, “the bias is framed by the statute.”

This political dynamic changed for the better when NAIC hired former Sen. Ben Nelson as its CEO. Nelson wasted no time asserting the authority of state insurance regulators, relative to the FIO. PIA heard from reliable sources that the FIO report was about to be issued in March, but was abruptly pulled back shortly after Nelson, days into his new post, gave a speech in which he said that the FIO needed to do “the job it was intended to do, but not our job.” Restating that the FIO is not a regulator, Nelson added, “I think they're beginning to understand that.”

Related: Read “Ben Nelson to the Rescue“

In March, 2013, the White House issued a statement acknowledging the limitations of the FIO and the primary role of state insurance regulation.

Then in congressional testimony on June 13, 2013, Nelson said the FIO and the Treasury Department should show deference to state insurance regulators in certain regulatory forums.

“The NAIC believes that the FIO can enhance existing efforts of the NAIC and theU.S.insurance regulators, and adds another federal voice. However, FIO does not speak for insurance regulators,” Nelson said, adding that only representatives of state regulatory bodies should speak on behalf of regulation. “We expect the Treasury Department to give deference to, and be supportive of, the views of the regulators in forums that focus almost exclusively on regulatory issues.” He said it is “inappropriate” for the FIO to seek to participate in supervisory colleges “without an invitation from the [state] regulators.”

Ben Nelson's immense clout as a former senator, governor and insurance commissioner is unmatched and his outspokenness as an unabashed advocate of state-based insurance regulation is very refreshing. He arrived just in the nick of time.

Related: Read Electronic Revolution