December 14th, 2007

The fascinating dynamics of insurance reform in the United States

Posted in  Deregulation 
Author: George Pieler and Lawrence A. Hunter || Location: Washington, DC, USA

The American Enterprise Institute will be holding a conference December 20 to explore whether an optional federal charter is necessary and sufficient to ease the entry of international insurance companies into the American market and in the process benefit American consumers.  In its write up about the conference, AEI says:

“Thus far, the debate about an optional federal charter for insurance companies has focused primarily on whether and how federal regulation of U.S. insurers will improve services for insurance consumers in the United States.  But insurance, like banking and securities, is increasingly becoming a globalized market.  U.S. insurers are increasingly diversifying their risks by offering their services abroad, and the reinsurance business model requires worldwide geographic diversification.  In addition, non-U.S. insurers and reinsurers who would like to compete in the United States complain that entry to the U.S. market is cumbersome and costly because of the fifty-state regulatory system.  Globalization of markets requires that regulators coordinate their policies; this is difficult for the United States because no one authority—even the National Association of Insurance Commissioners (NAIC)—can make binding commitments about U.S. regulatory policies. Are these obstacles depriving U.S. consumers of the benefits of international competition?  If so, can they be overcome by the states or the NAIC?  If not, is an optional federal charter a necessary response to a globalizing market?”

Movement towards an optional federal charter to modernize the way insurance is regulated in the United States is currently impeded by myriad political obstacles, not the least of which is a deep division within the insurance industry between larger companies that do business nationwide in most or all of the 50 states and smaller insurers who tend to do business in but a few states and have tailored their business models to the regulatory regimens in those specific jurisdictions.  As expected, larger companies that do business across the Untied States tend to favor an optional federal charter as a path towards standardizing the regulatory burden and minimizing its cost.  While it’s not a clean line of division, in general smaller, regional companies prefer to stick with the current state-by-state system of regulation. Not only aren’t standardization and uniformity of great concern to them, they actually gain a relative competitive advantage vis-à-vis larger, nation-wide companies under the current system.  Smaller, regional companies that specialize and learn the state regulatory systems intimately, thereby gain a significant competitive advantage against larger, nation-wide firms that face large costs due to non-standardization and non-uniformity of regulations.  

AEI’s decision to focus its conference on international companies seeking entry into the U.S. market highlights a wholly different facet of the political equation that must be addressed to bring insurance regulation into the 21st century.  In short, we wonder how long it will be before some large, nationally-competitive U.S. firms begin to harbor fears that the efficiencies and administrative improvements they hope to gain from an optional federal charter could trigger entry into the US market from vigorous foreign competitors:  potentially offsetting (or more?) the gains a more rational regulatory regime can bring?  The prospects of making the US a more globally-attractive competitive playing field has many interesting implications:  It will be fascinating to watch.