States Broke The Insurance Regulatory System

March 6th, 2009 at 12:08 pm | 1 Comment |

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About six months after the U.S. government first injected taxpayer money into AIG, viagra sale the company continues to teeter on the brink of bankruptcy and soak up taxpayer cash. Given what remains the official storyÑthat AIG is a mostly-profitable corporate powerhouse that got caught up in disastrous investment decisionsÑthis really shouldn’t be happening.  A better explanation, indeed, would go something like this: America’s broken insurance regulatory system contributed to AIG’s failures and only comprehensive reforms in the way America deals with insurers can prevent the same thing from happening again.

Under a system that hasn’t changed fundamentally since the ninetieth century, all fifty states assert independent rights to oversee virtually all insurance activities. In the name of “solvency” and “consumer protection” states can dictate rates, forbid or require the sale of certain products, and mandate investment strategy. But nobody has an effective overall view of what any large insurer does.

The system’s promise of “solvency” appears to have failed AIG. Its core insurance businessesÑsupposed to have near-guaranteed profits and near perfect financial stability as a result of state regulationÑcan’t currently find buyers despite apparently healthy balance sheets. And the company’s structure, 72 separate subsidiaries before the collapse, makes it nearly impossible to know where its money comes from. (State Farm, which has more U.S. customers than AIG, has only eight subsidiaries.)  Indeed, only one of AIG’s insurance subsidiariesÑthe highly specialized HSB groupÑhas found a buyer.

But state insurance regulators continue to stick their heads in the sand. For example, New York State Insurance Superintendent Eric Dinallo, who has bragged about his department’s ability to keep AIG’s policyholders safe, oversaw less than 10 percent of AIG’s operations. The current insurance regulatory system, indeed, actually encourages them to build structures like AIG that obfuscate their operations in order to escape regulatory scrutiny, justify rates, and introduce new products. It appears quite possible that AIG may have even outsmarted itself: the same structures that mislead some regulators may have fooled the company’s own managers.

Legislation introduced in the last Congress and likely to gain new life this year would create a federal capacity to oversee the insurance industry while simultaneously sweeping away a lot of the barriers that prevent rational pricing and new product introductions. Companies wouldn’t need to build structures like AIG’s and those that preferred the current system would see few changes. And the country would be better off.

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One Comment so far ↓

  • jlloyd

    Indeed it would. Many of these same arguments apply to health insurance as well – where a basic policy can cost twice as much in some states as others. One of the basic functions of the Federal government, per the Constitution, is to regulate interstate commerce. But why do the smart thing when you can create all sorts of political jobs on insurance commissions, and get all sort of special interest provision put in the laws and regulations, ultimately for the benefit of corrupt politicians?