6th Annual Insurance Reform Summit Featured Papers
Grace, M. F. (2009). “A Reexamination of Federal Regulation of the Insurance Industry.” Networks Financial Institute Policy Brief 2009-PB-02. February.
http://www.networksfinancialinstitute.org/Lists/Publication%20Library/Attachments/131/2009-PB-02_Grace.pdf
The Optional Federal Chartering (OFC) proposal introduced in the last session of Congress may have been the right bill for the introduction of federal regulation of the insurance industry at the turn of the 20th century. However, the current OFC proposal shows its 19th century roots as it merely copies the banking industry’s dual chartering provision and various aspects of state insurance regulatory law. This paper critiques the issue of federal regulation, not necessarily from the perspective of whether federal regulation dominates state regulation, but as to whether the federal or state regulation is structured sufficiently to minimize market failures or to minimize the effect of regulatory failures.
Vaughan, T. (2009). “The Implications of Solvency II for U.S. Insurance Regulation.” Networks Financial Institute Policy Brief 2009-PB-03. February.
http://www.networksfinancialinstitute.org/Lists/Publication%20Library/Attachments/132/2009-PB-03_Vaughan.pdf
Much work has been done in recent years on the subject of insurance regulation and capital requirements, and the process of regulatory reform will continue. Given recent financial turmoil and the experience with banks, investment banks, and insurance companies, underlying assumptions that have driven supervisory reform in the various sectors are being questioned. It behooves insurance supervisors to take a step back, revisit the underlying assumptions, and assess what implications, if any, their conclusions have for future work. The use of internal models to establish regulatory capital requirements cannot and should not disappear. However, internal models must be used appropriately, with recognition of their significant limitations. The optimal structure of insurance supervision is likely to be a combination of a rules-based and a principles-based approach. That is, internal models should be an adjunct to a rules-based capital requirement that establishes a floor for regulatory capital. The current environment has also demonstrated the importance of other aspects of regulation. Capital regulation is a necessary, but not sufficient, requirement for effective financial regulation. On-site examinations, offsite analysis of financial performance and trends, and frequent interaction with the regulated entity are equally important. These are long-standing features of the U.S. insurance regulatory system. Finally, current developments have demonstrated that market discipline cannot be relied on as a substitute for regulation and supervision. The optimal regulatory structure is one that encourages supervisors to take action when it is appropriate, and a system that incorporates duplicative regulatory oversight may advance that objective.