In a Thursday report to Congress, the U.S. Treasury’s Federal Insurance Office called for further federal intervention in regulation of the insurance sector.
Insurance premiums for life and health and property and casualty sectors totaled over $1.1 trillion last year—approximately seven percent of GDP—and insurers in the U.S. employ 2.3 million people.
The report, which is required under the 2010 Dodd-Frank Act, found that while federal involvement is needed to meet “policy goals of uniformity, efficiency and consumer protection,” regulation of the industry is best viewed as a hybrid model in which the state also plays a significant role.
Insurers have been under state oversight for the past century, but the FIO report said that the global reach of insurance firms necessitates federal involvement, noting the costs associated with state-based regulation—premiums are approximately 6.8 times greater for insurance companies in the U.S. than for U.K.-based insurers.
“Insurance regulatory issues will increasingly require international attention and cooperation,” the report said. “The federal government’s predominant role in foreign affairs is one reason for the necessity of a federal presence in insurance regulation. It would be much less costly, much less prone to arbitrage and much easier to negotiate internationally for more efficient and effective oversight of the insurance sector if U.S. insurance regulation had greater uniformity and predictability.”
The report said, however, that the federal government should not entirely displace state regulation because of its limitations.
“The business of insurance involves offering many products that are tailored for and delivered at a local level,” the report said. “For the most part, effective delivery of the product will require local knowledge and relationships, and local regulation.”
The FIO published reform suggestions for states that include developing a transparent and uniform oversight authority for risk transfer to reinsurance; cautious advance towards the implementation of principles-based reserving; and continued focus on supervisory colleges to ensure effective group supervision.
Additionally, the FIO recommended reform suggestions at the federal level, including the development and implementation of federal standards for mortgage insurers; the adoption and implementation of the National Association of Registered Agents and Brokers Reform Act; and an agreement for reinsurance collateral requirements between the Treasury and U.S. trade representative.
“Notwithstanding a decades-long debate about whether insurance should be regulated at the state or federal level, for the benefit of U.S.-based insurers and consumers, the debate is best reframed as one in which the question is where federal involvement is warranted, not whether federal regulation should completely displace state-based regulation,” the report said.