A major aspect of Paulson's big bang proposal is that it would provide for optional federal chartering of insurance companies. This would be a significant federal inroad into what has been an exclusively state-regulated industry. Much of the insurance industry is likely to embrace this, because it gets rid of the 50 regulators it’s had to deal with. And even critics of federalizing everything can’t object too much because, after all, it’s just “optional” chartering. Right?
Wrong. There are real problems with optional federal chartering, not least of which is that it will lead almost inevitably to total federalization. Henry Butler and I discuss this in our A Jurisidictional Competition Approach to Reforming Insurance Regulation. Here’s the abstract:
State regulation of insurance companies has been criticized for many years because of the burden imposed on insurers by having to comply with the laws of many jurisdictions. These problems are prompting calls for more federal regulation of insurance. However, all proposals to federalize insurance regulation create opportunities for abuse at the hands of the federal government and fail to utilize the benefits of a federal system. We propose a state-based regime that protects insurers from the worst effects of multiple regulators while preserving an opportunity for jurisdictional competition and experimentation.
In brief, our proposal is based on corporate-type jurisdictional choice (see my recent paper with Erin O’Hara on that), with modifications that recognize the greater demand for consumer protection in the insurance context.
We’re presenting this paper in two weeks at the Searle Research Symposium on Insurance Markets and Regulation at Northwestern -- obviously a rather timely program. Also on the same panel (in addition to many others in an interesting program) are Hal Scott, a main proponent of optional federal chartering, and Elizabeth Brown, whose work on consolidation of financial regulation is looking quite prescient right now.
When I worked in the insurance business, we used to say: "would like to deal with King Kong or with 50 monkeys."
Posted by: Fat Man | March 31, 2008 at 07:56 PM