That only makes sense. Insurers are tightly regulated and are unlikely to fail, certainly in a way that would cause a financial cataclysm. Insurance is a tool designed to manage the risk of loss covered by a policy, so by definition and by law, insurers invest conservatively. They have higher asset-to-liability ratios and are, therefore, far less leveraged than other types of financial firms. There’s also no such thing as a “run” on an insurance company since policyholders don't have traditional deposits to withdraw.
The insurance industry was identified with a notorious failure – AIG – but the company’s downfall didn’t involve insurance. AIG’s noninsurance activities got it into trouble, so the new U.S. rules would surely capture – and prevent – a similar situation.
Unfortunately, overseas insurance regulators have their own SIFI process - nicknamed G-SIFI with the "G" standing for “global.” Instead of following the U.S. process, the International Association of Insurance Supervisors (IAIS) would impose time-consuming and intrusive requests for confidential data that don’t align with U.S. financial reporting standards. The procedure would waste enormous resources and could end up labeling as G-SIFIs insurers that have already been deemed unworthy of further scrutiny by the very thorough U.S. process.
The difference could have real consequences for financial companies and their customers. In Europe, regulators are leaning toward requiring SIFIs to set aside more capital than is already required under law. That could prove to be an expensive overreaction, particularly for a U.S. insurer, which could better use that capital to provide additional coverage to consumers.
A similar problem is brewing with another program being considered by the IAIS called the Common Framework for the Supervision of Internationally Active Insurance Groups, or “ComFrame.” Initially proposed as a way for international regulators to coordinate supervision of insurance companies that operate in several countries -- a worthy objective -- ComFrame has threatened, in effect, to set ad hoc standards for companies that do business in three or more countries, which would bring them a new duplicative layer of regulation. Comframe is, therefore, blurring regulatory lines that could ultimately – and unnecessarily – discourage insurers from entering new markets to serve consumer needs.
The insurance industry appreciates the need for scrutiny and supervision. In the wake of the financial crisis, insurers fully embrace enhanced regulation for companies that pose a major risk to global financial stability. There is no greater consumer protection than the assurance that financial institutions are safe and sound. This is particularly true in insurance, where a policyholder relies on the financial wherewithal of an insurer to pay for covered losses when they unexpectedly occur. The U.S. insurance regulatory system has a good story to tell. Our business model and careful management worked even during a global financial meltdown.
But regulation can be too much of a good thing. Insurance companies do not operate like banks and shouldn't be judged by the same standards. Regulators should be praised for keeping better informed across state and international borders, but that's a far cry from adding new sources of regulation that will hinder companies from serving consumers. The insurance industry hopes that state-based regulators will collaborate with the new Federal Insurance Office to engage with their international counterparts to find a workable resolution of global regulation.
Restraint is a hallmark of smart regulation. U.S. regulators, after long and careful study, are moving in the right direction by setting up a process that effectively determines which companies create systemic risk without ensnaring those companies that do not pose any such threat. As international regulators decide how best to stave off future financial problems, the U.S. SIFI-determination process provides a useful model for them to follow.
Pusey is president and CEO of the American Insurance Association.