By Thomas E. Hampton

The Obama Administration recently introduced a Financial Regulatory Reform proposal in an effort to restore confidence in the integrity of our financial system. With the economic crisis experienced in this country and throughout the world’s financial markets, no one can disagree with the statements that to eliminate this situation from occurring again, the US financial regulatory system needs authority to regulate financial holding companies considered too big to fail in a more prudential manner; and that all financial products should be included under regulatory authority. With the Obama Administration focusing its reform proposals on the weaknesses in the regulatory processes of the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC), which permitted credit default swaps market to grow unfettered, as well as reducing the arbitrage in the banking regulatory system, some industry lobbyist are focusing the attention on reducing or possibly eliminating the state financial regulatory process. There is a saying in Washington, “Never let a good crisis go to waste,” so it appears that this crisis is an opportune time to propose this change, especially as it relates to the regulation of the business of insurance.

In the last 150 years, insurance regulation has been primarily the domain of the states. The one serious challenge to the states’ authority to regulate insurance came in 1944 with the Supreme Court ruling in the United States versus Southeastern Underwriters Association case. The Court stated in its conclusion that insurance was not considered interstate commerce and it recommended that Congress establish legislation to address this issue. The McCarran Ferguson Act enacted in 1945 allowed state law to regulate the business of insurance without federal government interference. In the late 1940s, most insurance companies operated in single states or in a particular region. Since that time, however, some insurance companies have grown to become national or international financial-services conglomerates, selling financial services products, and employing staff throughout the world. One of the primary reasons we hear from proponents of enacting the federal regulatory option is that the United States needs to establish an insurance regulatory system that is consistent with other industrialized nations; and that our current system of state regulation does not lend itself to accomplishing that goal. These same proponents fail to mention how the state insurance regulatory process has morphed with the growth of insurance companies as well as the complexity of the products being sold to consumers.

Insurance regulators have implemented an accreditation system to determine compliance with substantially similar financial regulatory standards, established a risk-based capital requirement, which calls for an insurance company to maintain different capital requirements based on their specific risk of loss in the types of investments they own or the type of business they underwrite. Insurance regulators, through their state regulatory association, the National Association of Insurance Commissioners (NAIC) and its members participate in discussions of international accounting and regulatory convergence with the Obama Administration and at the International Association of Insurance Supervisors. Finally, the NAIC has established an Office of Insurance Policy and Research, which provides statistical and empirical information on the US insurance industry. All these initiatives are being established without reducing our focus as the front line advocate for consumers.

As the Obama Administration reviews how to best establish a financial-services regulatory system, we hope it includes in the equation an appropriate analysis of the benefit state financial-services regulators continue to provide consumers through their consumer protection focus. The best way to avoid an economic crisis of this magnitude in the future, the consumer needs to be protected first and foremost. 

Commissioner Thomas E. Hampton is the head of the DC Department of Insurance, Securities and Banking.