Background The federal government’s role in regulation is to protect consumers and the market. There is an ongoing debate on whether the federal government should regulate the insurance industry due to the bailouts stemming from the financial crisis of 2008. Currently, state governments regulate the insurance industry. Proponents of federal regulation argue that states are inefficient in the duty of insurance regulation. Additionally, the federal government has economies of scale and may offer an increase in efficiency unlike state regulation. There are advantages to both sides of this debate; however, states should still be given this responsibility. The federal government should not regulate the insurance industry because it is not systemically
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Lack of substitutes is a problem that arises when there is industry consolidation and insufficient capacity to do the same, or similar, services of a firm. This was the issue, again, with the financial crisis because major banking institutions’ services could not be matched or similarly replicated. This caused the market to seize up and resulted in problems for the economy and markets. The top five banking institutions represent 69% of the total market share. The insurance industry is starkly different. There are many options for other companies to match similar services if it would happen that one insurance company were to go bankrupt. For example, AIG Financial Products (AIGFP), a division of AIG, offered a different set of services than the company’s traditional business model. Many other insurers were not involved in this space. AIGFP decided to write credit default swaps (CDS) which paid to the buyer if there happened to be a triggered credit risk event. The problem is that CDS were not considered insurance so they could not be regulated by the states. Additionally, few other major carriers were involved in this space which led to the government bailout of AIG in late 2008. This is an example of how systemic risk is caused by insurers getting involved in coverages outside the realm of …show more content…
States and programs are funded through taxpayers. Some personal and commercial lines are even bought through state insurance programs. Federal regulation would mean that these state departments would be eliminated and the federal government would assume responsibility of implementation and regulation of these programs, which cost taxpayers money. For example, Ohio, Wyoming, North Dakota, and Washington, all provide workers’ compensation (WC) through a monopolistic state fund. If the federal government were to change regulation, it would need to assume responsibility for the WC in these states or amend state statutes to allow additional workers’ compensation providers.
Additionally, the Federal Reserve is one of the agencies that is responsible for financial regulation and oversight. The Federal Reserve would oversee regulatory and capital requirements for the entirety of the US insurance industry, which would add cost to running the agency and may not add to market stability with the number of entities that are regulated.
Lack of substitutes is a problem that arises when there is industry consolidation and insufficient capacity to do the same, or similar, services of a firm. This was the issue, again, with the financial crisis because major banking institutions’ services could not be matched or similarly replicated. This caused the market to seize up and resulted in problems for the economy and markets. The top five banking institutions represent 69% of the total market share. The insurance industry is starkly different. There are many options for other companies to match similar services if it would happen that one insurance company were to go bankrupt. For example, AIG Financial Products (AIGFP), a division of AIG, offered a different set of services than the company’s traditional business model. Many other insurers were not involved in this space. AIGFP decided to write credit default swaps (CDS) which paid to the buyer if there happened to be a triggered credit risk event. The problem is that CDS were not considered insurance so they could not be regulated by the states. Additionally, few other major carriers were involved in this space which led to the government bailout of AIG in late 2008. This is an example of how systemic risk is caused by insurers getting involved in coverages outside the realm of …show more content…
States and programs are funded through taxpayers. Some personal and commercial lines are even bought through state insurance programs. Federal regulation would mean that these state departments would be eliminated and the federal government would assume responsibility of implementation and regulation of these programs, which cost taxpayers money. For example, Ohio, Wyoming, North Dakota, and Washington, all provide workers’ compensation (WC) through a monopolistic state fund. If the federal government were to change regulation, it would need to assume responsibility for the WC in these states or amend state statutes to allow additional workers’ compensation providers.
Additionally, the Federal Reserve is one of the agencies that is responsible for financial regulation and oversight. The Federal Reserve would oversee regulatory and capital requirements for the entirety of the US insurance industry, which would add cost to running the agency and may not add to market stability with the number of entities that are regulated.