Keep State Insurance Regulation

Professor Mark Kleiman of the UCLA School of Public Policy and Social Research suggests that it’s “[t]ime for state-level regulation of insurance companies to go the way of the buggy whip.”

I strongly disagree.

I spent the better part of late 2005 and early 2006 prosecuting class actions against multiple large insurance companies. This involved, in part, reviewing multiple boxes full of correspondence and filings between insurance companies and their state regulators.

I was very impressed by the professionalism and concern for the public I saw on the part of state insurance regulators.

Property and auto insurance in particular are heavily regulated by individual states, and this system has long functioned smoothly. These regulations have ensured for a long time these companies are “boring” and stable, with rates regulated to ensure a small but consistent profit margin. Any price changes and new fees must be justified by insurance companies in extensive filings with detailed claims information. Because this system works well, consumers can be assured that of their rates go up it is because the actual cost of insuring them has as well.

AIG’s scam was to collect money for writing credit default swap contracts, spend a large portion of the money it received from the contracts on lavish executive compensation, but never have the ability to pay its obligations to its counterparties under the contracts. The big regulatory failure was on the part of the Bush-era SEC when it allowed companies to pretend AIG’s CDS were as good as money in the bank. Without this regulatory forbearance by the SEC, nobody would have bought what AIG was selling, which only bore the remotest resemblance to insurance as the term is commonly understood.

While I don’t think it is Mark’s intention, in the real world plans to “replace a patchwork of 50 state laws and regulatory agencies with a single federal authority” usually ends up being a back-door deregulations to the detriment of the general public. For example, when the Supreme Court decided that the National Banking Act preempted state usury laws credit card company profits grew substantially and many consumers fell into a spiral of high-interest debt. Replacing state financial regulation with federal regulation also gave rise to highly predatory payday loan industry.

In theory the Fed and federal banking regulators could have capped credit card interest rates at any time, as 50 states once did, and which 47 states still do for non-bank loans. But it’s a lot easier to corrupt one central regulator than 50 state-level ones. And at minimum progressive states like California can protect their citizens from predatory corporations during periods, for instance much of the past decade, when most federal regulatory agencies suffered severely from “regulatory capture.”

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