After my 10-year old daughter caught me reading “Snoopy the Destroyer,” Paul Krugman’s column in the April 11, 2016, New York Times, I had to reassure her that Snoopy was still safe to watch. Krugman may scare little girls with his article arguing for more federal regulation of financial institutions, including MetLife, owner of the Snoopy logo, lest the economy blow up. But consumers and the broader economy should not be scared, due to the work of state insurance regulators.
The idea, as suggested by Krugman, that federal regulators know best would have Charlie Brown saying, “Good grief.”
As Iowa’s state insurance commissioner, I work closely with 55 other insurance commissioners, directors or superintendents through the National Association of Insurance Commissioners (“NAIC”) to supervise the nation’s insurance market. I serve as chair of the NAIC life and annuity (“A”) committee, which sets national policy on matters that affect the life insurance and annuity industry. Through these roles, I know our state-based regulatory system works to protect all American consumers and the financial soundness of the carriers we regulate.
The myth that federal regulators know best has long been dispelled, but it is still front and center today, particularly when those same federal officials are challenged on their decisions.
Alarm bells are going off at the Treasury Department after a U.S. District Court recently threw out the designation of MetLife as a systemically important financial institution (SIFI). Treasury Secretary Jack Lew lashed out at the court in public statements and in the pages of major U.S. newspapers that MetLife, a company that is almost 150 years old, somehow presents a threat to the U.S. unless the company is subjected to additional oversight and federal regulation that accompanies the SIFI designation. Secretary Lew fails to acknowledge that MetLife, Prudential and hundreds of other insurance companies are closely and successfully regulated and supervised by state insurance commissioners, and have been for decades.
Critics of the court’s decision – including Lew – argue that the court did not defer to the “experts” at the Financial Stability Oversight Council (FSOC), which found that MetLife posed a threat to the economy. However, the FSOC itself ignored its own true experts. The FSOC designated MetLife as a SIFI in December 2014 over the objections of the only two independent FSOC members with true expertise and experience in insurance regulation.
What we have learned following the 2008 financial crisis – and what Congress should keep in mind – is that the near collapse of AIG, and the accompanying $180 billion check from taxpayers to save it, was due to suspect federal oversight of AIG, not to any inadequacy in our state-based insurance regulatory system.
AIG was a large, complex financial company. The insurance operations were supervised by the state insurance regulators, while its financial products division was supervised by the Office of Thrift Supervision (“OTS”). It was AIG’s financial products division that became overextended by offering credit default swaps backed by the sizable balance sheet of AIG. OTS did not require AIG’s financial products division to have sufficient capital, and the company was left exposed.
I want to ensure that the economy is protected from a financial crisis as much as anyone, but the thought of federal regulation and supervision of traditional insurance activities does not allow me to sleep easier. To the contrary, we need a coordinated regulatory approach where regulators work together. The federal government’s supervision shouldn’t expand into areas where it lacks expertise and where states are already working effectively. Consumers will bear the costs of this unnecessary overlap and duplication.
The insurance industry is under the watchful eye of state insurance departments, and our track record of solvency regulation of large national and multinational insurers speaks for itself. The NAIC and state insurance departments have updated solvency oversight through transformational model laws that allow state insurance regulators to maintain a close watch on the insurance activities of the carriers domiciled in our respective states.
When Judge Rosemary Collyer rescinded MetLife’s designation, she found that FSOC failed to take into account existing regulatory regimes. In short, the court found that FSOC failed to consider the level of scrutiny that insurance carriers like MetLife face from state regulators.
Through strong statutory schemes and strong financial oversight, state regulators have detailed knowledge of insurance companies and successfully protect policyholders in all 50 states. Insurance companies do fail, as part of a healthy and competitive market, but it is a rare occurrence, because state insurance regulations require that insurance companies hold significant amounts of capital in reserve. Even when a company fails, policyholders are protected through our receivership process.
In addition to the amount of capital a carrier is required to hold, states also maintain strict rules on the kinds of investments an insurance carrier may make with policyholders’ money. If the OTS maintained this same type of oversight and approach, AIG would not have required a massive taxpayer bailout.
Alarmists like Secretary Lew insist that a large insurance company poses a threat to the U.S. economy and thereby requires federal supervision. They claim that Judge Collyer’s decision throwing out MetLife’s SIFI designation undermines broader efforts to reform our financial system in the wake of the 2008 financial crisis. But Judge Collyer’s decision is focused on the process that the Financial Stability Oversight Council used for designating MetLife as a SIFI in 2014, not the broader law.
Dodd-Frank anticipated the fallibility of FSOC designations, as the law allows companies to challenge their designation. I do not blame MetLife for challenging the FSOC.
FSOC continues to dismiss the legacy and expertise of state regulators like myself and has announced that it will appeal the District Court’s decision.
It is puzzling why the federal government believes it can do a better job than on-the-ground state commissioners. As state commissioners, our top priority is protecting policyholders and providing robust oversight.
This allows me to tell my daughter that Snoopy isn’t the bad guy, but she may learn to fear alarmists like Krugman and Secretary Lew as she begins to read past the funny pages.