For those of you who may have missed it, the Federal Reserve is using the Financial Stability Oversight Council portion of the Dodd-Frank Act to become the national insurance regulator. The implications of this are significant.
Before looking at the implications, how is the Fed becoming the de facto national insurance regulator?
- First, the Fed is using the FSOC to label all of the large insurance companies systemically important.
- Second, the Fed uses its right to regulate all systemically important firms granted under the Act.
Presto, insurers go from being primarily regulated by the state insurance commissioners to being primarily regulated by the Fed.
What are the implications of the Fed becoming the national insurance regulator?
First, it tilts the playing field in favor of the banks. Insurers and banks are natural competitors. Having the bank dominated Federal Reserve as the insurance regulator ensures a steady stream of regulations on the insurance industry that benefit banks to the detriment of insurers.
Second, it makes the Federal Reserve an even more powerful financial regulator at the expense of the states as they are effectively stripped of their regulatory authority. Do we really want that much power in a regulator that fights on a daily basis for its independence from any sort of oversight (political or otherwise).
Third, it is entirely unclear why the Fed would do a better job of regulating the insurance companies than the states do. All of the Too Big to Fail banks were effectively insolvent at the beginning of the financial crisis (as opposed to only AIG which was insolvent because a bank regulator, the OCC, failed to do its job). So it is not clear the Fed is capable of regulating the banks it has overseen for several decades even without the added burden of regulating the insurers.