Federal Chartering For Insurers?Federal Chartering For Insurers?

The insurance industry is the only type of financial service that escapes federal oversight in the United States. But that could soon change now that financial services companies are merging. The U.S. Congress is currently debating regulation.

The Graham-Leach-Bliley Act of 1999 began to erase the distinctions between the federally regulated banking and stock brokerage industries and state-regulated insurance businesses. With many firms now operating in all three segments, coalescing oversight at the federal level makes sense.

Market consolidation is leading insurers to operate in multiple states. As the work of complying with different state regulations becomes more onerous, many insurers are considering advocating for federal charters so they can reduce their costs and change their products more rapidly. IE sister publication Insurance & Technology reported recently that "insurers ... overwhelmed by [2004] information requests from state attorneys general and departments of insurance ... will spend much of 2005 catching up" with fulfilling those requests. IT systems that help manage the complexity are expensive and a low corporate priority because they aren't strategically vital.

Consumers and law enforcement would benefit from federal regulation, too. With power consolidated at the national level, insurers finally could (and might be compelled to) share data effectively in order to reduce fraud. Pooling insurance and other financial services data for analysis would reduce the burden on local police fighting fraud. By decreasing the level of fraudulent activity, costs passed along to consumers could fall. Although the industry has made attempts to increase data sharing, insurance experts and police still complain of big deficiencies. If Congress steps up and does the job right, everyone involved could benefit.