RIMS Backs GAO Report on Financial System

The Risk and Insurance Management Society Inc. (RIMS) is applauding the U.S. Government Accountability Office (GAO) for its report, “A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System,” calling it timely and constructive. The GAO study comes on the heels of the financial market turmoil and focuses on an analysis of factors leading to the financial crisis and proposes a framework for Congress in crafting potential regulatory reform proposals.

From RIMS perspective, the report is notable for highlighting the trend toward increasing globalization of financial instruments. Just as important, the report identifies the current fragmented United States regulatory structure as both an impediment to coordinating with other regulators on an international scale as well as contributing to regulatory inefficiency and ineffectiveness domestically. These factors impact insurance affordability and availability and are important to risk managers as purchasers of commercial insurance.

Pointing specifically to the GAO framework, Deborah Luthi, member of RIMS board of directors and director of Enterprise Risk Management Services at Matheson Inc., noted the call by the GAO for greater efficiency of financial services. While stopping short of an outright recommendation, Luthi is encouraged that the GAO suggests a possible solution lies with congressional consideration of an Optional Federal Charter (OFC) and creating a federal insurance regulatory entity. It is clear that the GAO perceives this as one way to address the overlapping inefficiency of the state based insurance regulatory system.

“RIMS believes that a federal regulator is better equipped to address the complexities of today’s insurance market,” says Luthi. “If the current outmoded system is maintained, any potential insurance market problems could be made worse.”

Additionally, an OFC and a uniform system of regulation would permit insurers to conduct business in all 50 states, thus avoiding multiple costs of state regulations. Another proposal supported by RIMS creates the foundation for a federal insurance regulator by establishing an Office of Insurance Information. This federal office would serve as a repository for collecting and disseminating insurance information in an effort to develop federal expertise, and a necessary component to the federal regulatory scheme.

The GAO Report outlines nine criteria by which to assess proposals for a new financial regulatory structure. One criterion for assessing proposals is whether it would eliminate overlapping federal regulatory missions, and where appropriate, minimize regulatory burden. The GAO goes on to suggest that Congress could consider an OFC as well as create a federal insurance regulatory entity as possible solutions, but admits that it has not studied the issue. The GAO further adds that it has noted difficulties with efforts to harmonize insurance regulation across states through the National Association of Insurance Commissioners-based structure.

In fact, RIMS believes a similar argument or application of the recommendation can be made to further advance legislation addressing the non-admitted market—or surplus lines—legislation which was passed by the U.S. House of Representatives twice, but died again in the U.S. Senate last Congress. Legislation would rectify the current cumbersome regulatory scheme applicable to surplus lines insurers whereby insurers are subject to premium taxes not only in their home states but also in states where they place insurance. This is another example of how, quite often, duplicative regulations hamper the efficient delivery of insurance to purchasers and could be remedied by federal action.

RIMS is calling upon Congress to also address these important reforms as they consider this much needed financial modernization and regulatory restructuring legislation.