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.According to the FederalReserve, at the end of 2006, U.S.insurers held assets totaling $6 trillion, compared with$12.6 trillion held by the U.S.banking sector and $12.4 trillion held by the U.S.securitiessector.The provision of insurance performs an essential function in our overall economy byproviding a mechanism for businesses and the general population to safeguard their assetsfrom a wide variety of risks.The insurance industry s overall importance in the financialsector, as well as its role in promoting commerce and economic growth more broadly,provides a clear interest for the federal government to ensure that the regulatory structuresurrounding insurance is efficient and effective.Much like other financial services, over time the business of providing insurance hasmoved to a more national focus even within the state-based regulatory structure.While 136 Martin T.Bannister (Editor)locally based insurers still play a role in the provision of some types of insurance, thegrowing trend is to develop products for a national market.Insurers with a nationalpresence can spread product development costs over a broader customer base, and inmany cases providing national products allows insurers to diversify better their riskexposure.The inherent nature of a regulatory system in which each state regulates theinsurance products sold within its borders (i.e., a state-based regulatory system) makes theprocess of developing national products cumbersome and more costly, directly impactingthe competitiveness of U.S.insurers.In addition to a more national focus, the insurance industry today operates in a globalmarketplace with many significant foreign participants.This is especially the case forsome types of insurance such as reinsurance, where over 2000 offshore reinsurersaccounted for 53 percent of the ceded U.S.reinsurance premiums in 2006.[129] In such aglobal marketplace, relying on a state-based regulatory system creates increasing tensionsboth in the ability of U.S.-based insurers to compete abroad, and in allowing greaterparticipation of foreign insurers in U.S.markets.The state-based insurance regulatory system evidences a number of potentialinefficiencies.In particular, the state-based structure results in the inevitable duplication ofregulatory functions and increased costs associated with multiple, non-uniformregulatory regimes.Even with the efforts of the National Association of InsuranceCommissioners ( NAIC ) to foster greater uniformity through the development of model lawsand other coordination efforts, ultimate regulatory authority still rests with individualstates.[130] For insurers operating on a national basis, this requires not only being subjectto licensing and regulatory examinations in all states where the insurer operates, but alsooperating under different laws in each state.For example, some of the differing state lawsfocus on consumer protection issues, such as required approvals of policy forms, filingprocedures, and allowable premium charges.Some aspects of state- level oversight,especially maintaining a clear view of local market activities, can add value to consumerprotection regulation.The next section of the report discusses issues associated with consumerprotection regulation in the optimal framework and the role of the states.In terms of prudential financial regulation, some progress in modernizing stateregulation has occurred as exemplified by the development of uniform solvency standardsthrough the NAIC s Accreditation Program ( Accreditation Program ), initiated in theearly 1990s.The Accreditation Program requires an independent team to review each state sinsurance regulatory agency to assess compliance with certain designated NAICFinancial Regulation Standards.[131] Nonetheless, each individual state where an insureroperates still possesses prudential financial oversight, which makes it difficult within thestate system to evaluate fully the risks of national insurers.Having states solely responsible for prudential insurance regulation has also led tothe creation of state-level guarantee funds.While prudential regulation of insurers is broadlyviewed as a mechanism to protect consumers by ensuring that an insurer has the financialcapacity to pay claims, such regulation does not prevent insolvencies in all cases.Until the1 960s, policyholders experiencing an insured loss were largely left without any explicitprotection upon an insurer s failure or inability to pay claims.This led to the creation ofvarious types of state-level guarantee funds, and today all states provide a guarantee fundassociation system that steps in upon the insolvency of an insurer and pays policyholderclaims up to specified statutory limits. The Optimal Regulatory Structure 137One way to address the inefficiencies in the state-based insurance regulatory system is toestablish a new FII charter.Similar to the FIDI charter, a key characteristic of the FIIcharter should be its clear focus on retail consumer products with some type ofgovernment guarantee.In terms of a government guarantee, a state-level guaranteesystem could be explicitly maintained in this framework.Alternatively, much like thestructure for FIDIs set forth above, in the long run a uniform and consistent federallyestablished guarantee structure could accompany a system of federal oversight.PFRAshould be responsible for the financial regulation of FIIs.The following are some issuesassociated with the establishment of a FII charter and a potential Federal InsuranceGuarantee Fund ( FIGF ).If a state-level guarantee system were maintained, similarissues regarding the types of insurance that could be sold under the FII charter and thestructure of the state-level guarantee system would have to be addressed.Basic Structure of FII CharterThe basic structure of the FII charter should mirror aspects described above for theFIDI charter.In particular, the FII charter should be open to all corporate forms, have fieldpreemption over state laws, and be subject to the same types of restrictions on affiliatetransactions as a FIDI charter.Types of InsuranceIf a FII charter and a guarantee system were established in the optimal structure, theyshould be linked together.Only insurance products sold under a FII charter shouldreceive the benefit of a federal assurance of access to guarantee coverage.Otherinsurance products in the optimal structure could be sold by FFSPs, as described below, andstates should still retain the ability to charter insurers.[132]The key aspect in determining the types of insurance products sold through a FII charterand the access given to guarantee coverage should be a link to retail consumers (e.g.,individuals and small businesses).More specifically, the FII and guarantee frameworkshould include personal insurance products providing some type of protection fromcatastrophic loss.Such personal insurance products could include property (e.g., fire,dwelling, homeowners, renters, personal property), personal automobile, liability (e.g.,general, umbrella), and life insurance (all products, individual and group).These types ofpersonal insurance products should form the bulk of the products eligible for a federalguarantee.Further consideration could be given to including other types of personalinsurance products in the guarantee system
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