As a frustrated Al Pacino complained in The Godfather Part III, “Just when I thought I was out, they pull me back in.”
And he wasn’t even in the insurance business!
Government modernizers, until recently, seemed ready to inject a modicum of regulatory competition into an industry barred from the same option enjoyed by banks — choosing between state and national chartering and thus getting to decide who regulates them.
State regulators, operating under a New Deal-era system, have prevented a national insurance market from developing, in the process leaving consumers no means of selecting products regulated by authorities other than their own state insurance commissioners.
Aware of that system’s defects, the Bush administration inserted an “optional federal charter” provision into its comprehensive plan for sweeping consolidation and realignment of responsibilities in financial services regulation. So far, so good.
Then, in a recent Financial Times opinion piece, New York Federal Reserve Bank president Timothy Geithner declared it was time to fold the tent on regulatory competition in financial services and to erect instead “a unified regulatory framework to govern the global financial system.”
The only competition Geithner chose to note in his article was “competition in laxity,” amid a “confusing mix of diffused accountability, regulatory competition, and a complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion.”
Suddenly the “optional” part of the administration’s “optional federal charter” proposal began to resemble a mere stepping stone away from mandatory state chartering and toward mandatory national, or international, chartering under a unified regulatory system — without competition of any sort.
All it may take is an insurance crisis brought on by ill-conceived state regulatory policies to set off a rush to regulation by a single national authority.
To say the very least, this wouldn’t constitute progress.
FASCINATING POLITICAL questions arise.
* Will the threat of state regulatory monopolies yielding to national or international regulatory monopolies finally unite a divided insurance industry to fight off a common threat? Or will insurance companies and agents continue to fight among themselves over means and ends?
* Will a segment of the insurance industry, eager to get out from under the thumbs of 50 state regulatory tsars, reconcile itself to the loss of optional federal charter status and embrace instead a national, or even international, regulation entity?
* Will, by contrast, contending factions within the insurance industry ally themselves to maintain a state insurance charter as a live alternative for companies by supporting regulatory competition and optional insurance chartering?
The answers matter far more than casual observers of the industry might suppose.
A single bureaucratic regulator inclines, unsurprisingly, not to the public’s interest but to its own. Indeed, that’s long been the complaint about the state insurance commissioners, who have prevented a national market for insurance from developing. When state regulators control prices and terms within their own jurisdictions, companies have no option for relief from excessive and ill-conceived regulation short of abandoning doing business there.
On the other hand, if regulators at different governmental levels are required to compete — as under an optional chartering system — businesses can hold regulators accountable by choosing which to be governed by.
WHERE THERE is a system of true interstate competition among regulators, as opposed to a feudal system of regulatory fiefdoms, a national market emerges. Consumers will hold regulators accountable for their policies by purchasing products from companies governed by consumer-friendly regulators — wherever those products originate.
Until the recent banking crisis, there was widespread consensus that the regulatory competition created by optional bank chartering had served consumers well. Predictably, politicians are using the banking crisis as an excuse to expand their power.
Worse, perhaps, politicians and bureaucrats are using fallacious arguments against regulatory competition as a way of avoiding their own responsibility for the current crisis, which was caused by the worst monetary policy since the Great Depression.
Regulatory competition isn’t the problem; it’s an immense and important part of the solution.