Eli Lehrer: AIG collapse shows Florida insurance regulators asleep at the wheel

Treasure Coast Palm--November 10, 2008

By TCPalm Staff

The collapse of AIG makes it clear that national and international firms need a measure of national solvency regulation that state regulation cannot provide.

Florida Insurance Commissioner Kevin McCarty easily counts among the loudest voices saying that consumers shouldn’t worry about the AIG collapse. Every few days, it seems, McCarty issues a statement telling consumers not to worry about AIG and assuring them of the stability of the current system of state-by-state regulations.

It is true that consumers with AIG policies will almost certainly get their claims paid at the end of the day. Given that the FBI is investigating AIG for potential fraud, however, it remains possible that the subsidiaries could have real financial problems that were simply hidden.

Even more important, AIG’s collapse shows that state regulators fell asleep at the wheel. AIG had insurance subsidiaries domiciled in more than a dozen states, meaning more than a dozen state regulators oversaw a portion of the company, but nobody had an overall view of AIG’s operations. Like other major insurers, AIG engaged in a variety of investments with its own money, sold consumer investment products and ran banking operations. And state regulators didn’t understand them.

One of McCarty’s colleagues, New York State Insurance Superintendent Eric Dinallo had authorized AIG to raid its consumer-serving subsidiaries to prop up other parts of the company. Had this happened, and the company’s $85 billion in federal loans assures that it won’t, a much more serious collapse of AIG’s insurance operations could have ensued if the parent company found itself unable to return the money.

Worse still, Florida’s own system shows the jeopardy that state regulation can create for those who want stability. Since early 2007, Gov. Charlie Crist and the Legislature have given McCarty nearly limitless authority to dictate what rates insurers charge while simultaneously offering them direct competition from a state agency, the Florida Citizens Property Insurance Corporation, which also sells property insurance.

Not only has Florida made it very difficult for money-losing insurers to pull out of the market, it has taken on at least $36 billion in liability in an effort to keep rates down by transferring “catastrophic” risks from private insurers to state taxpayers. If the right storm hits in the wrong place, this combination of factors could easily put some insurers near the financial brink – just from Florida alone.

The best solution: provide a federal regulator that has a full view of insurance companies’ operations. Recent events have shown this is preferable to a patchwork of inconsistent rules and regulations. Legislation toward that end has already gained bipartisan support in Congress and it deserves a close look from Florida’s delegation.

Nobody suggests that we should get rid of state regulation of insurance altogether. It plays a vital role. But it may well have let the collapse of AIG happen. Florida consumers deserve better system.

Lehrer is an adjunct fellow of the James Madison Institute in Tallahassee.