Vaughan: Economic Crisis Flashcards
Major criticism of insurance regulation
Cost of dealing with multiple states (and inefficiency)
“Why regulation fails”
Fallibility
Forbearance
Capture
Regulatory forbearance
Failure to take prompt action
Chance insurer will survive
Shutting down insurer is difficult
May produce higher deficiency (insurer may increase risk taking during wait)
Regulatory capture
Tendency of regulators to side with interest group
Similar to regulatory forbearance
Need checks and balances
Checks and balances in US regulation
Duplication
Peer pressure
Diversity of perspective
Duplication
(Martin Frankel case) – more than one regulator is involved, better chance of catching fraud
Lead regulator in each state responsible for coordination
NAIC Financial Analysis Division
Performs ongoing financial analysis of all nationally significant insurers
Identifies trends, troubled companies
Unusual findings reported to FAWG
NAIC Financial Analysis Working Group
16 experienced financial regulators
If troubled insurer identified: questions, meets, possibly recommends regulatory action;
Also a forum to challenge domestic regulators
Requirements for regulatory system to benefit from peer review process
Culture of free-flowing info
Willingness to challenge / be challenged
4 elements of building effective system of regulation
1) Regulators must have confidence in each other
2) Free sharing of information
3) Ability for other countries to take action if necessary
4) Must be credible mechanism to resolve situation where assets are insufficient to fund all claims
Five proposed principles of nationwide regulation
Needs to be uniform standards (where appropriate)
States have responsibility for setting/enforcing
State regulators have equal standing as other regulators
Mechanisms for collaboration and interaction with international and financial regulators on matters that impact US
Should not reduce state’s authority to impose taxes
