Systemic Risk Oversight and the Shifting Balance of State and Federal Authority over Insurance

The state-based model of U.S. insurance regulation has been remarkably enduring to date, in part because the traditional rationales for a greater federal roleefficiency, uniformity, and consumer protection—have not succeeded in displacing it. However, the 2008 financial crisis, the federal government’s unprecedented bailouts of parts of the insurance sector, and the need for a coordinated international approach radically shifted the debate about the proper allocation of power between the federal government and the states by supplanting traditional concerns about efficiency, uniformity, and consumer protection in insurance with a new federal mandate to control systemic risk. Unprepared and ill-equipped to counter this shift, the states face the biggest threat to their domination of U.S. insurance regulation in years. Already, the federal government has made inroads into insurance regulation for purposes of systemic risk oversight. That federal presence creates several openings for a broader federal role in insurance than just regulation of systemically important insurers. For instance, solvency regulation, which traditionally has been reserved to the states, increasingly could be subsumed under the rubric of systemic risk. Over time, additional federal incursions could include higher reporting requirements for insurers, regulation of discrete, systemically risky activities (regardless of an insurer’s size), oversight of captive reinsurers, and greater consolidated supervision of insurance groups.