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Much of the turmoil in America's financial markets involves exotic investments that most Americans never have heard of and never will get near. However, with that turmoil now spreading to the insurance sector and, in particular, the AIG Group - the world's largest insurance company - it's time to look at what the consequences could be for Florida's own troubled property insurance market.
The crisis makes clear that national and international firms need a measure of national solvency regulation that state regulation cannot provide. Florida Insurance Commissioner Kevin McCarty's is among the loudest voices saying that consumers shouldn't worry about the AIG collapse. It is true that consumers with AIG policies almost certainly will get their claims paid. Since the FBI is investigating AIG for potential fraud, however, the subsidiaries could have problems that simply were hidden.
More important, AIG's collapse shows that state regulators fell asleep at the wheel. AIG had subsidiaries in more than a dozen states, meaning that more than a dozen state regulators oversaw a portion of the company, but nobody had an overall view of AIG's operations. Like all 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. New York Insurance Superintendent Eric Dinallo this month authorized AIG to raid its consumer-serving subsidiaries to prop up other parts of the company.
Had this happened - and AIG's $85''billion in federal loans ensures that it won't - a more serious collapse of AIG's insurance operations could have ensued if the parent company couldn't return the money.
Since early 2007, Gov. Crist and the Legislature have given Mr.
McCarty nearly limitless authority to dictate what rates insurers charge while simultaneously offering them direct competition from a state agency, the Citizens Property Insurance Corp. Not only has Florida made it very difficult for money-losing insurers to pull out of the market, it has taken on billions in liability to keep rates down by transferring "catastrophic" risks from private insurers to state taxpayers. If the right storm hits in the wrong place, these factors could put some insurers near the financial brink - just from Florida alone. The same system of state regulation that failed AIG makes it nearly impossible to introduce new products - the last fundamentally new personal insurance came out in 1959 - and raises rates for people who actually manage to stay out of harm's way.
The best solution: Provide a federal regulator who has a full view of insurance companies' operations. Legislation has gained bipartisan support in Congress and it deserves a close look from Florida's delegation. State regulation of insurance plays a vital role. But it may have let the collapse of AIG happen. Florida consumers deserve a better system.
Editor's note: Eli Lehrer is a senior fellow with the Competitive Enterprise Institute in Washington and an adjunct fellow of the James Madison Institute in Tallahassee.