The Tip of the Iceberg

I have a piece in today’s National Review Online about the new bill that would provide optional federal chartering (OFC) for insurance companies. OFC, of course, would let insurance companies do what banks have long done and subject themselves to federal rather than state regulation. This could have good consequences if it lets insurance companies escape burdensome state regulations and move towards risk-based pricing for insurance policies.

I still haven’t even seen the final legislative langauge myself and, as I say in the piece, I think the devil is in the details. But the Sununu-Johnson bill is only the tip of the iceberg. There are other ways whereby we can move our insurance system towards risk-based pricing. Mutual recognition of state insurance charters would accomplish many of the same goals as OFC without enlarging the federal government’s powers. Insurance companies, one assumes, would operate in states that provided the laws that most moved towards risk-based pricing.

Likewise, financial instruments other than conventional insurance, for the most part, can already be sold and priced much more freely. Today, Lloyd’s associations, risk retention groups, catastrophe bonds, and weather futures can replace certain types of insurance in certain cases and don’t face the regulatory problems of traditional insurance.

In the other term, I think America needs a broad spectrum of insurance reform proposals. Some ideas that look good at first may fall down in practice and some not-so-promising ideas may turn out better than expected.