Insurance Regulation: Lessons from a Small Economy
46 Pages Posted: 21 May 2010 Last revised: 20 May 2018
Date Written: September 1, 2009
In March 2009, the faltering insurance behemoth AIG sparked national outrage when it announced a payment of $165 million in executive bonuses after receiving more than $170 billion in bailout money from the U.S. Treasury. President Obama expressed his personal indignation in a public statement, emphasizing “the need for overall financial regulatory reform.” Is this merely an anecdote, a unique case that requires a tailored solution, or a symptom of a more fundamental deficiency? The recent economic crisis showcased some of the main deficiencies of existing regulatory systems, and rekindled the debate on the importance and scope of regulation in general, and of financial services regulation in particular. Against this backdrop, insurance - one of the main pillars of the financial services sector - merits special attention, because it remains the only financial industry in the United States not regulated on the federal level.
The Article unveils the inherent weakness of regulation on the state level, and advocates cautious federal intervention. But unlike previous studies, it uses an interest-group theory with a strong comparative bent. An interest-group theory is premised on the idea that regulation provides a mechanism through which well organized interest groups can influence the distribution of economic rents in an industry. Presumably, insurance regulation is no different. In addition, the state system of insurance regulation in the United States makes the use of foreign experience incomparably valuable, because in the absence of federal intervention individual states operate much like small foreign economies. The vast foreign experience, despite its great value to American scholars and policymakers, is usually inaccessible due to language barriers. This Article aims to lift at least one barrier and to enrich scholarly and political discourse with timely and highly pertinent insights.
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