The Naic Model Investment Law: A Missed Opportunity
Posted: 24 Aug 1998
The National Association of Insurance Commissioners (NAIC) currently has a once-in-a-generation opportunity: to start with a clean slate and write a "model investment law" (MIL) that would provide detailed guidance for the 50 state insurance regulatory authorities. If written sensibly, this model law could enhance the safety and soundness of insurance companies, while allowing them the necessary flexibility to compete efficiently in the ever-widening markets for financial services -- in the U.S. and abroad. Alas, the draft that the NAIC staff has produced thus far has largely missed this opportunity. The draft law adopts a "pigeon-hole" approach that addresses categories of risk assets (and activities) on a stand-alone basis, ignoring portfolio effects and the potential for offsetting interactions among the categories. It ignores most of the basic lessons of modern finance theory. It ignores the existence (and wisdom) of the risk-based capital (RBC) requirements promulgated by the NAIC. It undermines, rather than strengthens, the proper goal of safety-and-soundness regulation: to preserve the solvency and long-run financial strength of the regulated institutions.The NAIC still has the opportunity to withdraw its draft and start over. By doing so, it could preserve this unique opportunity and pursue a sensible path of safety-and-soundness regulation.This paper will expand on these themes.
JEL Classification: G22
Suggested Citation: Suggested Citation