SEC BRINGS NEW FEDERAL OVERSIGHT TO U.S. INSURANCE
Written by Morningstar.com
NEW YORK -- The Securities and Exchange Commission, using its power as an enforcer of accounting rules, is asserting for the first time in decades a key role for federal officials in overseeing the insurance industry, according to Friday's Wall Street Journal.
Long regulated almost solely by states, insurers are facing multiple probes of their products and practices from both federal and local authorities. The SEC is playing a leading role in an investigation of American International Group Inc. (AIG), one of the world's largest and most powerful insurers, which this week admitted to a wide range of accounting improprieties.
More broadly, the SEC is probing 12 insurers, including General Re Corp., a unit of Berkshire Hathaway Inc. (BRKA, BRKB), ACE Ltd. (ACE), Chubb Corp. (CB) and Swiss Reinsurance Co. (RUKN.VX), said people familiar with the investigations. Regulators don't believe AIG's problems were isolated and think they may find similar misdeeds at other insurance firms, these people say.
The SEC's stepped-up scrutiny already is changing some practices in the industry. For instance, regulators are discouraging insurers from improperly boosting their financial positions by using nontraditional insurance products, known as "finite-risk" reinsurance, that regulators say are thinly disguised loans.
Amid the probes, the National Association of Insurance Commissioners, which represents state insurance regulators and drafts "model insurance laws" for states, says it is looking to toughen disclosure and accounting rules. " Accounting rules and disclosure rules require more transparency, which is a good thing," said Stephen Cutler, the SEC's director of enforcement.
The federal government's ability to regulate the insurance industry is still limited by law. The McCarran-Ferguson Act of 1945 gave primacy in regulating and taxing insurers to states. That's in marked contrast to the large federal role in such industries as banking and telecommunications.
The 1945 law, meant to settle controversy over the jurisdiction of state and federal governments in insurance, makes it clear that states oversee the adequacy of insurance company claims reserves. It also allows insurers to engage in some practices that otherwise would violate federal antitrust law, such as sharing information that lowers the cost of business.
April 1, 2005