How state regulation keeps insurance innovating safely

By Mark Afable

Private equity firms have taken more significant investment and ownership positions in life insurance and annuity companies. The positives that come from private equity’s involvement include increased capital and new, innovative investment strategies, along with new regulatory challenges to protect policyholders and ensure market stability.

Critics and consumer advocates have voiced concerns about the insurance regulatory system’s ability to regulate these entities. But are these concerns about developments legitimate?

Yes, and state regulators and the National Association of Insurance Commissioners understand the concerns and are taking the appropriate steps to address them. Some say I would naturally advocate for state regulation as a former state insurance regulator. However, I was also the chief legal officer of the country's 12^th-largest property and casualty insurance group, which also owns a life insurance company. Insurers are equally concerned that private equity-owned insurers are well-run and meet all the solvency requirements for protecting consumers. I believe that insurers want fair regulation that protects consumers and ensures a fair, balanced playfield. Why do I feel that way?

The insurance industry has been regulated on the state level for over a hundred years. The McCarran-Ferguson Act in 1945 and the Gramm-Leach-Bliley Act of 1999 cemented the states’ role. State-based insurance regulation has proven effective in numerous challenging economic situations, such as the 2008 financial crisis and the COVID-19 pandemic, proving resilient in those situations. There are numerous arguments in favor of state-based insurance regulation, including the history and experience of state regulators and the NAIC, the successful work of the NAIC Macroprudential Working Group, and the promotion of innovation and efficiency.

The NAIC and state regulators have been working together for more than 150 years and have proven they can address evolving concerns. Responding to inquiries from Washington two years ago, the NAIC said that the national system of state-based regulation is fully capable of assessing and supervising any insurance activity, regardless of ownership structure.

State insurance regulators have extensive expertise and insight into the solvency, investments, corporate structure and management of U.S. insurers at the individual entity and group level. Regulatory financial examiners, actuaries, investment analysts, attorneys and other specialized experts with decades of experience, coupled with centralized resources of the NAIC and financial data analysis capability, are brought to bear to supervise the largest and most resilient insurance market in the world.

The current regulatory regime has been successful and continues to leverage its extensive experience to anticipate the insurance industry's needs.

The NAIC’s Macroprudential Working Group was created to analyze risks to insurers due to complex investments. Maryland Insurance Commissioner Kathleen Birrane stated in her testimony to Congress in 2022 that the working group has developed a list of 13 regulatory considerations to address the potential risks to insurers due to the complexity of the investments. She explained that the list of regulatory considerations is being used to “identify where existing disclosures, policies and/or procedures should be modified, or new ones created, to address any gaps based on the increase in the number of private equity owners of insurers as well as the increase in asset managers’ involvement in insurance, the increase of private investments in insurers’ portfolios and other causes.”

Many insurers have been writing complex insurance products and using complex investment strategies over the years. The regulatory regime has had continued success with assessing risks in the market. The introduction of private equity firms does not change the skill and ability of the current regulatory regime. The NAIC Financial Analysis Handbook includes guidance on necessary considerations for review and approval of private equity acquisition of insurers (Form A process). This work was spearheaded by the Private Equity Issues (E) Working Group.

State-based insurance regulation promotes innovation and creativity, important qualities to impact all markets effectively. Each state has unique socioeconomic, climate, geographical size, and other characteristics that contribute to the needs of its insurance market. State insurance departments are better equipped to address diverse needs and make more effective regulatory decisions. They can experiment and innovate without the fear of disturbing regulation in all 50 states. Uniformity is also present with state-based regulation because many states choose to adopt the NAIC model laws or adopt laws with very similar language.

State-based regulation has proven effective and innovative for centuries. State insurance departments and the NAIC are well-equipped to continue working together to assess the risks in the insurance industry and provide appropriate solutions. The successful history of the current regulatory framework, the current work of the NAIC Macroprudential Working Group, and the promotion of innovation and creativity are reasons to believe the state-based insurance regulatory framework is equipped to oversee private equity ownership of life insurance and annuity writers.

Mark Afable served as Wisconsin Insurance Commissioner 2019-2021. He is an executive in-residence at Marquette University’s College of Business Insurance Program. Contact him at [email protected].