The foibles of democracy

What is so hard about insurance regulation? Subject companies take in premiums and investment income and pay out claims and expenses. This is not what a fellow on TV referred to the other night as “rocket surgery”.

Yet, in the US, a hotchpotch of state and federal rules has all but killed the reinsurance industry. Executives would rather start companies somewhere—anywhere—else, and attack the US markets only once they are established in another jurisdiction. The US penchant for worldwide taxation has its part to play—most business people understand the Laffer curve, which governments everywhere choose not to—but the minefield of regulation is the primary obstacle.

In the UK, the Financial Services Authority (FSA) (referred to by cynics as the Fundamentally Supine Agency) has proved to be a washout and is to be replaced by a prudential regulatory authority. One doubts the new agency will do much better simply by changing its name.

Bermuda has led the world in understanding that red tape adds nothing, but stifles and then kills initiative. From the days 30 years ago when the Bermuda Monetary Authority was, shall we say, not entirely relevant, it has emerged, under the leadership of Matthew Elderfield and now Jeremy Cox, as a fine example of how intelligent regulation can be appropriately applied.

"An almost total lack of scandal in Bermuda's re/insurance industry over the past 25 years is testament to the efficiency of Bermuda's regulatory model."

It helps, of course, that the giant Bermuda companies need globally respected regulation to combat the image of surf, sea and sand that permeates any discussion of activities on islands in the sun. All the players in the public/private partnership understand that a strong regulator and strong companies go hand-in-hand. An almost total lack of scandal in Bermuda’s re/insurance industry over the past 25 years is testament to the efficiency of Bermuda’s regulatory model.

Now we are told that South Carolina lawmakers are considering changing the position of insurance director (known elsewhere as the industry regulator) to an elected role. Do you need me to outline just how bad an idea this is? Proponents argue that the measure will ensurethat insurance regulators are not indebted to the governors who appoint them. Eleven states, apparently, have similar measures in place—and insurance regulation in the US remains a catastrophe. The idea that Joe Public knows best is very au courant but very, very flawed.

Insurance regulators make good money, so it’s not hard to attract good people. They answer, essentially, only to the law. The companies under their charge must supply enough information to enable their businesses to be thoroughly analysed and completely understood. Yet, with a few exceptions (Vermont is especially well managed in this regard), insurance regulation in the US remains an us-versus-them game. Aye, there’s the rub.

Admittedly, there are more bad guys and gals in the US and UK than there are guys and gals of any description in Bermuda. But there is more money available for regulation in the larger countries, often wasted due to a lack of understanding that what is good for the goose is equally good for the gander. The regulator and the regulated in the larger countries dance a pas de deux that values arm’s-length at all costs, even above common sense and efficiency.

Elected or not, insurance commissioners and prudential regulatory authorities will not fulfil their purpose until they understand that the great majority of insurance companies are not criminal enterprises. Hammering and hampering them all to catch the odd delinquent is bad policy and bad practice. It’s time for regulators to wise up.