The following is a guest post by Marc Levinson, a senior fellow for international business at the Council on Foreign Relations. The following opinions expressed are his own.
In a critical area of the financial reform bill that’s about to pass, Congress has lost its nerve. As senators and representatives met Tuesday to agree on key details of the final bill, they voted to give the insurance industry a free ride – and did so in the name of consumer protection.
The conventional wisdom, much promoted on Capitol Hill, is that insurance was the shining star as a crisis wracked the financial sector in 2007 and 2008. Tough state regulation is said to have kept insurers robust as banks tottered, leaving no reason for federal intervention.
Unfortunately, this picture is far from true. The subprime crisis exposed poorly regulated insurers as major sources of risk, transmitting problems from one part of the financial sector to another.
Financial experts, as well as state regulators, have long insisted that insurance cannot give rise to systemic risk. Insurance policyholders, the reasoning goes, cannot line up to demand cash if a company runs into trouble. Unlike a bank, an insurer’s obligations are long-term, which is said to give regulators plenty of time to deal with problems and make sure consumers’ claims are paid.