April 16, 2009 - Op-Ed Contributor
Regulate Me, Please
By Tom Wilson
THERE are plenty of people singling out causes for the collapse of the financial markets, and conveniently, the source of the problem is usually someone else. But accountability lies with all of us — the insurance industry, regulators, banks and credit rating agencies. The insurance companies that wrote credit default swaps were happy not to be regulated. Insurance regulators didn’t expand their oversight to ensure the solvency of these companies. Banking regulators, banks and credit rating agencies did not properly assess the strength of issuers and readily accepted these complex derivatives.
My company, Allstate, serves more than 17 million American households. While we played only a small role in unregulated insurance markets, we have a duty to help stabilize the financial system. It was, after all, an insurance product that contributed to the risk that almost brought down the global economy.
Insurance is defined as coverage by contract in which one party agrees to indemnify or reimburse another for loss. The credit default swaps written by American International Group are clearly insurance since they are a contractual obligation by A.I.G. to pay should there be a default on a security. It should be no surprise that a big insurer like A.I.G. would be a major issuer of credit default swaps. What is surprising is the claim that insurance did not contribute to the recent market failures, and therefore insurers don’t need to consider how to prevent them from happening again.
Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks. Business leaders must work with the government to create a new regulatory structure. All companies that create risk for the financial markets need to be in “the pool” of federal regulation, including companies like Allstate. A good start would be for Congress to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies.
Such a sophisticated federal insurance regulator would oversee the financial stability of large companies. We should also consider expanding private insurance to protect personal savings from systemic risks. And we need to establish a federal agency that would be empowered to deal with any large failing financial institutions, outside of bankruptcy. We must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.
Business and government leaders must avoid the trap of diminished expectations and continue to demand the best of ourselves and our fellow Americans. Millions of hard-working families are counting on us to get this right.
Tom Wilson is the chief executive of Allstate.