Obama-era agreement on insurance regulation strikes the right level of detail after international negotiation.
One of the last accomplishments of the Obama Administration was the conclusion of an agreement with the European Union on how to treat insurance and reinsurance companies doing business with both the United States and the European Union.
The Obama Administration finished this deal—known as a covered agreement, the need for which stemmed from the response to the financial crisis—one week before the inauguration of President Donald Trump. The agreement’s principles-based approach makes it a streamlined and workable solution for coordinating the regulation of multinational insurance companies.
The agreement followed a period during which both the United States and Europe ramped up the intensity of supervision of insurance companies after the 2008 financial crisis. In 2008, insufficiently hedged entry into the credit default swaps market, combined with dependence on a securities lending program that dried up just as the swaps started to fare disastrously, ruined America’s largest insurance company, American International Group (AIG).
AIG required an enormous bailout, which led regulators on both sides of the Atlantic to conclude that insurance companies—long thought to be the most reliable corner of finance—could pose real threats to financial stability.
Regulators hoped that more regulation on both sides of the Atlantic would be the answer. The problem was how to coordinate that regulatory supervision. Could the regulators trust that insurers seeking to do business in the United States and European markets posed fewer risks than AIG did if regulators from only one of those jurisdictions could police the firm’s balance sheets?
Regulators traditionally solve these international trust problems in one of two ways: legal treaties and regulatory cooperation.
The legal, as opposed to regulatory, way would have been for the United States and European Union to create a treaty committing to treat domestic and foreign insurers equally, provided the foreign insurers were sufficiently regulated. Such a treaty would be similar to trade treaties, which are the province of diplomats and which tend to be extremely detailed.
For instance, the treaty that created the World Trade Organization (WTO) included 60 separate deals and was 550 pages long. The Harmonized Tariff Schedule of the United States, which implements the American trade commitments, fills two volumes.
But there are problems with the legal approach. In addition to the complexities of treaty negotiation, adopting treaties requires a degree of political consensus, at least in the United States. The U.S. Senate must ratify these agreements, and it is hard to persuade the modern Senate to sign off on a treaty.
The other way to handle international trust problems is for regulators to come together and agree on a coordinated approach to regulation. This might be characterized as the regulatory, as opposed to legal, approach, since it does not seek to make international law, but rather tries to align domestic law. No Senate ratification is required to make effective this coordinated approach.
Regulators prefer agreement in principle over agreement on every detail, which means that agreements tend to be much shorter than treaties. The covered agreement on insurance made at the end of the Obama Administration fills only 27 pages. By regulatory cooperation standards, that is even lengthy and downright specific.
By comparison, the first version of the Basel Capital Accord, which regulated the amount of money that banks would have to hold in reserve in case of emergencies, could be expressed in 13 pages—even after 10 years of updates—although it has admittedly got longer with subsequent updates.
Similarly, the international regulatory deal on securities—the International Organization of Securities Commission’s multilateral memorandum of understanding on enforcement—is only nine pages long.
Of course, even short regulatory deals contain plenty of hard and fast directives. But the point of these international regulatory deals is also to establish an ongoing relationship, rather than to address every possible issue that could arise beforehand.
Some stakeholders who worry about the insurance deal between the United States and the European Union have complained that it is not specific enough. State insurance commissioners have suggested that before the insurance agreement is implemented, “a clarification of the current covered agreement would lead to a better result for the United States.”
At a Senate hearing on the deal—in which I participated—U.S. Senator Mike Crapo (R-Idaho) put the question this way: “Can the [concerns] be addressed without reopening the agreement?”
Reopening negotiations on the covered agreement would be unnecessary and possibly even counterproductive. It is always possible for regulators to try to add more detail to a deal, but sometimes it is not worth it.
Agreements on regulatory cooperation do not always benefit from the sorts of specifics that diplomats put in treaties. The insurance agreement is meant to establish the basic principles for determining when a country should accept the way that a foreign multinational insurance company is regulated in its home country. It is also meant to reduce barriers that keep insurance companies from doing business overseas.
For these reasons, the insurance agreement provides a perfectly comfortable level of detail. By contrast, I doubt I am alone in never having finished reading every one of the agreements that form the basis of the WTO. Sometimes, at least when it comes to international financial regulation, less is more.
