Insurance is supposed to be safe and dependable, if not a little boring. So when millions of Americans suddenly find themselves wondering if they can really count on their insurance companies for retirement and death benefits, something has clearly gone askew.
High anxiety is sweeping this country in the wake of several runs by policyholders and state takeovers of insurance companies. The present patchwork of state regulation of the insurance industry has left some policyholders protected and others holding the bag. The reality is that some states provide excellent oversight, and some do not. Some protect nearly all policyholders with financial safety nets, and others offer only promises.
The insurance industry needs uniform standards across the land--particularly when insolvency strikes--and that usually means federal regulation. But the savings and loan debacle has shown us that federal involvement is no panacea. Congress has no appetite to take on any further oversight, let alone make good losses in another financial industry. Any attempt to get Washington involved in regulating the insurance industry is likely to take years.
A better solution is for the National Association of Insurance Commissioners, the umbrella group of state insurance regulators, to force stronger capital standards on the industry. Insurers have been writing more investment-oriented products and making riskier investments. These need bigger cushions of capital to protect policyholders.
The NAIC also should enforce uniform rules for state insurance funds. At the moment, for example, 20 state insurance funds cover guaranteed-investment contracts, or GICs, oneof the most popular products sold by the insurance industry in the 1980s. All the other state insurance funds don't.Both uniform rules and stiffer capital requirements will help the consolidation under way in the $1.4 trillion life insurance industry. A major reshuffling is taking place among the 2,300 life insurance companies in the U. S., as consumers and pension managers switch funds from weak to strong hands.
NO GUARANTEES. Corporations have a major role to play in insurance reform through their pension programs. The shift away from defined-benefit to defined-contribution plans has moved financial responsibility for retirement onto the shoulders of their employees. Companies bought nearly $150 billion worth of GICs in recent years and offered them in their employee 401(k) pension accounts without clarifying the investment risk involved. According to employee-benefit surveys, some 65% of all pension money in 401(k) retirement plans is invested in GICs. Employees are now bringing lawsuits against their corporations to compensate them for losses from GICs that went sour. The employees are left holding the bag after putting their retirement money into an investment vehicle promoted as "guaranteed." It's something of a shock for them to find out now that neither the insurance company issuing the GICs nor the employer actually guaranteed anything. Companies owe it to their employees to offer a wide variety of investment vehicles and clearly explain the degree of risk in each.
In an era of job uncertainty and mobility, where individuals are expected to take charge of their retirement, people need more information and more assurance about their insurance. It doesn't have to cost taxpayers hundreds of billions of dollars, either.