Wait to Sic Feds on Insurance Industry

This is heresy in my industry, but why not try national regulation of insurance? Could it be worse than state regulation? You bet it could.

Could it be done more professionally and in a way less subject to political influence? Yes, but not likely.

Hasn't Worked for Financials

Consider the regulation of financial companies presently done by the federal government. The feds did not do a great job with the savings and loan crisis. The government has shown a distinct tendency to lapse into mere partisan politics in overseeing government-sponsored enterprises. GSE regulation has been weak, and just now is waking up.

When the big banks were on the rocks in the early 1990s, were the regulators proactive in reducing exposure to commercial real estate-related assets? No. Did the regulators act intelligently in the mid-1980s when agricultural loans were a problem, or during the lending to lesser-developed countries (as they were called then)? Again, no and no. Dare I go into how well they have protected consumers from unscrupulous lending practices? Or how well the Securities and Exchange Commission has done with gain-on-sale accounting? I'm not a fan of the federal government's regulatory skill.

Unintended Effects

I don't think national regulation of insurance is a solution to the current crisis. I think it would be interesting to try, though.

It might have these unintended effects, good, bad, and weird, regardless of whether the basic regulation is done well or poorly:

1. It would lead to incredible consolidation in the space. Big companies would be freed from the expense of having to comply with 50-plus different sets of state regulations. Filing, use and regulatory compliance would become simpler, as would taxation and solvency regulation. A lot of little marginal stock, mutual and fraternal companies would merge out of existence as they lost out to larger companies with lower cost structures. It certainly would benefit the big life and personal lines insurers, e.g., Allstate (ALL - commentary - Cramer's Take), MetLife (MET - commentary - Cramer's Take), Prudential Financial (PRU - commentary - Cramer's Take), Aflac (AFL - commentary - Cramer's Take) and Principal Financial, to name a few.

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At time of publication, Merkel and/or his fund was long Allstate, MetLife and Prudential, though positions may change at any time.

David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

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Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.