Obama 'Oversight Plan' May Overlook Insurers

(MoneyWatch)  President Obama's oversight plan for the financial sector is probably making the 50 state regulators of the nation's insurance industry very happy right now. It doesn't take away any of their authority, especially for smaller insurance companies which like being regulated at the local level.

But for the big national companies like Travelers it's a mixed bag. They wanted national regulation because they are tired of being nibbled at by the 50 dwarfs every time they come up with a new insurance plan. They were hoping for one-stop shopping at the federal level.

Obama's plan splits the difference. State regulators still maintain their authority, their perks and their staffs. But in the works is an Office of National Insurance (ONI) within the U.S. Treasury Department. The proposed ONI would, according to the President's draft document, "gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector."

The idea of a national regulator isn't completely dismissed. The Treasury Department would be mandated to "support proposals to modernize and improve our system of insurance regulation."

For big insurers like Prudential, MetLife, and Allstate, it's a baby-step forward. They have long complained that insurers from around the world, who are largely regulated at the national level, can't find anyone in the U.S. to talk to because no one is home. The closest thing to a national authority was former New York Insurance Superintendent Eric Dinallo.

What a shame, because the U.S. insurance industry, despite being fragmented, is the biggest in the world and a good sector of the economy with $5.7 trillion in assets, or about one quarter of the whole financial sector. This doesn't hit home until you see the failure of an insurance giant like American International Group (AIG).

Which is probably the reason why Obama is thinking about the insurance industry. And the AIG disaster, as insurance regulators are fond of pointing out, didn't happen on their watch. It was the fault of the much-maligned Office of Thrift Supervision (OTS), the dumbest regulator in town. But Obama is about to deflate the OTS's balloon and give its responsibilities to a new federal regulator.

So insurance commissioners throughout the land have won their argument, at least for now. If the insurance system ain't broke why fix it? At the same time the proposed ONI is likely to serve as a place where big insurers can come, put their feet up, and find a sympathetic ear in Washington.