Unlike much of the investment business—supervised at the federal level—insurers are almost entirely overseen by individual states.
And how are states performing in what is essentially a test case of decentralized authority? Well, if one is to judge from what promoters of insurance products are allowed to say in their marketing materials, they are not doing too well.
Here is an example of an unsolicited email. AnnuityAdvantage, an online insurance agent, touts fixed-rate deferred annuities as an “equally safe alternative to a bank CD” i.e. an essentially no-risk investment. At the same time, the insurers standing behind those products are rated B++, and their annuities are backed not by the Federal Deposit Insurance Corp, but by state guaranty funds, which sometimes don’t pay policyholders in full or promptly. It’s inconceivable for an investment advisor working at a federally supervised financial company advertising even an A+ rated bond as “no-risk.” A mutual fund calling its B++ rated holdings as safe as CDs would not likely make it past the SEC registration process.
Why is supervision so different at the state level? It could be because many state laws regulating insurance marketing have gaps, and more still leave interpretation and implementation up to state insurance commissioners, as opposed to attorneys general or private lawsuits.
One solution to this far-from-ideal regulatory framework would be to place the more investment-like insurance products under federal supervision. The SEC attempted this in 2010, but legislators opposed it and a federal court stopped it. The Dodd-Frank Act, which, among other things, sought to improve accountability and transparency in the financial system, as well as to protect consumers from abusive financial services practices, for the most part excluded the insurance industry from oversight by the Consumer Financial Protection Bureau.
A new administration or Congress might turn out to be more dedicated to consumer financial protection. Until then, another financial crisis could cause B++ rated insurers to default on the “no risk” policies consumers are being advised to purchase.
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States Aren’t Great at Regulating Insurance | Wealth Management