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A Glimpse Into Insurance Reform

It’s financial regulation week in Washington, which began with official administration messages on Monday and will culminate in an official announcement Wednesday and testimony Thursday by Tim Geithner, secretary of the Treasury, in the House and immediately prior to that in the Senate.

At the same time, the hard work of arguing out potential reform details with industry representatives goes on. Much of this discussion takes place behind closed doors, but we are lucky on Tuesday to have a glimpse at some of the horse trading, and vested interests, before the House Financial Services subcommittee on capital markets, insurance and government sponsored enterprises – with a hearing entitled "Systemic Risk and Insurance."

The witness list is an A-team of industry representatives, together with an articulate state insurance commissioner and (unusually) a member of the European parliament who works on insurance reform. The testimony of all witnesses is already online, and you can peruse the special interests and turf battles that lie ahead. I particularly recommend that you read the testimony from Travelers; post your favorite quotes from this or other testimony below.

Notably missing from this hearing is a strong voice for consumers per se. For example, Professor Elizabeth Warren has long been a proponent of a Financial Products Safety Commission, and this idea now seems to be gaining traction in some parts of Capitol Hill. Presumably this concept would apply also to insurance – these are complex products that consumers often do not understand and, in many cases, overpay for.

In thinking ahead about future financial crises and how to prevent them, we should not assume that the next bubble and bust will be just the same as what we just saw. We should look instead for all kinds of loopholes and misperceptions that can become exuberance or manias of any kind. And we should search carefully for ways to protect consumers – if people are protected against misrepresentation by the purveyors of financial products (and illusions), that makes it somewhat harder to get another crazy boom going.

I’m not singling out the insurance industry for attention – although remember AIG! - but I’m also suggesting they should not be neglected as we seek to tighten up on how our financial system operates.

--Simon Johnson

By Terri Rupar  |  June 16, 2009; 8:15 AM ET
Categories:  Regulation  
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