Interstate Banking and Insurance

There’s a debate going on about an Obama ad attacking McCain for proposing to do for health insurance what we’ve done with banking (or something to that effect). The reference is to an article ghost-written for McCain that called for allowing insurers regulated in one state to do business directly with consumers in another state. The McCain campaign is complaining that the ad makes it sound like McCain’s proposal for health-care is in some way related to or analogous to whatever deregulatory reforms led to the subprime crisis (and those would be . . . ?) while in fact he was referring to the reform of banking regulation that allowed interstate banking starting in the 1990s. See here and here and here.

Here’s the thing, though: unless McCain is proposing significant national regulation of the insurance industry, his proposal is not at all analogous to the reform that led to interstate banking. State-chartered banks are regulated by the Fed. The controversy around interstate banking revolved, broadly, around two questions: would interstate banking mean less “hands-on” lending by local institutions, and would it mean overconcentration of market power in too few banks. But a national regulatory infrastructure already existed for a national market in banking services. Insurance companies, by contrast, are regulated by state insurers, not by the federal government. If you allow insurance companies chartered in one state to sell products in another state, that would be analogous not to interstate banking but to corporate domicile: just about every major corporation in America is incorporated in Delaware because they have the most business-friendly legal environment for incorporation. Similarly, with interstate insurance, every insurance company would reincorporate in the most favorable jurisdiction. Is that they way we want to regulate a national insurance market? Maybe – but that’s the case that would need to be made, and it’s not a case that needed to be made with interstate banking. And semi-literate press releases like this one from the New York insurance regulator do not inspire confidence that this is the way to go.

I’m happy to be corrected if McCain is, in fact, proposing the creation of a national insurance regulator. If not, I don’t think the analogy holds up; in fact, McCain’s original analogy is more deceptive than Obama’s ad.

UPDATE: just to be clear, apropos of that press release I mocked, I think there’s a case to be made that credit derivatives should be regulated as insurance. There’s also a case (a better case, I think) that they should be regulated as securities. That’s a big question the Federal Government needs to address once it’s got the ongoing crisis somewhat under control. But if they are going to be regulated as insurance, we are probably going to have to have a national insurance regulator.