It's an interesting topic. Our actuarial examination process has an entire exam devoted to insurance regulation. The syllabus cites 3 common regulatory problems:
- Regulatory Fallibility - Mistakes made by regulators that lead to a failure to identify troubled firms
- Regulatory Forebearance - Reluctance to take action against firms correctly identified as troubled
- Regulatory Capture - Tendency of regulators to side with the the firms they are supposed to be regulating
The approved solution to these regulatory issues (in no particular order) is:
- Peer Review - 3rd party independent review of regulatory examination results
- Duplication - Multiple regulatory agencies conducting examinations of the same firm (Insurance is regulated at the state level, so there are potentially 50 regulators looking at a single insurer)
- Diversity of Perspective - Examination teams that consist of a broad range of backgrounds and perspectives will generate an end result that tends toward the center (as opposed to producer vs consumer tended outcomes)
So insurance companies are regulated by 50 different states and are also subject to review by the National Association of Insurance Commissioner and the Federal Insurance Office (both National Insurance regulators), which covers the peer review and duplication. The diversity of perspectives comes from having several insurance commissioners appointed vs elected. It is commonly felt that elected insurance commissioners have greater susceptibility to regulatory capture.
I'm not saying that the regulatory environment for insurance is ideal, but there is a reason that no insurance companies needed bailouts during the last recession (AIG was bailed out due to
un-regulated insurance-type products that were supposed to be regulated by finance.
Also in fairness, Insurance regulation in the US is one of the more expensive ways to regulate - but it is effective.
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