There is an interesting dichotomy in the American economy right now. While the jobs market remains relatively strong, Americans’ sense of their own financial security has sharply deteriorated. Surveys show inflation, rising interest rates, and financial turmoil have Americans worried. As of last month, the number of Americans who say they can comfortably retire is at the lowest level in the past two years.
One aspect of the American financial services market that has always provided stability and benefitted American families’ bottom lines, is the availability of a variety of tools and options for investments and financial planning. Conversely, any move that limits existing options should be viewed quite skeptically.
But moves that will limit Americans’ financial options seems to be the road being taken by the National Association of Insurance Commissioners (NAIC), a trade organization for state insurance regulators. The pseudo-regulatory body is poised to push a measure to raise capital charges—the amount of cash an insurance company must be able to access when they invest premiums into other assets—by as much as 50 percent.
The new rules would only apply to smaller, private investment-backed plans, effectively distorting the market to favor some entities over others. Big insurers who dominate the market would be given a pass.
Unfortunately, such a dramatic change would likely decrease the availability of some of the more common financial planning tools, including life insurance and annuities. By stifling competition through punitive regulatory measures, the NAIC would also drive up prices on individuals and families using these products trying to secure their futures.
Targeting only certain companies will of course significantly reduce the options available to consumers. Data shows that nearly 70 percent of people with life insurance plans feel financially secure, while fewer than half of those without life insurance feel the same. Maintaining a freer market allows Americans to purchase the products of their choosing—products and policies they can afford and that they believe will serve their needs.
The NAIC doesn’t even seem to have a clear idea of the harm it will cause, as one member of the committee that generated the proposal publicly questioned whether the organization was moving too fast, given that there doesn’t seem to be sufficient data or analysis.
The attention and energy spent on these proposed rules are also puzzling given the large risks that currently exist in the industry. In April, Morgan Stanley issued a serious warning: commercial property prices could fall as much as 40 percent, “rivaling the decline during the 2008 financial crisis.” The commercial real estate sector might also be heading toward a collapse. Moody’s predicts that office utilization rates will only return to 50-60 percent of pre-pandemic levels. At the same time, office building values are down 25 percent, and office rents have fallen. Commercial real estate lender Warren de Haan recently said, “The backdrop is setting up for a likely scenario where we see more distress than we’ve seen since the Great Recession…”
It is the large life insurers that are heavily leveraged in the commercial real estate market. The American Council of Life Insurers estimates commercial real estate investments by the life insurance industry to be $570 billion, and 2022 was the worst year for those investments in the last two decades.
Issues with systemic risks to the industry certainly seem more worthy of the NAIC’s attention.
A better, more transparent, context for these types of financial regulations would be for them to be taken up by elected officials. State legislators, for example, should look to other more responsible alternative proposals in determining insurance policies. After all, the tools to protect individuals and families are already available to regulators. They should be utilized before a one-size-fits-all approach is pushed on the market.
While the NAIC may have a long-standing industry role, in the end it is an unelected body, which should make give observers pause—especially on how its regulations can hurt everyday Americans’ ability to build and choose financial products that they judge best.
The reality is that the NAIC proposal to penalize smaller, private equity-backed insurers would impact how Americans use their hard-earned money to save, undoubtedly exacerbating their financial concerns. The good news is there are governors around the country – including Virginia Governor Glenn Youngkin, Missouri Governor Mike Parson, Ohio Governor Mike DeWine, and Texas Governor Greg Abbott – who have shown they are willing to stand up for free market principles and their constituents’ financial well-being. Americans deserve to be secure in their retirement and their families’ financial futures. Any proposal that would harm that financial security should be rejected.
Mario H. Lopez is the President of the Hispanic Leadership Fund, an advocacy organization that promotes liberty, opportunity, and prosperity for all in public policy.
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