U.C. Irvine Law Review








U.S. insurance regulation focuses predominantly on individual insurance entities, rather than on groups of commonly owned and managed companies. Yet the bailout of AIG and emerging international norms increasingly suggest that effective insurance regulation must operate on both a legal-entity and a group-wide basis. For this reason, state insurance regulators have in recent years focused renewed attention on group insurance regulation. These efforts have produced a “windows and walls” framework for group regulation that attempts to insulate individual insurance companies from potential financial risks associated with their parents and affiliates (“walls”), while simultaneously allowing regulators to remain attuned to these risks (“windows”). This Article argues that the windows and walls framework largely fails to meet the goals of group regulation in insurance because it relies almost exclusively on the capacity and willingness of state insurance regulators to investigate, diagnose, and respond to group-level risks effectively. Relying so extensively on effective enforcement is problematic because group risk in insurance is immensely complicated and inherently dynamic. Meanwhile, state insurance regulators have poor incentives to invest their limited efforts and resources towards regulating group risk, as the potential negative consequences of group risk extend well beyond their states’ borders. This Article illustrates these points by focusing on two recent case studies: the pre-crisis regulation of securities lending at AIG and the recent rise of shadow insurance among U.S. life insurers. In both instances, the Article argues that the entity-centric orientation of state insurance regulators caused them to fail to appreciate or prevent the build-up of substantial risk within groups of affiliated insurance companies. Ultimately, the Article suggests that effective group regulation in insurance requires either group-oriented state insurance regulation that relies less on the discretion of individual regulators, or else regulation of group-level risk by a federal entity.


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