Unpacking the 10-for-1 Deregulation Impact on Insurance Risk Strategies

In January 2025, President Donald Trump signed Executive Order 14192: "Unleashing Prosperity Through Deregulation." This order takes a bold step by requiring that for every new regulation introduced, at least ten existing ones must be eliminated—a significant escalation from the previous "two-for-one" policy.

The intention behind this move is to stimulate economic growth and foster innovation across various sectors, including the insurance industry. With deregulation throwing the rulebook out the window, insurance firms find themselves in uncharted waters. Without the usual safety nets, companies must now navigate this new normal by revisiting their internal policies to keep risk management on point.

Immediate Reactions and Legal Challenges

Organizations that have long grappled with the financial and administrative burdens of regulatory compliance may view this deregulatory shift with optimism, anticipating reduced costs associated with auditing and compliance activities. However, many of the deregulatory actions are already facing legal challenges, and the process of repealing established regulations is often intricate, requiring adherence to numerous procedural requirements and time constraints. 

The push for deregulation is raising a lively debate among business leaders. Some argue that reducing government oversight aligns with effective risk management, embracing the idea that "the best governance is the one that governs least." They believe that less intervention allows businesses to operate more freely and efficiently.

Conversely, organizations like ShareAction and the Interfaith Center on Corporate Responsibility (ICCR) see regulation as a positive force. They argue that proper oversight encourages companies to act responsibly, addressing critical issues such as environmental sustainability, social justice, and ethical governance. 

This divide highlights the challenge of finding the right balance between reducing regulations to promote business freedom and maintaining enough oversight to ensure companies act in the best interest of society. It's a complex issue with passionate arguments on both sides.

Historical Context of Deregulation in Insurance

The insurance industry has experienced periods of deregulation that have impacted risk management practices. A notable example is the liability insurance crisis of the 1980s in the United States, where a surge in insurance losses and premiums led to widespread economic disruption. During this period, premiums for general liability increased from about $6.5 billion to approximately $19.5 billion between 1984 and 1987. This crisis adversely affected a diverse range of organizations, including municipalities, social service providers, and various industries, leading to the unavailability of coverage and soaring premiums.

The Commodity Futures Modernization Act (CFMA) of 2000 is another poignant example of how deregulation can lead to unintended and severe consequences. By preempting state "bucket shop" and gaming laws, the CFMA exempted financial derivatives like credit default swaps (CDS) from regulatory oversight, effectively allowing these instruments to operate without the scrutiny typically applied to insurance products. This lack of oversight facilitated the unchecked proliferation of high-risk financial products, which played a significant role in the 2008 financial crisis.

The absence of regulation in the CDS market meant that financial institutions could engage in speculative trading without sufficient capital reserves to cover potential losses. When the underlying assets—primarily subprime mortgages—began to default, the cascading failures among institutions holding these swaps precipitated a systemic collapse. This scenario underscores the critical importance of thoughtful regulation in maintaining financial stability.

The implications of deregulation on the insurance industry are not confined to the United States; similar patterns have been observed globally. For instance, the 1988–1992 Norwegian banking crisis emerged following financial deregulation that led to risky credit operations and a subsequent lending boom. The removal of lending rate caps resulted in banks engaging in high-risk activities, which, coupled with external economic shocks like a significant drop in oil prices, culminated in a systemic banking crisis.

Stepping Through the Looking Glass - The Probable Areas of Impact in Insurance 

As the U.S. insurance industry ventures into a new era of deregulation, there's a lot of buzz about how this shift might reshape risk management practices. While it's too early to draw definitive conclusions, some potential areas could be influenced:

Risk Assessment and Pricing

With fewer regulatory constraints, insurers might adopt more aggressive risk assessment models and pricing strategies to capture market share. This competitive environment could tempt firms to underprice policies, potentially compromising the adequacy of premiums relative to the risks assumed. Such practices risk insufficient reserves to cover claims, threatening the financial stability of insurers.

Product Innovation and Complexity

Deregulation could encourage insurers to develop more complex and innovative products to meet diverse consumer needs. While innovation can be beneficial, it may also introduce new risks that are not fully understood or anticipated. The proliferation of complex products without adequate risk assessment could lead to increased exposure to unforeseen liabilities.

Capital Adequacy and Solvency

Regulations often require insurers to maintain certain capital levels to ensure solvency and protect policyholders. Deregulation might relax these requirements, allowing insurers to operate with lower capital buffers. While this could enhance profitability, it increases the risk of insolvency, especially during periods of high claims or economic downturns.

Risk Equalization Mechanisms

Risk equalization is a method used to balance the risk profiles of insurance members, preventing insurers from discriminating against high-risk individuals. Deregulation could impact these mechanisms, leading to potential disparities in coverage and pricing, thereby affecting the accessibility and affordability of insurance for high-risk individuals.

Market Stability and Consumer Protection

A deregulated environment may lead to aggressive competition, with insurers potentially engaging in riskier practices to achieve higher returns. This could result in market instability, as seen in past financial crises where inadequate regulation contributed to systemic failures. Consumers might face reduced protection if regulatory safeguards are weakened, leading to issues such as the mis-selling of policies or the denial of legitimate claims.

Regardless of one's stance on deregulation, the reduction of compliance requirements does not eliminate the underlying risks. Instead, it transfers the onus of risk management squarely onto organizations. The absence of regulatory mandates necessitates that insurance firms proactively identify, assess, and mitigate risks to safeguard their financial stability and protect policyholders. Failure to do so in a deregulated environment can lead to severe consequences, including financial losses, reputational damage, and legal liabilities.

The impact of this Executive Order 14192, "Unleashing Prosperity Through Deregulation," on the insurance industry remains uncertain.  Its effects on risk management within insurance firms are yet to be fully understood. It will be important to monitor how these deregulatory measures influence the industry's stability and consumer protection in the coming years.