The financial world is bracing for actions by the new presidential administration. Significant leadership changes at regulatory agencies and a push toward deregulation could significantly alter your financial services organization's regulatory and insurance landscape. By learning from the past, you can anticipate the changes and risks deregulation poses and help your company prepare for the possible changes ahead.
2008 financial crisis: Lessons from history
The 2008 financial crisis is a cautionary tale. Deregulation and weak enforcement led to widespread institutional failures and massive economic disruption.
The years leading up to the crisis saw the convergence of several key factors:
- Banking deregulation: Policies such as the repeal of the Glass-Steagall Act in 1999 removed barriers between commercial and investment banking, encouraging financial institutions to take on riskier, profit-driven activities.
- Weak oversight: Regulatory agencies failed to identify and address risky lending practices, allowing dangerous financial practices to escalate unchecked.
- Systemic risk: Reduced accountability due to the above-mentioned factors encouraged financial institutions to prioritize short-term gains over long-term stability. This created systemic vulnerabilities that ultimately led to the collapse of major financial firms.
For insurers, the crisis underscored the perils of deregulation and weak oversight. Directors and officers faced significant litigation as investors and other stakeholders sought accountability for financial losses. Insurers paid out massive claims tied to fiduciary breaches, poor governance, and failures in risk management.
Deregulation fallout
The new presidential administration seems likely to prioritize a similar deregulatory agenda. Regulatory agencies such as the Federal Reserve, FDIC, SEC, and CFPB have historically played pivotal roles in maintaining oversight and enforcing compliance, and new leadership could dramatically shift priorities.
Specific areas likely to be affected include:
- Capital requirements: Experts expect easing capital requirements to be a top priority for the new administration. Capital requirements help banks’ reserves withstand losses during times of financial instability. Reducing these requirements may give banks greater flexibility to lend, invest, and grow their businesses but may increase systemic risk. A smaller financial cushion means that banks are more vulnerable to sudden economic shocks, leading to liquidity crises or, in extreme cases, institutional failures.
- Mergers and acquisitions (M&A): A more lenient stance on M&A activity within a deregulated environment could accelerate banking sector consolidation. For financial institutions, this creates opportunities for growth and competitive positioning. However, rapid consolidation carries its own risks. Integration challenges, cultural mismatches, and operational complexities can strain resources, especially if risk management practices fail to scale alongside growth. Over-concentration within the financial sector can amplify systemic vulnerabilities as fewer, larger institutions dominate the market.
- Regulatory enforcement: Reducing enforcement intensity may lead to a more permissive regulatory environment. While this may reduce administrative burdens for financial institutions, it also creates an environment where risky behaviors can flourish. Deregulation increases the likelihood that these risks will go unnoticed or unaddressed until they cause significant financial or operational fallout.
Implications for the insurance sector
For insurers, deregulation is a double-edged sword. Relaxed rules may lower compliance-related litigation risks. However, they can foster environments where unchecked behaviors lead to larger systemic failures, ultimately impacting carriers. Insurers will likely respond to deregulation within financial services by:
- Reassessing risk models: With fewer regulatory guardrails, underwriters may pivot from a compliance-based assessment to one focused on broader governance and fiduciary practices.
- Preparing for market polarization: Cautious insurers may maintain stringent underwriting criteria, while more opportunistic players might capitalize on deregulation’s short-term opportunities, such as:
- Expanding their appetite to include companies that are less burdened by compliance requirements or operational hurdles due to deregulation. These institutions may have higher profit potential but also carry higher risks due to reduced oversight.
- Adjusting their pricing models to reflect the new regulatory environment, offering competitive premiums to attract clients who are newly eligible or seeking coverage in a changing risk landscape.
- Marketing insurance products that align with the specific risks of a less regulated environment.
- Growing their footprint in markets where stricter regulations previously limited their involvement.
Reduced oversight doesn’t eliminate liability. Fiduciary breaches, mismanagement, and failures to meet investor expectations remain significant exposures.
Preparing for an uncertain future
Since insurers are likely to respond to a more deregulated environment once these changes take effect, maintain a business-as-usual approach in the meantime. Continue to:
- Uphold compliance standards: Until the new administration formalizes regulatory changes, adhere to existing rules and avoid preemptive changes to your practices.
- Focus on governance: Keep prioritizing strong governance and risk management practices, regardless of regulatory shifts.
- Monitor developments closely: Stay informed about evolving regulations to adapt your practices responsibly and mitigate risk.
Strategic partnerships in a changing regulatory landscape
Reduced compliance may provide operational breathing room, but the underlying risks of poor governance, unchecked behaviors, and systemic instability remain significant. Navigating this environment requires a steady hand and strategic foresight.
In times of transition, partnerships built on trust, expertise, and proactive guidance will make all the difference in safeguarding long-term stability and success.
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Connect with the Risk Strategies Management Liability team at MLPG@risk-strategies.com.
