Principles Based or Rules Based Regulations?

As I mentioned in my last post, there is growing interest in the U.S. to explore a more principled approach to laws and regulations. In a letter dated November 28, 2007 from the NAIC (National Association of Insurance Commissioners) to the Department of Treasury, the NAIC conveys a clear message that “caution” should be the word of the day. TREAS-DO-2007-0018; Written Comments of the National Associations of Insurance Commissioners.

Some key points to ponder;

• “The goal of financial services regulation in general and specifically insurance regulation should be to provide comprehensive consumer protection and a robust and efficient market.”
• There is no single U.S. insurance market, any regulatory structure must be cognizant of and able to adapt to the differences between the multiple U.S. insurance markets.
• The NAIC is clearly in favor of improving the communications and coordination between and across jurisdictions but is confident the existing structure should be left largely intact.
• The NAIC cites the ambiguities of a principles based system of regulations as putting the consumer at a disadvantage without explicit rules.
• The NAIC cites that U.S. regulation was originally principled based but that problems affecting consumers resulted in the need for more rules based regulations.

While the NAIC presented some impressive budget numbers for themselves, I would be interested in your comments regarding the budget expense for the industry to work within this largely rule based functional structure. Do you agree with the NAIC perspective or have a different view?