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Although the need for a federal bailout of the troubled American International Group created demands for strong federal regulation of insurance, to this point the industry appears to have preserved state oversight for property and casualty carriers.
Although only the House has completed work on financial services reform, there appears to be little political support for a federal takeover of insurance regulation.
For example, the industry was able to carve itself out of regulation by a new Consumer Financial Protection Agency.
Meanwhile, provisions of legislation creating a system for resolving large, systemically-risky financial services companies ensures a strong voice for state regulators in the process.
The House bill, passed on Dec. 11, creates a National Insurance Office, but through industry lobbying, its powers have been watered down. And, in general, state solvency and consumer protection laws remain intact.
Charles Symington, senior vice president of government affairs for the Independent Insurance Agents and Brokers of America, said the final language in the provisions creating a federal insurance office within the Treasury Department narrows its scope from what was originally sought by the Obama administration and House Financial Services Committee staff, “and provides it with no regulatory authority whatsoever.”
Leigh Ann Pusey, president and CEO of the American Insurance Association, said her group—a longtime supporter of an optional federal charter--is “encouraged the legislation establishes a Federal Office of Insurance and believes that this provision offers a substantial contribution toward broadening and deepening our nation’s understanding of the critical role of insurance in our financial system.”
Unlike most parts of the House bill, the insurance provisions have bipartisan support.
At press time, it was unclear when the Senate Banking Committee would unveil its legislation and how comparable it would be to the House version.
Two provisions key to insurance are in the House bill--H.R. 4173, the Wall Street Reform and Consumer Protection Act. One provision stirring deep concerns among both life and property and casualty insurers would require large financial institutions to pre-fund a systemic risk resolution fund.
The fund--created through assessments against financial institutions with assets of more than $50 billion--would be used to pay for the failure of systemically significant financial firms.
“A new pre-funded systemic fund would threaten the economic recovery by diverting capital from job creation when previous efforts to augment capital are beginning to have an impact,” argued a letter to both the House and Senate signed by, among others, AIA and the Property Casualty Insurers Association of America.
“Further, there is no evidence that the existence of such a fund would deter the creation of new asset bubbles or other market distortions,” the letter added.
All P&C insurance companies voiced concern with the potential impact of the dissolution fund on the industry.
“To the extent property and casualty insurers are considered in these reforms, the nature of our business and regulatory standards, our existing resolution and guaranty [fund] processes, and the general risk our industry poses to the broader financial system has to be recognized,” said Ms. Pusey.
"AIA opposes legislation that subjects our industry to pre-funding obligations for systemically important financial companies and assesses insurance companies to pay for the risks presented by the failure of non-insurance institutions,” she added. PCI voiced similar objections.
One change in the bill would allow the director of the Federal Insurance Office to have an advisory role on the Financial Services Oversight Council that would deal with large financial institutions that might create a systemic risk.
State insurance and banking regulators would play a similar role on the council, and the insurance regulator of a domiciliary state of a troubled systemically risky insurance company would have to be consulted before federal regulators stepped in to deal with it--including calling for the company to raise capital, or to declare it insolvent.
A manager’s amendment to the bill includes a provision requiring the Oversight Council to use state law when resolving failing state-regulated insurers.
The Senate is likely to debate its measure in the first quarter, so stay tuned!