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NU Online News Service, April 17, 2:48p.m. EDT
New York Insurance Superintendent Eric Dinallo announced today that he has begun an inquiry into whether Allstate Corporation engaged in illegal participation in unregulated insurance markets.
Mr. Dinallo said that, in reaction to statements in an opinion piece yesterday by Allstate’s chief executive, he wrote the personal lines insurer asking for details on all of its participation in “unregulated insurance markets.” The piece had argued for federal regulation of insurers.
The superintendent also asked the Northbrook, Ill.-based firm for information about its knowledge of any insurance companies that conducted unregulated writing of credit default swaps.
Mr. Dinallo’s statement noted that Allstate Chief Executive Officer Tom Wilson in his New York Times piece arguing for federal regulation of insurance had mentioned that his company “played only a small role in unregulated insurance markets....” and, “The insurance companies that wrote credit default swaps were happy not to be regulated.”
“In New York and in other states, it is illegal for an insurance company to write a credit default swap unless approved by the state insurance regulator under limited conditions,” Mr. Dinallo said.
He added, “If Allstate broke the law or is aware of any other insurance company that broke the law, Allstate should immediately report that conduct to the appropriate state insurance regulator. I have asked Allstate's New York companies to report immediately any inappropriate or unregulated use by them of credit default swaps.”
The superintendent noted that he had “said for more than a year that credit default swaps should be regulated and that those who write them should be required to hold adequate reserves. But one thing should be clear. While the credit default swap market is not regulated, insurance company use of credit default swaps is.
“In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval.”
The Allstate opinion article, he said, had called for federal regulation of insurance based on “a number of inaccurate and misleading statements: that credit default swaps are insurance; that AIG sold credit default swaps as an insurer; and that insurance companies were unregulated in selling credit default swaps.
“In fact, most credit default swaps are not insurance because most buyers were not insuring something they owned, which is a requirement for insurance.”
The regulator said that AIG had “purposely sold huge numbers of credit default swaps through a federally regulated non-insurance subsidiary because it would not have been allowed to sell swaps with no limits, no controls and no reserves through a state-regulated insurance company. Insurance company sales of credit default swaps are highly regulated and limited.”
Mr. Dinallo also attacked the Allstate opinion article for “a number of broad statements that could risk unnecessarily undermining consumer confidence in the insurance industry as a whole. It states that insurance companies wrote credit default swaps and were not regulated and their solvency was not protected.”
He explained that the piece did not name the insurers involved, “leaving consumers to wonder which companies. It says AIG sold credit default swaps as an insurer, suggesting any insurer could do the same, which is not true. It says Allstate itself was involved in unregulated insurance, without defining what that means.”
According to Mr. Dinallo, the article was unclear in stating that insurance contributed to the market failure, whether “it means only credit default swaps or insurance generally. Consumers should know that insurance companies are weathering this crisis better than the rest of financial services and that state regulators are focused on ensuring insurers are solvent and can pay claims. I welcome a principled debate about federal regulation of insurance, but the last thing an insurance executive should be doing now is undercutting consumer confidence.”
Allstate said they would respond shortly to Mr. Dinallo’s announcement and comments.