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NU Online News Service, March 9, 2:08 p.m. EST
WASHINGTON—Guaranty fund trade groups have written Senate Banking Committee members urging them to exclude insurance companies from any legislation creating a separate authority to regulate large financial institutions.
The letter was signed by officials of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the National Conference of Insurance Guaranty Funds, which deals with property and casualty industry liquidations.
The letter was written as there were signs the committee will unveil financial services reform legislation soon to impose federal oversight on insurance companies as well as other financial services companies that could impose a systemic risk on the global financial system.
That would include oversight of large institutions by the Federal Reserve Board as well as other federal financial regulatory agencies, including the Treasury Department.
Another proposal, currently contained in the House version of the legislation, would create a special resolution authority funded by fees from financial firms with assets over $50 billion.
The letter said that insurance companies are fundamentally different than banks; that the existing guaranty fund system is designed to protect consumers above commercial interests in any liquidation; and creating a new system would undermine the existing guaranty system used to resolve problems with troubled insurance companies.
“A proposal to resolve insurer failures directly, in a new resolution regime that would not protect or effectively replicate the priority status of policyholders (and of the ‘safety net’ protecting policyholders), perversely could leave policyholders at greater risk of incurring financial harm in connection with insurance company receiverships than they are today,” the letter said.
More generally, the letter added, “any proposal to resolve insurer failures directly in a new federal resolution regime would undermine the current system, which has been effective in protecting policyholders and other claimants.”
The letter argued that liquidations of insurance companies “are fundamentally different than for financial services institutions that are primarily engaged in banking or banklike activities.”
Because insurance claims evolve over time, the “run on the bank” scenario for other financial institutions “is not a significant risk in insurer insolvencies,” the companies wrote.
The letter added that the current resolution and guaranty fund system is well designed to address these differences, “while the various federal resolution authority proposals do not address these fundamental distinctions.”
The letter said that there are strong policy reasons for “maintaining the existing system for protecting insurance policyholders.”
The letter explained that guaranty associations protect insurance consumers by paying for specified losses and other benefits that arise under policies issued by a failed insurer and, in the case of long-term policies issued by life and health insurers, by continuing coverage.
“The insurance receivership statutes of all U.S. jurisdictions give an “absolute priority,” in distributing the assets of insolvent insurers’ estates, to claims of consumers (and of guaranty associations, for costs they incur to protect consumers), over the lower-ranking claims of general and subordinated creditors,” the letter said.
“This absolute priority dramatically lessens the insolvency’s impact on policyholders, and it provides the guaranty associations with funding that helps them fulfill the failed insurer’s obligations to consumers,” said the letter.
Further, the groups wrote that the “paramount goal” of the existing insurance insolvency system is to protect the consumer; “this objective parallels the goal of protecting depositors in bank failures.”