Congressional approval of federal regulation for insuranceappears unlikely for 2009, and prospects for an optional federalcharter in the long term are dim–particularly for property-casualtyfirms, the head of the Federal Deposit Insurance Corp. indicated ina private briefing to p-c industry executives.

In addition, if insurance is addressed at all next year, thefocus of the incoming Obama administration and federal bankingregulators will be on the life insurance side of the business, notproperty-casualty, FDIC Chair Sheila Bair said in an off-the-recordbriefing to directors of the American Insurance Association on Nov.14.

A copy of a summary of her remarks was obtained by NationalUnderwriter and confirmed through other sources.

Ms. Bair said that plans to create an optional federal chartermay fall by the wayside in Congress, suggesting that insurersseeking federal regulation might be better off finding a regulatoryhome within existing federal banking agencies.

Those in the p-c industry who want federal oversight in general,and a federal charter in particular, face an uphill climb becausetheir sector “is not in any financial trouble, and it isstate-regulated, so it is not in the sights of those will beinvolved in federal financial services regulatory reform,” Ms. Bairexplained.

Regarding an OFC, she said that “re-regulation will favor fewerregulators at the federal level, rather than more, and it will bedone in phases. All current federal regulators have their handsfull with the various bailout and stimulus packages that Congresshas passed.”

The reason creation of a separate federal agency to regulateinsurance is unlikely, she added, is that “the last thing thefederal regulators need is to be distracted by turf fights amongthe four current federal regulators.”

Ms. Bair told AIA that the p-c industry “may have to fight toget in the process and the legislation, and differentiate itselffrom the banks, if that's what the AIA companies want.”

Property-casualty insurance also has the complications of rateregulation and protection for policyholders versus stockholders asissues to be worked out, she noted. However, “in the long term,there seems to be consensus that it would be beneficial to Congressand the Treasury/Administration if there were insurance expertiseat the federal level,” Ms. Bair said, according to the AIAsummary.

Looking at the broader regulatory reform picture, Ms. Bair toldAIA officials that dealing with an overhaul of financial servicesregulation will be delayed by the incoming Obama administration andCongress until 2010 in favor of tackling more urgent priorities.Moreover, it will be done in “phases,” she said.

She also told AIA members that the Obama administration willtake the lead in drafting legislation overhauling regulation offinancial services. During the question-and-answer session thatfollowed, an industry lobbyist said that Sen. Chris Dodd, D-Conn.,chair of the Senate Banking Committee, and Rep. Barney Frank,D-Mass., who heads the House Financial Services Committee, willserve to “balance things out.”

Asked to elaborate on her remarks to the AIA, Ms. Bair,responding through FDIC representative David Barr, said that “sincethis was not a public event, we will not comment on thediscussion.”

Blain Rethmeier, an AIA representative, would only say that “aswith all our meetings, they are closed to the press, so I can'tgive you any guidance on what she said.”

One industry lobbyist working on the future shape of insuranceregulation cautioned that “nothing is set in stone, and this isjust one idea.”

However, several life insurance lobbyists confirmed that as aresult of recent direction as to how insurance might be regulatedby the federal government, their companies are going back to thedrawing board to determine what form of federal regulation would beacceptable, and which banking agency they believe would be theirmost appropriate federal regulator.

Jack Dolan, a representative for the American Council of LifeInsurers, confirmed that Kim Dorgan, its chief lobbyist, recentlytold an industry strategy group that “Congress will be quite busyat the start of 2009,” and that an “OFC is likely not a top item ontheir agenda.”

However, Mr. Dolan added, “that does not mean it is anon-issue.” Moreover, he said, the “ACLI is still pursing anOFC.”

In her comments to AIA, Ms. Bair said the Obama administration'spriorities in 2009 will be:

o Regulation of mortgage-backed securities and credit defaultswaps.

o Standards for the mortgage lending industry and for allmortgage brokers/originators.

o Stronger disclosure rules for executive compensation andbalance sheets.

Regarding the possibility of “systemic regulation” acrossindustries, she said that would be “hard to conceptualize.” Intheory, she said, “such a regulator would look at thesystemic/liquidity risk of the enterprise and work with itsfunctional regulators to address its financial problems.”

However, the current thinking is that such a regulator would bea backstop for financial services entities that cannot be allowedto fail, she added.

“It is anticipated that there would be a recovery/fee/assessmentmechanism for any funds provided by backstop to such an entity,”she said.

On Nov. 24, President-Elect Obama said he will nominate TimothyGeithner, current president of the Federal Reserve Bank of NewYork–which oversees the government's bailout of AmericanInternational Group–as Treasury secretary.

Ms. Bair told the AIA directors that AIG represents the firstnon-bank entity that is “too big to fail” as seen through a federallens.