NU Online News Service, Sept. 23, 12:06 p.m.EDT

A new academic study finds that the government bailout ofAmerican International Group during the financial crisis is noreason for optional or mandatory federal insurance regulation.

The report warning against the application of systemic riskregulation to insurers was written by Scott Harrington, professorof insurance and risk management at the University ofPennsylvania's Wharton School, and published by the NationalAssociation of Mutual Insurance Companies.

Blame for the financial crisis and the near collapse of AmericanInternational Group should reflect "the substantial evidence offundamental failures in U.S. and foreign regulation of commercialbanking, thrift lending and investment banking," according to thereport analyzing the role of AIG and the insurance sector in thefinancial crisis of 2008-09.

The report, titled "The Financial Crisis, Systemic Risk, and theFuture of Insurance Regulation," notes that AIG's problems wereheavily influenced by its credit default swap portfolio, which wasassembled by a non-insurance AIG subsidiary that was not subject toinsurance regulation.

According to Mr. Harrington's analysis, AIG's situation is an"anomaly" in an insurance sector that "was largely on the peripheryof the financial crisis." The financial crisis and the government'srescue of AIG "do not strengthen arguments for either optional ormandatory federal regulation of insurance," he wrote.

The report states events at AIG do not justify creation of asystemic risk regulator with authority over insurers and non-bankinstitutions that are designated as "systemically significant."

It finds that, compared to banking, systemic risk is relativelylow in insurance markets, especially for property and casualtyinsurance, "because insurers hold greater amounts of capital inrelation to their liabilities."

The report explained that this reduces insurers' vulnerabilityto shocks in the economy. But the creation of a systemic riskregulator "would very likely undermine market discipline andprotect even more institutions, investors and consumers from thedownside of risky behavior."

Chuck Chamness, NAMIC's president and chief executive officer,said, "NAMIC is pleased to have had the opportunity to provideProfessor Harrington with a forum for his thoroughly researched andthought-provoking inquiry into the role of insurance in thefinancial crisis.

"His analysis and conclusions should be carefully considered bypolicymakers as they consider measures that could affect the futureof insurance regulation."

NAMIC is a longtime opponent of federal insurance regulation andproposals for optional federal charters for insurers.

Mr. Chamness called Mr. Harrington "one of the country's mostwidely published and respected insurance experts."

The report questions whether the AIG crisis would have beenaverted if federal insurance regulation been in place before theonset of the financial crisis.

Noting that federal regulators failed to anticipate or preventthe implosion of Citibank, Bank of America, and other bank andinvestment bank holding companies, Mr. Harrington concludes that"it's just as likely or more likely that federal regulation oflarge insurers would have further increased risk."