Washington

Even though debate on a national health care reform bill in theU.S. Senate is grabbing all the headlines, federal legislation thatwould radically alter how insurers are regulated remains on thefront burner in Congress, with crucial details yet to be workedout, industry lobbyists warn.

For example, debate will resume Nov. 30 on a package of billsdealing with a host of financial services reform issues raised byvarious House committees, leading up to a floor vote on the entirelegislative package in early December.

At stake is the oversight of firms posing a systemic risk,the regulation of derivatives, investor protection and the creationof two new agencies–a Consumer Financial Protection Agency and aFederal Insurance Office.

However, industry officials and congressional staffers say themost significant development regarding financial services reformoccurred earlier in the month in the Senate.

That was when members of the Senate Banking Committee, preparingfor introduction of health reform legislation, decided to break upinto small groups to draft the various components of an omnibus andbipartisan financial services regulatory reform package.

"The concern was that Sen. Chris Dodd would force a partisanvote across-the-board in the committee, see how the politics playedout, and based on that deduct what ultimately could be achieved,"according to one industry lawyer. "Now, I think we're getting closeto skipping the first part."

The hope is that omnibus and bipartisan financial servicesregulatory reform legislation will be ready for committee actionbefore Christmas, the lawyer said.

In a statement to the committee as he started debate on hisversion of the legislation, Sen. Dodd, a Connecticut Democrat, saidhe was dropping his bill and taking members of the committee "attheir word" at agreeing to work together on bipartisanlegislation.

He said he was "wedded to nothing" in his discussion draft, andwould lift his deadline to have all amendments to him by Nov.25.

"I believe that means we are closer to getting regulatory reformthan we were two weeks ago," the lawyer said.

An American Insurance Association representative, BlainRethmeier, added that "anything that can be done to lower thetemperature and produce meaningful reform is encouraging. Itappears that both Sen. Dodd and Sen. Richard Shelby, R-Ala.,ranking minority member, have the best of intentions as showcasedby this development."

Complicating matters is the fact that the insurance componentsof the legislation are not the key issues, according to theindustry attorney and several congressional lobbyists.

Industry sources say the consensus is that a new FederalInsurance Office to be created within the Treasury Department wouldbe allowed substantive preemption authority over state insurancelaws, subject to a notice-and-comment period that could take up totwo years.

Meanwhile, in the House, the insurance industry won substantiveconcessions reflecting its unique status in legislation beingdrafted by the House Financial Services Committee, designed to givefederal regulators strong authority to oversee troubledinstitutions that pose a systemic risk to the financial system.

Final action on the bill–the Financial Stability Improvement Actof 2009–is expected to be completed this week.

First, the industry won an amendment to the bill that raises to$50 billion from $10 billion the asset threshold for being assessedin advance to pay the cost of resolving a systemically riskyinstitution.

The Property Casualty Insurers Association of America stronglyurged the committee to raise the limit. PCI officials said "thecompanies which contributed the most to recent financial crisiswere large financial firms engaging in risky non-insuranceactivities."

Raising the asset threshold to $50 billion focuses the cost ofresolving troubled institutions "on large companies that are morelikely to be systemically risky than smaller companies," PCIargued.

"It is very important that the Main Street business community isnot required to pay for the activities of Wall Street risk-takers,"added PCI Senior Vice President Ben McKay.

However, Mr. Rethmeier of AIA said members of his group remainopposed to insurance industry participation in any pre-fundingprogram, regardless of the level of the threshold.

"We continue to take issue with any mechanism that improperlyassesses entities for the systemic failures of others, and remainstrongly opposed to the idea of pre-funding because it runs counterto our own resolution system in the property-causality industry,"said Mr. Rethmeier.

"If you're a company that's under the $50 billion cap, then youprobably like the way the bill has been amended, but that's not thepoint," he added.

One amendment gives the Systemic Risk Council that will becreated by the legislation the authority to monitor internationalregulatory developments–including those relating to insurance andaccounting.

The amendment creating a prefunded resolution authority to berun by the Federal Deposit Insurance Corp. includes a provisionsought by the insurance industry that says assessments are to bebased upon a "risk matrix" that "takes into account" the riskspresented to the financial system.

In addition, the amendment requires that the new resolutionauthority "take into account" any assessments to pay for orreimburse payments to cover the costs of liquidation or insolvencyof another insurance company–thus recognizing that resolution ofinsolvent insurance companies is currently through payments byinsurers into state guaranty funds.

Another amendment mandates that the domiciliary state regulatorbe involved in any federal regulatory decision involving higherprudential supervision of an insurance company, and whether or notto subject an entity that includes an insurance company to theFDIC's resolution authority.

One amendment transfers authority over insurance companies thatown thrifts to the Federal Reserve Board from the Office of ThriftSupervision.

However, the amendment would specifically apply only to "savingsand loan holding companies that are, on a consolidated basis,predominantly engaged in the business of insurance."