A regulatory lawyer raised concerns about a new proposed FDICrule dealing with resolving troubled insurers that the federalagency believes constitute potential systemic risk to the financialsystem.

Francine L. Semaya, a New York-based insurance regulatoryattorney, fears the proposed regulation is an example of how theDodd-Frank Act will impose federal regulation on the business ofinsurance.

She noted that the proposed regulation says that state insurancelaw will continue to govern a financially troubled or insolventinsurance company, but at the same time only allows 60 days for thedomiciliary regulator to seek a court order to resolve thefinancial issues facing such a company.

If not, then the Federal Deposit Insurance Corporation has theauthority to get appointed as the receiver.

"It has been documented that 60 days is clearly not enough timeto 'resolve a troubled company,' particularly if you are workingwith a national property and casualty insurer with long-tailbusiness," Ms. Semaya said.

She noted that a regulator has two primary goals–protection ofpolicyholders, claimants and the public, and protecting the assetsof the insurer.

"Not every financially troubled company needs or should beplaced in receivership, whether that procedure is a rehabilitationor liquidation," argued Ms. Semaya, who chairs the FederalInvolvement in Insurance Regulation Modernization Task Force of theTort Trial and Insurance Practice Section of the American BarAssociation.

Under the right set of circumstances a troubled company, "ifdiscovered early enough, can be turned around or at least survivein a controlled run-off procedure," said the lawyer, who is alsothe immediate past president of the International Association ofInsurance Receivers.

"Obviously, with the FDIC looking over the state regulator'sshoulder, a state regulator might feel compelled to move to protecta troubled insurer from federal involvement by placing it inpremature receivership," she said, referring to the need to takequick action within the 60-day timeframe.

Of greater concern, she said, is the uncertainty that once adomiciliary regulator takes regulatory action against a financiallytroubled insurer and places it in receivership, "will the FDIC theninterfere with the orderly process of the rehabilitation andliquidation process?

"The state receivership process, although not perfect andsometimes too lengthy, for the most part is effective in theprotection of policyholders, claimants and the public," Ms. Semayasaid.

The FDIC rule was published for comment on Oct. 19.

The rule states specifically that the FDIC will not interferewith the state resolution of a troubled insurance company–evennon-insurance subsidiaries–except under extremely limitedcircumstances.

This will include making the troubled insurance company'spolicyholders whole, the FDIC said.

But, the FDIC does say in the rule that the law gives it thepower to liquidate a subsidiary or affiliate (including a parententity) of an insurance company, where such subsidiary or affiliateis not itself an insurance company.

Specifically, the FDIC said it is proposing that "it will notunduly impede or delay the liquidation or rehabilitation" of aninsurance company it deems systemically risky, "or the recoveriesby its policyholders."

The proposed regulation is 12 CFR Part 380.

The proposed regulation implements a provision of the Dodd-FrankAct that gives the FDIC the authority to take over and shut downnon-bank financial companies, including insurance companies.