An Aon Corp. official speaking on behalf of a national brokeragegroup urged the Treasury Department last week to make use of theyet to be developed insurance component of the Troubled AssetRelief Program as a means of opening up tight U.S. creditmarkets.

“Such an approach would benefit taxpayers, financialinstitutions saddled with illiquid assets, and homeowners,” said D.Cameron Findlay, executive vice president and general counsel ofAon. Mr. Findlay testified on behalf of the Council of InsuranceAgents and Brokers at an oversight hearing on the EmergencyEconomic Stabilization Act of 2008 held by the House FinancialServices Committee.

The insurance program to back up distressed mortgage-basedsecurities was added as the price for House Republicans to supportthe legislation. The Treasury Department is drafting regulationsthat will be used in connection with the program, but has notimplemented the insurance component as yet.

In response to a question, Treasury Secretary Henry Paulson saidhe “hasn't looked” at the Aon plan, but that his staff might haveexamined it. “We will develop a plan,” he said. “The legislationasked us to develop a plan and we will develop a plan.”

Pressed further, however, he declined to offer specifics, sayinghe would not “speculate about what is likely to be implemented inthe future.” He also responded to a similar question from Rep.Carolyn Maloney, D-N.Y., by saying he could not tell when the planwill be completed.

In his testimony, Mr. Findlay proposed that the insuranceprogram be based on the Price-Anderson Nuclear Indemnity Act, usinga combination of risk retention, risk pooling and governmentbackstop liquidity.

“Insurance plays a fundamental role in the operation of theworld's financial markets,” Mr. Findlay said. “Any coordinatedeffort to combat the turbulence roiling those markets shouldconsider the potential for an insurance component.”

He explained that as long as the problems created by depressedvaluation of mortgage-based assets in the capital markets remain,“no matter the volume of capital infusions, financial institutionswill have a difficult time playing their critical role in thefunctioning of our economy.”

Mr. Findlay said a properly-structured insurance program(outlined in an accompanying sidebar article) would havesignificantly lesser short-term cash requirements than capitalinfusions. In addition, because an insurance plan would be largelyfunded by its direct beneficiaries, it would restore liquiditywithout requiring massive outlays of government funds, to theultimate benefit of taxpayers.

“The insurance of illiquid assets would also protect financialinstitutions and the economy,” he said, explaining that aninsurance program would provide asset holders the option to keeptheir securities until maturity, or until economic conditionspermit the restoration of the assets' value. As a result, he said,it would not flood the market with distressed assets, which couldhave the effect of further depressing values.

“An insurance program would also prevent opportunistic purchasesof depressed assets by predatory investors,” according to Mr.Findlay. “Furthermore, the plan provides a framework for managingrisks from the securitization of assets to helping the financialservices sector avoid similar crisis in the future.”

For these reasons, he added, “CIAB and its members believe thatthe Department of Treasury should vigorously exercise the authoritygranted to it in Section 102 of the Emergency EconomicStabilization Act, and establish a program to insure the value oftroubled and illiquid financial instruments.”