Congressional approval of federal regulation for insurance appears unlikely for 2009, and prospects for an optional federal charter in the long term are dim–particularly for property-casualty firms, the head of the Federal Deposit Insurance Corp. indicated in a private briefing to p-c industry executives.

In addition, if insurance is addressed at all next year, the focus of the incoming Obama administration and federal banking regulators will be on the life insurance side of the business, not property-casualty, FDIC Chair Sheila Bair said in an off-the-record briefing to directors of the American Insurance Association on Nov. 14.

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

Ms. Bair said that plans to create an optional federal charter may fall by the wayside in Congress, suggesting that insurers seeking federal regulation might be better off finding a regulatory home 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 because their sector “is not in any financial trouble, and it is state-regulated, so it is not in the sights of those will be involved in federal financial services regulatory reform,” Ms. Bair explained.

Regarding an OFC, she said that “re-regulation will favor fewer regulators at the federal level, rather than more, and it will be done in phases. All current federal regulators have their hands full with the various bailout and stimulus packages that Congress has passed.”

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

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

Property-casualty insurance also has the complications of rate regulation and protection for policyholders versus stockholders as issues to be worked out, she noted. However, “in the long term, there seems to be consensus that it would be beneficial to Congress and the Treasury/Administration if there were insurance expertise at the federal level,” Ms. Bair said, according to the AIA summary.

Looking at the broader regulatory reform picture, Ms. Bair told AIA officials that dealing with an overhaul of financial services regulation will be delayed by the incoming Obama administration and Congress 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 will take the lead in drafting legislation overhauling regulation of financial services. During the question-and-answer session that followed, 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, will serve to “balance things out.”

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

Blain Rethmeier, an AIA representative, would only say that “as with all our meetings, they are closed to the press, so I can't give you any guidance on what she said.”

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

However, several life insurance lobbyists confirmed that as a result of recent direction as to how insurance might be regulated by the federal government, their companies are going back to the drawing board to determine what form of federal regulation would be acceptable, and which banking agency they believe would be their most appropriate federal regulator.

Jack Dolan, a representative for the American Council of Life Insurers, confirmed that Kim Dorgan, its chief lobbyist, recently told an industry strategy group that “Congress will be quite busy at the start of 2009,” and that an “OFC is likely not a top item on their agenda.”

However, Mr. Dolan added, “that does not mean it is a non-issue.” Moreover, he said, the “ACLI is still pursing an OFC.”

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

o Regulation of mortgage-backed securities and credit default swaps.

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

o Stronger disclosure rules for executive compensation and balance sheets.

Regarding the possibility of “systemic regulation” across industries, she said that would be “hard to conceptualize.” In theory, she said, “such a regulator would look at the systemic/liquidity risk of the enterprise and work with its functional regulators to address its financial problems.”

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

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

On Nov. 24, President-Elect Obama said he will nominate Timothy Geithner, current president of the Federal Reserve Bank of New York–which oversees the government's bailout of American International Group–as Treasury secretary.

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

Special Reports /

Federal Regulation Unlikely To Pass In 2009, FDIC's Chair Tells AIA Directors

Related Stories

Recommended For You