Washington

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Compromise legislation proposed by the Obama administration andRep. Barney Frank would give federal banking regulators broadauthority over large, troubled insurers, stirring concern withinthe property and casualty industry and among state officials.

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The Financial StabilityImprovement Act's key language would remove the restraints on theFederal Reserve Board's authority over companies subject toconsolidated regulation under the 1999 Gramm-Leach-Bliley Act.

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Moreover, "it provides specific authority to the Fed and otherfederal financial agencies to regulate for financial stabilitypurposes and quickly address potential problems," according to adescription of the bill provided by the House Financial ServicesCommittee, chaired by Rep. Frank, the Massachusetts Democrat.

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It allows a to-be-created Financial Services Oversight Councilto use certain criteria to determine whether an institution issystemically risky. Under the bill, only federal financial servicesregulators could be members, with a state insurance regulator and astate banking regulator as advisory members.

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It would allow the Fed, as the systemic regulator, to makerecommendations as to corrective action a potentially troubledinstitution needs to take to ensure solvency, and says only thatthe Fed would have to consult with state regulators before makingthose recommendations.

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It would also give the Federal Deposit Insurance Corp. broadauthority to resolve problems with insolvent institutions declaredsystemically risky, as well as charge large, so-called "too big tofail" institutions to pay the cost of resolving troubles at a largebank, insurer, securities firm or hedge fund.

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The Property Casualty Insurers of America, the AmericanInsurance Association and the National Association of MutualInsurance Companies all issued statements, pointing out thatp&c companies pose no systemic risk because of the type ofproducts they sell, their liquidity ratios and their relativelyconservative businesses.

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"The property and casualty industry is extremely competitive,and the companies in that industry are generally low-leveragedbusinesses, with lower asset-to-capital ratios than other financialinstitutions, more conservative investment portfolios, and morepredictable cash outflows that are tied to insurance claims ratherthan 'on-demand' access to assets," said an AIA representative,Blain Rethmeier.

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He added that "our financial regulatory standards reflect thenature of our business."

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A PCI representative, Cliston Brown, said that "notwithstandingour industry's critical role in the economy, traditionalproperty-casualty companies don't operate like banks or otherfinancial firms." Therefore, he added, "it is absolutely criticalthat as lawmakers proceed on any systemic risk or resolutionauthority legislation, these differences are taken intoaccount."

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Jimi Grande, NAMIC senior vice president of federal andpolitical affairs, said, "We have been explaining for nearly a yearnow that insurance is fundamentally different from other financialservices products, and insurance does not pose a systemic riskbecause insurers are very liquid, they maintain low leverageratios, are not interconnected and are heavily regulated forsolvency at state level."

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The fact Congress is looking at systemically risky companies"causes us some concern," Mr. Grande noted, although he said NAMIChas not considered specific remedies it might propose to removep&c companies from the scope of the bill.

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"What they are looking for is broad authority to look at anyonewhom they deem significantly risky," he said. "But as we havediscussed over the past few years, there are inherent dangers inidentifying institutions that are too big to fail."

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The National Association of Insurance Commissioners alsocautioned that the oversight system envisioned by Treasury and Rep.Frank must complement, not displace, the current coordinated,national system of state-based insurance supervision.

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"A regime change that results in redundant, overlappingresponsibilities will result in policyholder confusion, marketuncertainty, regulatory arbitrage and a host of other unintendedconsequences," said Connecticut Insurance Commissioner ThomasSullivan, representing the NAIC at a hearing last week before theHouse Financial Services Committee.

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Mr. Sullivan cited the problems of American International Groupin his testimony, noting that AIG's insurance subsidiaries remainedsolvent "while the holding company spiraled into failure."

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"The NAIC's solvency and capital standards have ensured thatpolicyholder commitments are met and companies remain stable," hesaid. "State regulators have placed appropriate restrictions on theinvestments held by insurers."

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He also said the proposed legislation should be revised to "walloff" insurance company holdings from the broader holding company,and suggested federal-state coordination on a proposed FinancialServices Oversight Council to facilitate information-sharing,rather than relegate state insurance and banking regulators to anadvisory role.

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"Any new regulatory scheme should also "respect the strongpolicyholder protections states have in place," he said, addingthat having "multiple sets of eyes" in the examination of holdingcompanies "allows for checks and balances."

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