NU Online News Service, Nov. 2, 4:00 p.m. EST

WASHINGTON–The authority of federal regulators to oversee and liquidate troubled large insurance companies should be significantly pared back in legislation Congress is considering, insurance interests are arguing.

Representatives of the industry made their comments in letters to lawmakers in advance of the House Financial Services Committee's consideration of a bill creating a systemic risk regulator.

The letters were written by officials of the American Council of Life Insurance, the American Insurance Association and the Property Casualty Insurers Association of America (PCI) to the leadership of the committee.

In general, the letters argue that the current guaranty system for insurers could be pre-empted by the resolution mechanism that would be established under the proposed legislation, and there is the potential that policyholders could be severely affected if an insurance holding company is designated as potentially systemically risky.

The American Insurance Association said in its letter, "Notwithstanding our industry's critical role in the economy, traditional property-casualty companies do not operate like banks or other financial firms.

"Therefore, it is absolutely critical that as lawmakers proceed on any systemic risk or resolution authority legislation, these differences are taken into account," the letter concluded.

And officials of the ACLI cited a potential for extremely adverse consequences from subjecting life insurance companies to such oversight.

"Policyholders, beneficiaries and other individuals who rely on life insurance payments and proceeds would be adversely affected by such an outcome," the ACLI said in a letter signed by Frank Keating, its president and chief executive officer.

The committee will begin work tomorrow on the bill, the "Financial Stability Improvement Act of 2009."

Under its provisions the Federal Reserve, the Federal Deposit Insurance Corporation and a council of federal regulators would be given broad authority to deal with so-called "too big to fail" financial institutions, including non-banks such as insurers.

According to one legal analysis, "In brief, the legislation opens the door for oversight of insurance holding companies by the Federal Reserve, and FDIC resolution of insurance holding companies in financial trouble."

Moreover, the analysis said, "any activity or practice that is designated as posing a systemic risk also gives rise to Fed oversight.

"The language is very broad and could, conceivably, cover many insurance activities, notably reinsurance," the study concluded.

In their letters, the AIA and PCI both make the same point, as stated by the AIA in a letter to the committee leadership by Leigh Ann Pusey, AIA president and CEO.

"AIA stands firm in our belief that traditional property and casualty companies do not pose a systemic risk like other financial firms."

"The property and casualty industry is extremely competitive, and the companies in our industry are generally low-leveraged businesses, with lower asset-to-capital ratios than other financial institutions, more conservative investment portfolios, and more predictable cash outflows that are tied to insurance claims rather than "on-demand" access to assets," her letter said.

"Our financial regulatory standards reflect the nature of our business," it adds.

David Sampson, PCI president and CEO said in remarks submitted last week, "There is no equivalent, in our industry, of a 'run on the banks' due to the fact that we have a stable mandatory marketplace."

"We believe that all regulatory reform legislation, including any new resolution authority, should focus on truly systemically risky entities that are not currently regulated adequately for systemic risk and not already subject to an effective resolution system," he added.

Under the bill, a Financial Services Oversight Council would be created and insurance holding companies that were designated by the Council would be subject to systemic risk oversight by the Federal Reserve.

Insurance subsidiaries of "identified financial holding companies" could be subject to Fed oversight if state insurance regulators fail to implement heightened prudential standards recommended by the Fed, according to the legislation.

An insurance holding company that is an "identified financial holding company" would be subject to the resolution authority of the FDIC if it fails, according to the bill's provisions..

On the Financial Services Oversight Council, one insurance regulator representative would be included in a non-voting role.

Unlike other members of the Council, the insurance representative would be limited to a two-year term.

Special Reports /

Insurance Trade Groups To Congress: 'No Systemic Risk Here'

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