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

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

Representatives of the industry made their comments in lettersto lawmakers in advance of the House Financial Services Committee'sconsideration of a bill creating a systemic risk regulator.

The letters were written by officials of the American Council ofLife Insurance, the American Insurance Association and the PropertyCasualty Insurers Association of America (PCI) to the leadership ofthe committee.

In general, the letters argue that the current guaranty systemfor insurers could be pre-empted by the resolution mechanism thatwould be established under the proposed legislation, and there isthe potential that policyholders could be severely affected if aninsurance holding company is designated as potentially systemicallyrisky.

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 banksor other financial firms.

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

And officials of the ACLI cited a potential for extremelyadverse consequences from subjecting life insurance companies tosuch oversight.

"Policyholders, beneficiaries and other individuals who rely onlife insurance payments and proceeds would be adversely affected bysuch an outcome," the ACLI said in a letter signed by FrankKeating, 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 DepositInsurance Corporation and a council of federal regulators would begiven 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 legislationopens the door for oversight of insurance holding companies by theFederal Reserve, and FDIC resolution of insurance holding companiesin financial trouble."

Moreover, the analysis said, "any activity or practice that isdesignated as posing a systemic risk also gives rise to Fedoversight.

"The language is very broad and could, conceivably, cover manyinsurance activities, notably reinsurance," the studyconcluded.

In their letters, the AIA and PCI both make the same point, asstated by the AIA in a letter to the committee leadership by LeighAnn Pusey, AIA president and CEO.

"AIA stands firm in our belief that traditional property andcasualty companies do not pose a systemic risk like other financialfirms."

"The property and casualty industry is extremely competitive,and the companies in our 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," her letter said.

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

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

"We believe that all regulatory reform legislation, includingany new resolution authority, should focus on truly systemicallyrisky entities that are not currently regulated adequately forsystemic risk and not already subject to an effective resolutionsystem," he added.

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

Insurance subsidiaries of "identified financial holdingcompanies" could be subject to Fed oversight if state insuranceregulators fail to implement heightened prudential standardsrecommended by the Fed, according to the legislation.

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

On the Financial Services Oversight Council, one insuranceregulator representative would be included in a non-votingrole.

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