Washington

Even though debate on a national health care reform bill in the U.S. Senate is grabbing all the headlines, federal legislation that would radically alter how insurers are regulated remains on the front burner in Congress, with crucial details yet to be worked out, industry lobbyists warn.

For example, debate will resume Nov. 30 on a package of bills dealing with a host of financial services reform issues raised by various House committees, leading up to a floor vote on the entire legislative package in early December.

At stake is the oversight of firms posing a systemic risk, the regulation of derivatives, investor protection and the creation of two new agencies–a Consumer Financial Protection Agency and a Federal Insurance Office.

However, industry officials and congressional staffers say the most significant development regarding financial services reform occurred earlier in the month in the Senate.

That was when members of the Senate Banking Committee, preparing for introduction of health reform legislation, decided to break up into small groups to draft the various components of an omnibus and bipartisan financial services regulatory reform package.

"The concern was that Sen. Chris Dodd would force a partisan vote across-the-board in the committee, see how the politics played out, and based on that deduct what ultimately could be achieved," according to one industry lawyer. "Now, I think we're getting close to skipping the first part."

The hope is that omnibus and bipartisan financial services regulatory reform legislation will be ready for committee action before Christmas, the lawyer said.

In a statement to the committee as he started debate on his version of the legislation, Sen. Dodd, a Connecticut Democrat, said he was dropping his bill and taking members of the committee "at their word" at agreeing to work together on bipartisan legislation.

He said he was "wedded to nothing" in his discussion draft, and would lift his deadline to have all amendments to him by Nov. 25.

"I believe that means we are closer to getting regulatory reform than we were two weeks ago," the lawyer said.

An American Insurance Association representative, Blain Rethmeier, added that "anything that can be done to lower the temperature and produce meaningful reform is encouraging. It appears that both Sen. Dodd and Sen. Richard Shelby, R-Ala., ranking minority member, have the best of intentions as showcased by this development."

Complicating matters is the fact that the insurance components of the legislation are not the key issues, according to the industry attorney and several congressional lobbyists.

Industry sources say the consensus is that a new Federal Insurance Office to be created within the Treasury Department would be allowed substantive preemption authority over state insurance laws, subject to a notice-and-comment period that could take up to two years.

Meanwhile, in the House, the insurance industry won substantive concessions reflecting its unique status in legislation being drafted by the House Financial Services Committee, designed to give federal regulators strong authority to oversee troubled institutions that pose a systemic risk to the financial system.

Final action on the bill–the Financial Stability Improvement Act of 2009–is expected to be completed this week.

First, the industry won an amendment to the bill that raises to $50 billion from $10 billion the asset threshold for being assessed in advance to pay the cost of resolving a systemically risky institution.

The Property Casualty Insurers Association of America strongly urged the committee to raise the limit. PCI officials said "the companies which contributed the most to recent financial crisis were large financial firms engaging in risky non-insurance activities."

Raising the asset threshold to $50 billion focuses the cost of resolving troubled institutions "on large companies that are more likely to be systemically risky than smaller companies," PCI argued.

"It is very important that the Main Street business community is not required to pay for the activities of Wall Street risk-takers," added PCI Senior Vice President Ben McKay.

However, Mr. Rethmeier of AIA said members of his group remain opposed to insurance industry participation in any pre-funding program, regardless of the level of the threshold.

"We continue to take issue with any mechanism that improperly assesses entities for the systemic failures of others, and remain strongly opposed to the idea of pre-funding because it runs counter to our own resolution system in the property-causality industry," said Mr. Rethmeier.

"If you're a company that's under the $50 billion cap, then you probably like the way the bill has been amended, but that's not the point," he added.

One amendment gives the Systemic Risk Council that will be created by the legislation the authority to monitor international regulatory developments–including those relating to insurance and accounting.

The amendment creating a prefunded resolution authority to be run by the Federal Deposit Insurance Corp. includes a provision sought by the insurance industry that says assessments are to be based upon a "risk matrix" that "takes into account" the risks presented to the financial system.

In addition, the amendment requires that the new resolution authority "take into account" any assessments to pay for or reimburse payments to cover the costs of liquidation or insolvency of another insurance company–thus recognizing that resolution of insolvent insurance companies is currently through payments by insurers into state guaranty funds.

Another amendment mandates that the domiciliary state regulator be involved in any federal regulatory decision involving higher prudential supervision of an insurance company, and whether or not to subject an entity that includes an insurance company to the FDIC's resolution authority.

One amendment transfers authority over insurance companies that own thrifts to the Federal Reserve Board from the Office of Thrift Supervision.

However, the amendment would specifically apply only to "savings and loan holding companies that are, on a consolidated basis, predominantly engaged in the business of insurance."

Special Reports /

Insurers Brace For Capitol Hill Battles Over Federal Regulatory Reform Proposals

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