NU Online News Service, May 3, 3:35 p.m.EDT

U.S. Senate Republicans believe that failure to increase federaloversight of large insurance companies is a major deficiency offinancial services reform legislation, questioning whether stateguaranty funds are adequate enough to deal with large insurancefailures.

In a report issued late Friday, Republicans said the need toprovide funds to American International Group to keep it frombecoming insolvent pointed out the necessity to study the "adequacyof state guaranty funds to handle the failure of large,interconnected, and international insurance companies."

The report noted that it was not only AIG that received federalfunds during the 2008-2009 financial crisis but several other"prominent insurance companies," including Hartford Insurance Groupand Lincoln Financial Services.

Debate on the legislation, S 3217, the "Restoring FinancialStability Act of 2010," began Monday on the Senate floor.

The Republican's report said the bill lacks a requirement thatthe Treasury Department study the adequacy of state guaranty fundsto handle the failure of these large insurance companies.

"What notably is lacking" in provisions of the bill that dealwith tightened financial regulation "is any provision to enhanceregulatory oversight of large insurance companies," the Republicanpaper said, adding that the "collapse of AIG revealed seriousshortcomings in the regulation of large, interconnected, andinternational insurance companies."

Specifically, the report said, "The failure of AIG was due, inlarge part, to the massive securities lending operation thatseveral state-regulated AIG insurance companies rancollectively."

The Republican's report was released just two days after theGovernment Accountability Office issued a report indicating thatbecause of federal help, AIG is now "stable."

However, the report said, the ability of the government torecover all the $182 billion it has loaned to AIG since 2008depends on the ability of its underlying insurance companies toincrease profitability.

The comments about the need to study the viability of theguaranty fund system in the "dissenting views" comments byRepublicans is dealt with in discussing Republican concerns aboutTitle V of the bill, which creates an Office of NationalInsurance.

This provision provides very limited powers to the ONI. Underthe Senate bill, this agency would have the authority to collectand analyze insurance data and prepare a study for Congressrecommending to Congress the best ways to modernize the insurancesystem.

But, the Republicans say in the dissenting views, "we believethat among the issues that the reported bill presently mandates thedirector of ONI to study, there should be a study of the adequacyof state guaranty funds to handle the failure of large,interconnected, and international insurance companies."

Moreover, the Republicans, in criticizing the bill, said "Whileinsurance regulation is a complex matter and our state systemlargely has functioned well for nearly two hundred years, the sizeand international reach of many insurance companies has raisedlegitimate questions, including whether reforms are needed toreflect changes in the marketplace."

It added, "The failure of the reported bill to includeprovisions to ensure the proper oversight of large, interconnected,and international insurance companies like AIG is a glaringomission."

Their comments are likely to stir up strong opposition fromsupporters of state regulation.

In a recent letter to the Senate, for example, the NationalConference of Insurance Legislators criticized the provisioncreating the Office of National Insurance. They said statelegislators fear such an office "would preempt state law andeventually threaten successful state insurance oversight."

The letter added, "As has been evidenced and attested to overand over again, and despite the wishes of those who would seek toavoid the protections of state regulation, insurance regulation didnot contribute to the crisis and does not need federalintervention."