WASHINGTON–Recent developments at American International Group are fueling both sides of the debate over federal regulation, with proponents and opponents each using the AIG mess to bolster their respective positions.
The National Association of Insurance Commissioners noted that AIG has remained solvent because of its insurance subsidiaries, and said calls for federal regulation of insurance in light of the AIG crisis are "simply unable to be supported."
But the two House sponsors of legislation creating an optional federal charter yesterday said the Federal Reserve Board's bailout of AIG was a "startling indication of the need to establish an optional federal charter for insurance."
The bill is the National Insurance Act of 2007, H.R. 3200. The companion bill in the Senate is S. 40.
"This unprecedented move by the Fed highlights the dangers of letting a 19th-century system govern a 21st-Century marketplace," said Rep. Melissa Bean, D-Ill. "Our largest insurers are too complex, too interconnected worldwide, to allow the limited resources of state regulators to serve as the only option for oversight," she said.
On the other hand, NAIC President and Kansas Insurance Commissioner Sandy Praeger noted, "The key distinction here is that AIG's insurance subsidiaries did not cause this crisis–rather, they will play a critical role in the solution."
She said that "calls for federal regulation of insurance in light of these events are simply unable to be supported. State regulatory oversight has kept the AIG insurance subsidiaries solvent, despite the actions of its federally regulated parent and non-insurance entities."
"If future developments challenge that solvency, there are state insurance regulatory safeguards in place to protect policyholders," she added.
The NAIC said state insurance regulators have "quickly mobilized to ensure that policyholders of the insurance subsidiaries remained protected." The group said the oversight will continue as AIG operates under the credit facility offered by the Federal Reserve.
The NAIC also said it has established a working group to oversee AIG insurance interests and to coordinate with federal regulators as needed. New York State Insurance Superintendent Eric Dinallo is chair of the working group, with Pennsylvania Insurance Commissioner Joel Ario serving as vice-chair.
In Congress, Rep. Ed Royce, R-Calif., co-sponsor of the House bill, said "Congress needs to address this matter before the Federal Reserve is forced to step in again."
He said the insurance marketplace "requires a world class regulator with the authority to adequately oversee these firms."
At the end of 2007, he noted, AIG had assets over $1 trillion, larger than the gross domestic product of 47 states.
"Clearly the status quo is no longer an option," Rep. Royce said.
The NAIC pointed out that AIG's parent got into financial distress because "non-insurance entities are not subject to the strict solvency framework applied to insurers."
This allowed various non-insurers "to engage in risky credit transactions (huge positions in credit derivative swaps on mortgage-backed securities) without the appropriate limits and minimum capital/surplus to protect the company from a downswing in the mortgage-backed security markets," the NAIC said.
Before the federal Gramm-Leach-Bliley Act, the NAIC explained, insurance regulatory authority only applied to "actual insurance entities and transactions with those entities." Within AIG, it said, there are 71 U.S. insurers subject to this authority.
The remaining 176 entities are split between foreign entities and non-insurance U.S. entities. The lead U.S. regulator of AIG financial holding company is the Office of Thrift Supervision, a federal banking regulator, the NAIC noted.
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