SCOTTSDALE, Ariz.–The chief insurance regulator of Illinois told a gathering of insurers here yesterday that the nation's financial crisis was a failure of federal regulators, not U.S. corporate governance laws.
"It's a failure of federal regulators not regulating where they have jurisdictions," said Insurance Director Michael McRaith in an address to the Property Casualty Insurers Association of America (PCI) annual meeting here.
Earlier, he noted that the American International Group Financial Products unit, which brought about the company's financial distress and need for a federal bailout, had chosen to be regulated by the U.S Office of Thrift Supervision (OTS).
OTS, he said, is the only federal agency that can preempt state law without notice, but, "OTS effectively does not regulate," Mr. McRaith added.
Mr. McRaith also severely criticized Treasury Secretary Henry Paulson's financial recovery plan, calling it an "irresponsible approach."
Under the Bush administration bailout of financial firms, "money is being made available to the largest and healthiest life insurers in the world," he said.
State regulation of insurers is not perfect and needs to be enhanced and modernized, the commissioner said, adding that even in 1933, when major financial reforms were passed, "not once did they propose a law to federalize insurance."
That is because the industry is "not about Wall Street" and more about paying the claims of Main Street individuals, he said.
Mr. McRaith did, however express support for some federal laws for the sector.
He mentioned reinsurance, where state laws require foreign companies to post collateral to operate, stating there was no need for the country to impose "an unreasonable restraint on trade."
He also termed it "insane" that there is not one uniform federal licensing procedure for agents and brokers–a concept that is currently the subject of pending legislation in Congress.
Mr. McRaith said he supported the proposal for a Federal Office of Insurance Information–to deal with foreign treaties affecting the industry, as well as maintain a database of information on U.S. insurers.
He attacked the notion that the United States should follow the schemes for regulating insurance used by United Kingdom's Financial Services Authority or the European Union.
He observed that Solvency II–the updated regulatory requirements for European Union insurers–had not yet been given final adoption, so that its full details were not known, adding that Solvency II "would have allowed AIG's insurance companies to fail."
Under FSA regulation, he said, four of the U.K.'s largest lenders had needed a rescue when they were having financial difficulties.
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