Federal Bailout Funds Shouldn't Skew Insurer Competition, AIA Warns

Lawmakers must ensure that money being doled out to companies under federal bailout programs doesn't give them an unfair competitive advantage over firms not taking U.S. Treasury funds, the American Insurance Association asserted last week in a letter to Congress.

The letter specifically cites the “Federal Reserve's intervention with American International Group” as well as the Treasury Department's creation of a Capital Purchase Program, under which it has designated $250 billion for qualified financial institutions in the form of equity stakes.

AIA voiced concern that “government ownership of private companies does not produce regulatory policy at the state or federal level that gives those institutions a marketplace advantage over their competitors as government seeks to protect its investment.”

The government must act to ensure taxpayer capital isn't used for unintended purposes–such as gaining market share from financial institutions that are accessing private capital at market rates–because this presents “a substantial risk of market distortion,” the AIA said in the letter, signed by its outgoing president, Marc Racicot.

The letter was sent to the chairs and ranking minority members of the Senate Banking Committee and the House Financial Services Committee–the congressional panels that have primary oversight over the federal aid programs.

Besides AIG, mostly life insurance companies have applied for aid through the programs. They include The Hartford Insurance Group (a multiline carrier), the Principal, Genworth Financial, the Phoenix Companies, Lincoln Financial, Protective Life and Aegon.

Other insurance companies with both life and property-casualty businesses have apparently applied as well, but have not publicly disclosed their applications.

So far, Treasury Secretary Henry Paulson has limited carriers under consideration for funding from TARP–the Troubled Asset Relief Program–to those currently subject to some federal regulation, either through owning banking institutions or charters as a bank holding company.

As of now, the only insurer that has officially received aid is AIG. Most others have applied for aid by simultaneously saying they intend to acquire a thrift institution or a bank and at the same time applying for a bank holding company or thrift charter–if they did not have one already.

“Congress must exercise its oversight responsibility to ensure that the limited purposes of these initiatives do not result in outcomes that distort private markets and create conflicts with the government's role as market regulator,” the AIA letter said.

In addition, AIA warned, “there is a significant risk that the provision of subsidized government capital will perpetuate the view among companies that access to that capital is essential to keep pace with market competition.”

The number of companies and industry sectors now seeking access to government capital under the Emergency Economic Stabilization Act–which created TARP–provides strong evidence that this concern is justified, “as institutions may feel compelled to participate in a dramatically discounted alternative to the capital markets,” AIA said.

If this happens, Mr. Racicot said in his letter, “the fundamental purpose behind these government programs gives way to the misperception that government is needed as a permanent market participant in order to maintain the level of competition, rather than to provide emergency stabilization of the economy as a whole.”

The programs cited in the letter include funds authorized through passage of the EESA in September, as well as related initiatives by the Federal Reserve and the Federal Deposit Insurance Corp.

The letter is consistent with a statement issued by the AIA board on Oct. 27, in which it said it had surveyed its members, and that a majority had responded by saying they did not support the inclusion of property-casualty insurers in Treasury's Capital Purchase Program, and that those members would elect not to participate in the CPP even if it were made available.

Meanwhile, the Treasury Department is maintaining its stance that insurers seeking federal bailout dollars must do so through a federally regulated entity, leaving those without a banking subsidiary or organization out in the cold.

At a press conference late last month announcing a new federal facility to support lending to consumers and small businesses, Mr. Paulson said his department would continue to work only with those financial entities “where there is a federal regulator” as it considers applications for TARP funds.

Mr. Paulson noted that several insurance companies have federal charters–either through owning banking institutions or charters as a bank holding company–and that those who have applied will be considered. “To broadly go to insurance companies,” he added, however, “we have not made that decision yet.”

Overall, Mr. Paulson said the Treasury is working to establish processes for the companies and markets that will fall within the parameters of TARP. “We're working all the time to develop and deploy programs that we think will work and will be effective,” he said.

Additionally, he criticized those who argue that the continuing troubles in the credit market are proof that the Treasury's actions have been ineffective. It would be “na?ve” he said, “to think that a bill could be passed, or a single action be taken, that would make all our troubles go away.”