Two TARP Panelists Call For Optional Insurance Charter

WASHINGTON--Two members of the Troubled Asset Relief Program Oversight Panel today recommended in a minority report that Congress create an optional federal charter for insurers.

"Congress should institute a federal charter that may be utilized by insurance firms to underwrite, market, and sell products on a national basis," the minority report said.

"By allowing insurance firms to choose between a unified national charter or maintaining operations under existing state regulation, Congress can build upon the success of state guarantee pools and maintain state jurisdiction over premium taxes," the report said.

"A national charter would also allow regulators to take a comprehensive view of the safety and soundness of large insurance companies and to better understand the potential risks they may pose to the strength of the broader U.S. economy," it added.

The Special Report on Regulatory Reform was mandated through the Emergency Economic Stabilization Act (EESA), which was passed by Congress last September.

In general, the report said, "modernized regulation can dramatically reduce the risk of crises and swindles while preserving the key benefits of a vibrant financial system."

The recommendation for an OFC was made by former Sen. John Sununu, R-N.H., and Rep. Jeb Hensarling, R-Tex., now the ranking minority member of the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee.

Former Sen. Sununu, who was defeated in November for reelection, was a primary sponsor for the past two Congresses of legislation that would create an optional federal charter for insurers.

Reacting to the recommendation, Blain Rethmeier, a spokesman for the American Insurance Association, said, "Yet again, in today's report by the Congressional Oversight Panel, we hear the call to modernize insurance regulation and overhaul our financial regulatory structure."

Mr. Rethmeier added that, "If we are to rebound from this financial crisis and reform our system in a meaningful and intelligent way, there must be serious consideration of establishing a federal regulator for insurance and creating an office where a basic expertise on insurance matters could exist."

The main report made eight recommendations. It was headed by Elizabeth Warren, a bankruptcy professor at the Harvard Law School.

In its primary recommendations, the panel said that the government should:

o Identify and regulate financial institutions that pose systemic risk--including critical nonbank institutions--by designating the Federal Reserve Board or another agency to handle that task.

o Limit excessive leverage in U.S. financial institutions through a series of capital reforms.

o Increase supervision of the shadow financial system--a network of hedge funds, private equity funds, over-the-counter derivatives, off-balance sheet conduits, and other centers of capital and investment activity.

o Create a new floor for standards governing mortgages and other consumer credit products, mainly by focusing that authority in a single federal regulator.

o Reform executive compensation structures so as to discourage excessive risk taking, such as by requiring contract provisions to revoke bonuses given to executives of failed institutions.

o Reform the credit rating system by establishing a new rating board and other safeguards.

o Establish as a U.S. diplomatic priority the goal of certain global regulatory minimum standards to allow individual nations to respond to collective risks.

o Plan for the next crisis.

The report recommended creation of a single federal regulator to set minimum standards for consumer credit products while leaving states free to enact tougher requirements.

Although the report leans toward establishing that authority within the Federal Reserve Board, it could be housed elsewhere or created anew.

In their minority suggestions, Mr. Sununu and Rep. Hensarling cited the case of the American International Group conglomerate, which has required billions in federal loans to stay afloat.

They said that while individual state insurance regulators have effectively managed state guarantee pools, as well as safety and soundness within their jurisdiction, "they simply are not equipped to effectively oversee a global firm such as AIG, which had 209 subsidiaries at the time the federal government acted to prevent its collapse in the fall of 2008."

Of the 209 subsidiaries, the report said, only 12 fell under the jurisdiction of the New York insurance commissioner, which was effectively AIG's primary regulator.

"By allowing insurance firms to choose between a unified national charter or maintaining operations under existing state regulation, Congress can build upon the success of state guarantee pools and maintain state jurisdiction over premium taxes," their report said.

A national charter would also allow regulators to take a comprehensive view of the safety and soundness of large insurance companies and to better understand the potential risks they may pose to the strength of the broader U.S. economy, they wrote.

"Lastly, a federal insurance regulator would be able to implement effective consumer protection, provide a clear federal voice to coordinate global insurance regulation with foreign counterparts, and ensure appropriate access for U.S. insurance companies in overseas markets," they said.