WASHINGTON–The ranking minority member of the Senate Banking Committee signaled today that plans for a general overhaul of financial services regulation should involve considering federal insurance industry oversight.
In comments at a hearing on the need for modernizing insurance regulation, Sen. Richard Shelby, R-Ala., said that the Committee is moving towards "a very comprehensive regulator for the entire financial system."
He also said that recent events–including the need to rescue American International Group–"raises some "serious questions about the adequacy of state supervision."
Given the importance of insurers in our markets and overall economy, we should at least consider whether additional Federal oversight is needed," Sen. Shelby said.
"If insurers are managing risks on a national basis, it may make sense to consider regulating them on a national basis as well," he said.
"We also need to examine whether the existing insolvency regime can handle the failure of a large insurer," he said. "If insolvency needs to be managed at the national level, then, once again, a Federal insurance regulator may be our only option."
At the same time, Sen. Chris Dodd, D-Conn., chairman of the committee, was less critical, noting that while the current financial crisis did not have its origins in the insurance industry, "its adverse effects have been keenly felt by participants in the insurance marketplace."
Sen. Dodd noted that insurance is primarily state-regulated, but, "in recent decades the insurance industry has become increasingly national and even international, and some insurance companies have engaged in very complex and sophisticated transactions made possible by modern advances in financial engineering."
He added that, "In response many have observed that the regulation of insurance needs to be modernized accordingly," also noting that "various approaches have been proposed."
But Sen. Shelby was blunter.
He said that, even before the start of the present financial crisis, "there were legitimate questions about whether our insurance regulatory system was adequate for the 21st Century."
He added that recent events, "most prominently, the stunning collapse of insurance giant AIG," have only further demonstrated the pressing need for a review of our insurance regulatory structure.
He then cited the fact that at a committee hearing two weeks ago, it was revealed that "problems with the company's state-regulated insurance entities played a role in the company's collapse."
He noted that AIG's insurance subsidiaries suffered more than $20 billion in losses from their securities lending operations and had to be recapitalized with a loan from the Federal Reserve.
"The circumstances that permitted AIG's securities lending operations to potentially threaten the solvency of several of its insurance companies and their counterparties suggest that our regulatory system has not been keeping up with developments in the market," he added.
For example, he said, it appears AIG sought to conduct its securities lending operations on a nationwide basis by pooling the resources of approximately a dozen separate insurance companies regulated by five different states.
"Because insurance is still regulated at the state level, it is unclear whether any single state insurance regulator was responsible for overseeing AIG's entire securities lending operation," Sen. Shelby said.
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