Allstate Op-Ed Sparks N.Y. Inquiry

He also wrote, "The insurance companies that wrote credit default swaps were happy not to be regulated," adding that insurance regulators didn't expand their oversight to ensure the solvency of companies that wrote credit default swaps.

Reacting a day later, Mr. Dinallo said, "In New York and in other states, it is illegal for an insurance company to write a credit default swap unless approved by the state insurance regulator under limited conditions."

He added, "If Allstate broke the law or is aware of any other insurance company that broke the law, Allstate should immediately report that conduct to the appropriate state insurance regulator. I have asked Allstate's New York companies to report immediately any inappropriate or unregulated use by them of credit default swaps."

Michael McRaith, insurance director in Allstate's home state of Illinois, also reacted to Mr. Wilson's remarks. In a letter to the Times, the Illinois regulator said the "myth-laden pleas" of an otherwise prudent CEO in search of federal regulatory relief should be viewed cynically."

Before the current economic crisis, "financial institutions pushed for deregulation to promote 'innovation,' while fundamental consumer protections, like solvency, were dismissed as obstacles to profit," he noted.

Mr. Dinallo attacked the article for saying that AIG sold credit default swaps as an insurer, "suggesting any insurer could do the same, which is not true," according to the N.Y. regulator.

Mr. McRaith wrote, "Despite the prodigious incompetence of its non-insurance units, AIG operated 71 U.S.-based insurers that continue to meet all obligations to consumers. As the poster child for regulatory reform, AIG underscores why state insurance regulators welcome collaborative integration with a federal financial systemic regulator."

Mr. Dinallo said, "In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval."

The Allstate opinion article, he said, had called for federal regulation of insurance based on "a number of inaccurate and misleading statements: that credit default swaps are insurance; that AIG sold credit default swaps as an insurer; and that insurance companies were unregulated in selling credit default swaps."

"In fact, most credit default swaps are not insurance because most buyers were not insuring something they owned, which is a requirement for insurance."

The regulator said that AIG had "purposely sold huge numbers of credit default swaps through a federally regulated non-insurance subsidiary because it would not have been allowed to sell swaps with no limits, no controls and no reserves through a state-regulated insurance company. Insurance company sales of credit default swaps are highly regulated and limited."

Mr. Dinallo also attacked the Allstate opinion article for "a number of broad statements that could risk unnecessarily undermining consumer confidence in the insurance industry as a whole."

He explained that the piece stated that insurance companies wrote credit default swaps, but did not name the insurers involved, "leaving consumers to wonder which companies."

"It says Allstate itself was involved in unregulated insurance, without defining what that means," he continued.

According to Mr. Dinallo, the article was unclear in stating that insurance contributed to the market failure, whether "it means only credit default swaps or insurance generally. Consumers should know that insurance companies are weathering this crisis better than the rest of financial services and that state regulators are focused on ensuring insurers are solvent and can pay claims. I welcome a principled debate about federal regulation of insurance, but the last thing an insurance executive should be doing now is undercutting consumer confidence."

REAL AGENDA QUESTIONED

Last week, the Washington-based Competitive Enterprise Institute, a conservative think tank, blasted New York Superintendent Eric Dinallo, suggesting that it was the N.Y. regulator who was acting illegally by staging an illegal probe of Allstate.

"You know or ought to know that the interconnectedness of all financial markets means that anybody involved in issuing or purchasing debt instruments–things that almost all insurers do–played a 'small role' in unregulated insurance markets. It seems that Mr. Wilson's statement was simply an acknowledgement of lawful business practices that are already common knowledge. Thus it appears that you are opening an inquiry under false pretenses," CEI wrote in a letter to Mr. Dinallo.

The letter said there was reason to believe Mr. Dinallo's "real agenda may be to stop insurers, particularly large companies like Allstate, from calling for federal regulation of the insurance industry– something that may diminish your authority over such companies."

CEI claimed, "It is widely known that your employees have made telephone calls to other insurers operating in New York State asking them to back off of efforts to promote federal regulation of insurance. Thus, it appears rather certain that your real agenda has little or nothing to do with your publicly expressed motives."

The letter went on to cite laws that the group said made Mr. Dinallo's inquiry improper. "We hope that some of the companies that you have taken to harassing will do the right thing and file a lawsuit against you and your department," the CEI letter added, asking Mr. Dinallo to withdraw his threat to investigate.

In its letter, CEI revealed that the group disagrees with Allstate's call for mandatory federal chartering, and in fact disagrees with the company on a wide range of other issues.