AIG Not A Reason For Federal Charter, Congressional Staff Told

NU Online News Service, Oct. 14, 2:59 p.m. EDT

WASHINGTON–American International Group's financial problems should not be a factor in a decision whether to establish optional or mandatory federal chartering of insurance companies, congressional staff were advised at a briefing.

That viewpoint came from Scott Harrington, an Alan B. Miller Professor in the Health Care Management and Insurance and Risk Management departments at the Wharton School, University of Pennsylvania.

"AIG's problems cannot be attributed to any alleged defects in the current system of insurance regulation," he said.

During his appearance on Capitol Hill Mr. Harrington said his research indicated that "numerous federal regulatory agencies in the U.S. and Europe had authority over AIG and the units that caused its collapse."

But, he said, those regulators were "asleep at the switch," failing not only to properly assess the riskiness of AIG's credit default swap portfolio, but also the degree to which regulated commercial and investment banks were overexposed to the risk that AIG might be unable to meet its obligations to counterparties.

Mr. Harrington in speaking to congressional staff summarized findings he made in a recent report commissioned by the National Association of Mutual Insurance Companies titled "The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation."

Besides his findings on AIG, Mr. Harrington also took issue with an Obama administration proposal to designate certain institutions as "systemically significant."

These would include insurers determined to be "Tier 1 Financial Holding Companies" that would be subject to special oversight by a new systemic risk regulator.

"If you designate certain insurance companies as systemically significant you might as well yell from the rooftops that they will be bailed out and they are 'too big to fail,'" Mr. Harrington said.

He said his research indicates that even with the more stringent regulation and increased capital standards promised by the federal government, "investors and consumers would know that they would be made whole by the government in the event of an insolvency of a systemically significant company, giving those companies a distinct competitive advantage."