Bill Would Have Federal Reserve Board Regulate Jumbo Insurers

Moreover, "it provides specific authority to the Fed and other federal financial agencies to regulate for financial stability purposes and quickly address potential problems," according to a description of the bill provided by the House Financial Services Committee.

It allows a to-be-created Financial Services Oversight Council to use certain criteria to determine that an institution is systemically risky. Under the bill, only federal financial services regulators would be members, with a state insurance regulator and a state banking regulator as advisory members.

It would allow the Fed, as the systemic regulator, to make recommendations as to corrective action a potentially troubled institution needs to take to ensure solvency, and says only that the Fed would have to consult with state regulators before making those recommendations.

It would also give the Federal Deposit Insurance Corporation broad authority to resolve insolvent institutions declared systemically risky. Insurance industry lawyers said they have not completed their analysis of what authority the FDIC would have to resolve these institutions.

It would also give the government broad authority to place levies on large, so-called "too big to fail" institutions to pay the cost of resolving a troubled large bank, insurer, securities firm or hedge fund.

The Property Casualty Insurers of America, the American Insurance Association and the National Association of Mutual Insurance Companies all issued measured statements dealing with the proposed bill.

In general, all said they saw no reason that property and casualty companies pose a systemic risk to the system because of the type of products they sell, their liquidity ratios and their relatively conservative businesses.

Specifically, as stated by Blain Rethmeier of the American Insurance Association, the "property and casualty industry is extremely competitive, and the companies in that industry are generally low-leveraged businesses, with lower asset-to-capital ratios than other financial institutions, more conservative investment portfolios, and more predictable cash outflows that are tied to insurance claims rather than 'on-demand' access to assets."

And, he added, "Our financial regulatory standards reflect the nature of our business."

The legislation, the Financial Stability Improvement Act, was exposed as a discussion draft late yesterday by Rep. Frank, chairman of the House Financial Services Committee.

A hearing will be held by the committee tomorrow. Thomas Sullivan, Connecticut insurance commissioner, will testify on behalf of the National Association of Insurance Commissioners. A markup drafting session for the legislation will be held next week.

The bills sponsors say it would:

o Create a mechanism for monitoring and reducing the threats that systemically risky firms pose to the financial system.

o Establish a process for winding down large, financially troubled non-bank financial institutions in a way that protects American taxpayers and minimizes the impact on the financial system.

o Overhaul and update our financial regulatory system.

Cliston Brown, a spokesman for the PCI, reacted by saying, "Notwithstanding our industry's critical role in the economy, traditional property-casualty companies don't operate like banks or other financial firms."

Therefore, he added, "it is absolutely critical that as lawmakers proceed on any systemic risk or resolution authority legislation, these differences are taken into account."

Jimi Grande, NAMIC senior vice president of federal and political affairs, said the bill grants "sweeping authority to the government over companies they designate as systemically significant."

He added, "We have been explaining for nearly a year now that insurance is fundamentally different from other financial services products and insurance does not pose a systemic risk because insurers are very liquid, they maintain low leverage ratios, are not interconnected and are heavily regulated for solvency at state level."

Mr. Grande said that preventing a future economic hardship is an obvious priority for lawmakers and financial services companies, but that the potential for a congressional overreaction is always a concern. "There's always an inherent danger when trying to identify any institution as systemically significant," he said. "When we label someone as too big to fail it creates a moral hazard."

"What they are looking for is broad authority to look at anyone whom they deem significantly risky," he said. "But, as we have discussed over the past years, there are inherent dangers in identifying institutions that are too big to fail."