Systemic Risk Bill May Do Consumers More Harm Than Good, Insurers Warn

The authority of federal regulators to oversee and liquidate large, troubled insurance companies should be significantly pared back in legislation Congress is considering to deal with systemic risk to the economy, industry leaders are arguing.

Representatives of the industry made their comments in letters to lawmakers in advance of the House Financial Services Committee's consideration of a bill creating a systemic risk regulator.

The letters were written by officials of the American Insurance Association, the Property Casualty Insurers Association of America and the American Council of Life Insurance to the leadership of the committee.

In general, the letters argue that the current state guaranty fund system for insurers could be preempted by the resolution mechanism that would be established under the proposed legislation, warning there is the potential that policyholders could be severely affected if an insurance holding company is designated as potentially systemically risky.

"Notwithstanding our industry's critical role in the economy, traditional property and casualty companies do not operate like banks or other financial firms," explained the AIA in its letter. "Therefore, it is absolutely critical that as lawmakers proceed on any systemic risk or resolution authority legislation, these differences are taken into account."

In their letters, the AIA and PCI both make the same point about the relative lack of systemic risk in their industry.

"AIA stands firm in our belief that traditional property and casualty companies do not pose a systemic risk like other financial firms," wrote AIA's president and chief executive officer, Leigh Ann Pusey, in her letter to the committee leadership.

"The property and casualty industry is extremely competitive, and the companies in our 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," her letter said.

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

PCI's president and CEO, David Sampson, in his own letter said, "There is no equivalent, in our industry, of a 'run on the bank' due to the fact that we have a stable, mandatory marketplace."

"We believe that all regulatory reform legislation, including any new resolution authority, should focus on truly systemically risky entities that are not currently regulated adequately for systemic risk and not already subject to an effective resolution system," he added.

ACLI officials cited a potential for extremely adverse consequences from subjecting life insurance companies to such broad oversight.

"Policyholders, beneficiaries and other individuals who rely on life insurance payments and proceeds would be adversely affected by such an outcome," the ACLI said in a letter signed by its president and CEO, Frank Keating.

The House committee began work last week on the bill, the "Financial Stability Improvement Act of 2009."

Under its provisions the Federal Reserve, the Federal Deposit Insurance Corp. and a newly created council of federal regulators would be given broad authority to deal with so-called "too big to fail" financial institutions, including non-banks such as insurers.

According to one legal analysis prepared for an insurance association–released to National Underwriter on the condition that its source remains anonymous–"in brief, the legislation opens the door for oversight of insurance holding companies by the Federal Reserve, and FDIC resolution of insurance holding companies in financial trouble."

Moreover, the analysis said, "any activity or practice that is designated as posing a systemic risk also gives rise to Fed oversight."

However, the study warned, "the language is very broad and could, conceivably, cover many insurance activities, notably reinsurance."

The full House is unlikely to debate financial services reform legislation until the first week of December, according to Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee.

Rep. Frank said he will revise the draft legislation he developed with the aid of the Treasury Department. The revision will take place because of objections by fellow Democrats on the committee so that large financial institutions will be levied in advance to fund a pool of cash that can be used to help liquidate troubled large financial institutions.

He also said that under the bill the Federal Reserve Board would lose its authority to provide funds to troubled non-banks under Section 13 (3) of the Federal Reserve Act. That is the provision the Fed used to provide the American International Group insurance conglomerate with up to $182 billion at one point last year.

He said the fund is needed to ensure there is no collateral damage to the markets from the failure of a very large financial institution.

In the original draft, Rep. Frank and the Treasury Department proposed that taxpayers pay to cover the costs of unwinding a large financial institution, with those funds later to be recouped from levies on large financial institutions, including insurers with assets of more than $10 billion.

Under the revised plan, he said, if funds run out, taxpayer dollars will be used, subject to expedited Congressional disapproval. He said the exact size of this fund is unknown, but "we're not talking in the hundreds of billions of dollars."

As for legislation creating a Federal Insurance Office, Rep. Frank did not mention during his press conference last week any timetable for his committee to consider such a bill.

But his chief spokesperson said later that Rep. Frank was meeting soon with officials of the House Ways and Means Committee to discuss jurisdictional issues holding up debate on the legislation by the House Financial Services Committee.

"But we don't think these issues will prevent marking up the legislation very soon by our committee," the spokesperson said.

Insurance industry sources last week said the Treasury Department and representatives of the U.S. Trade Representative Office were meeting to discuss the jurisdictional issues raised by provisions in the FIO legislation, which would give the Treasury Department the authority to negotiate insurance trade pacts with foreign countries.