Systemic Risk Legislation Draws Insurer Objections

NU Online News Service, Nov. 18, 2:45 p.m. EST

WASHINGTON–Property and casualty and life insurers have written lawmakers objecting to language in legislation giving federal regulators oversight of insurance holding companies they believe pose a systemic risk to the financial system.

The letters were sent to all members of the House Financial Services Committee, which is currently marking up the bill, the Financial Stability Improvement Act of 2009.

Each member of the committee was written to by groups representing five property and casualty insurance trade groups, representing both underwriters and agents, as well as the American Council of Life Insurers.

P&C organizations that wrote are the American Insurance Association; the Independent Insurance Agents and Brokers of America; the National Association of Mutual Insurance Companies; the Property Casualty Insurers Association of America; and the Reinsurance Association of America.

The industry groups asked that large insurance companies not be subject to any oversight by bank regulators unfamiliar with the insurance industry regulatory scheme.

They also requested that bank regulators not have the authority to determine whether insurance companies should be responsible for contributing into a fund that would be used to pay for resolving troubled financial institutions.

And, they voiced particular concern over an amendment to the proposed legislation that would require institutions that are designated systemically important to pay in advance into a fund that would be used to resolve insolvent financial institutions.

Such an amendment was expected from Rep. Luis Guitierrez, D-Ill., during the markup of the legislation by the committee.

In its letter, the five p&c insurance trade groups said, "We strongly oppose the idea of prefunding because it runs counter to our own resolution system, amounts to a tax …"

"We see no benefit to our industry and its customers that would flow from adopting an amendment to prefund the enhanced resolution authority," the letter said.

The bill would give the Federal Reserve, the Federal Deposit Insurance Corporation and a council of federal regulators broad authority to deal with so-called "too big to fail" financial institutions, including non-banks such as insurers.

The committee legislation would give a proposed Financial Services Oversight Council authority to designate "financial companies"–which expressly include U.S. and foreign non-bank financial institutions such as insurers–for heightened prudential regulation setting down requirements that limit risk-taking and keep the stability of the financial system.

But, it would not give the so-called Council the authority to oversee the operating subsidiaries of insurance companies.

According to the ACLI letter, the bill would change the Bank Holding Company Act to effectively treat operating insurance companies as if they were national banks merely because they are in a holding company system that also owns an ancillary non-bank depository institution.

"Many insurance companies' insurance holding company systems contain small thrifts that are used to enhance the services provided to policyholders," the ACLI letter said.

And many p&c insurance companies also include subsidiaries that operate thrifts.

"Although policy makers may see a need to restructure the regulation of thrifts, that should be done in a way that does not damage the other corporate entities within the holding company," the letter said.

In its letter, the p&c industry said it "did not pose systemic risk to the U.S. financial system or to the economy" during the economic crisis that is prompting the legislation.

The p&c industry letter said, "We believe that any federal proposal to subject financial companies to heightened prudential supervision should start from the premise that property and casualty companies engaged in insurance activities should not be subject to such supervision."