NAIC Gets Fed Insurance Office Revised

The National Association of Insurance Commissioners has won significant changes to legislation creating a Federal Insurance Office, giving state regulators more say in its operations.

The new language is contained in a manager's amendment to the bill agreed to last week. It would require the new agency to closely coordinate with state regulators, and would give Congress and the courts the authority to further limit the agency's authority in insurance matters.

The changes in the Federal Insurance Office Act of 2009 were agreed to by the leadership of the House Financial Services Committee.

The bill was scheduled to be marked up late last week by the committee, but insurance industry sources said that after some parties objected, committee officials agreed to delay drafting activity until after the Thanksgiving holiday.

The proposed NAIC alterations to the legislation apparently upset supporters of a stronger federal role in regulation of insurance. These include the American Insurance Association, the Reinsurance Association of America, the American Council of Life Insurers and the Financial Services Roundtable.

The changes the NAIC negotiated in the bill would:

o Mandate closer cooperation between the states and the FIO on narrow international agreements.

o Ensure that international agreements don't preempt state prudential regulation of U.S. insurers.

o Limit the scope of agreements to recognizing a level of supervision consistent with state protections.

o Add congressional involvement and consultation.

o Add judicial review on preemptive determinations made by the proposed agency.

o Reassert state authority to regulate the "business of insurance."

"The recent amendments strike an appropriate balance among the needs of consumers, state regulators and federal negotiators, by preserving important state and market regulation while allowing for agreements with equivalent regulatory systems," said NAIC President Roger Sevigny.

"While the NAIC continues to oppose a federal functional regulator for insurance or misguided attempts to further empower the FIO, the bill as currently drafted is an appropriately narrow and targeted improvement to our system of supervision," added Mr. Sevigny, who is New Hampshire's insurance commissioner.

SYSTEMIC RISK

In other federal regulatory news, property and casualty as well as life insurers have written lawmakers objecting to language in legislation giving Washington 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 p&c 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 insurers 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 insurers should be responsible for contributing into a fund that would be used to pay for resolving troubled financial institutions.

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.

"We strongly oppose the idea of prefunding because it runs counter to our own resolution system, amounts to a tax …," the five p&c insurance trade groups said in their letter. "We see no benefit to our industry and its customers that would flow from adopting an amendment to prefund the enhanced resolution authority."

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

But it would not give the proposed Financial Services Oversight 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. 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 groups said its industry "did not pose systemic risk to the U.S. financial system or to the economy" during the economic crisis that is prompting the legislation. "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."