Blow To Insurers Softened In Latest Systemic Risk Bill

Also partly prompted by AIG's problems were provisions mandating that large financial institutions pre-pay into a fund that will be used to dissolve troubled financial institutions.

The vote sets the stage for House floor action beginning as early as this week on a host of bills designed to tighten regulation of financial services firms as well as provide stronger protection for consumers buying financial products.

The systemic risk legislation:

o Creates a council of federal regulators headed by the secretary of the Treasury to recommend to the Federal Reserve Board stronger supervision of systemically risky institutions.

o Grants authority to the Federal Deposit Insurance Corp. to create a fund that will be used to dissolve large, troubled financial institutions without federal assistance.

o Requires that financial institutions, including insurers, with assets of more than $50 billion contribute to a fund that would be used to liquidate troubled financial firms taken over by the FDIC.

One amendment to the bill likely to be fiercely debated would give the government preemptive authority to break up large, risky firms out of concern they could pose a systemic risk to the economic system.

The amendment gives the Systemic Risk Council the authority to determine whether the size, concentration or interconnectedness of an individual firm "poses a grave threat to the United States." If the Council reaches that conclusion, a company could face limits on its business practices, or be required to sell or divest business units.

It was proposed during markup drafting of the bill by Rep. Paul Kanjorski, D-Pa., chair of the committee's Capital Markets Subcommittee.

At the request of the insurance industry, an amendment was added saying assessments are to be based upon a "risk matrix" that "takes into account" the risks presented to the financial system.

Another gives the Systemic Risk Council the authority to monitor international regulatory developments, including those relating to insurance and accounting.

Other language mandates that the state regulator where a company is domiciled be involved in any federal regulatory decision involving higher supervision of an insurance company, and whether or not to subject an entity that includes an insurance company to the FDIC's resolution authority.

The insurance industry also won an amendment that transfers authority over insurance companies that own thrifts to the Federal Reserve Board from the Office of Thrift Supervision.

Other language in the measure requires that the new resolution authority "take into account" the assessments paid to state insurance guaranty funds to cover or reimburse payments to cover the costs of liquidation or insolvency of another insurance company.

The amendment transferring authority over insurance companies that own thrifts to the Federal Reserve Board from the Office of Thrift Supervision would apply only to "savings and loan holding companies that are, on a consolidated basis, predominantly engaged in the business of insurance."

The size requirement for insurers that would be assessed in advance for a fund to pay costs involved in the failure of any systemically risky institution was raised to $50 billion from $10 billion after strong lobbying by the insurance industry.

The Property Casualty Insurers Association of America strongly urged the committee to raise the limit. PCI officials said "the companies which contributed the most to the recent financial crisis were large financial firms engaging in risky non-insurance activities." PCI's senior vice president, Ben McKay, said raising the limit to $50 billion focuses the cost of resolving troubled institutions "on large companies that are more likely to be systemically risky than smaller companies."

"It is very important that the Main Street business community is not required to pay for the activities of Wall Street risk-takers," he added.

But Blain Rethmeier, a representative for the American Insurance Association, said members of his group remain opposed to insurance industry participation in any pre-funding program.

"We continue to take issue with any mechanism that improperly assesses entities for the systemic failures of others, and remain strongly opposed to the idea of pre-funding because it runs counter to our own resolution system in the property and causality industry," he said.

"If you're a company that's under the $50 billion cap, then you probably like the way the bill has been amended, but that's not the point," he said.