Proposed Systemic Risk Fund Draws Fire From Insurers, NCOIL

NU Online News Service, March 11, 11:20 a.m. EST

WASHINGTON–A provision in upcoming financial services reform legislation that will subject large insurers to federal oversight is running into heavy opposition from various industry groups, including state insurance legislators.

The bill in question would provide for a broad overhaul of financial regulations. It is due to be introduced Monday by the Senate Banking Committee Chairman Christopher Dodd, D-Conn. Sen. Dodd and Sen. Bob Corker, R-Tenn., are coordinating the drafting of the measure.

Drawing particularly heavy criticism is a provision for regulation of institutions that pose a systemic risk. It would require insurers with assets of more than $50 billion to contribute to a fund that could be used to wind down large financial services firms that became insolvent.

The proposal is running into heavy fire from various industry groups, including the National Conference of Insurance Legislators and trade groups representing state guaranty funds.

A new coalition of 11 property and casualty insurers who are likely to be among the group of financial services companies with assets of $50 billion or more has also joined the battle.

The systemic risk provision will call for raising $50 billion upfront from companies with assets of more than $50 billion. But, the provision will also allow the government to require large companies to be responsible for providing additional funds if necessary to pay for resolving a troubled company.

Part of the measure is expected to designate the Federal Deposit Insurance Corporation as responsible for winding down troubled companies.

It is unclear whether the provision will mandate that states be responsible for dealing with operating subsidiaries.

In opposition, insurance company interests argue that their industry, which supports existing insurance guaranty funds already, has a viable resolution system in place and should be excluded from the federal system that would be created under the emerging Senate bill.

A letter to Sen. Corker and Sen. Dodd sent by officials of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the National Conference of Insurance Guaranty Funds, argues that insurance companies are fundamentally different than banks.

It explains that the existing guaranty fund system is designed to protect consumers above commercial interests in any liquidation; and creating a new system would undermine the existing guaranty system used to resolve troubled insurance companies.

"A proposal to resolve insurer failures directly, in a new resolution regime that would not protect or effectively replicate the priority status of policyholders (and of the 'safety net' protecting policyholders), perversely could leave policyholders at greater risk of incurring financial harm in connection with insurance company receiverships than they are today," the letter said.

And a resolution adopted by NCOIL at its recent spring meeting asks the committee to exclude the insurance industry from systemic risk regulation, federal resolution authority, and assessments to fund the resolution of systemically risky financial firms.

The resolution argues that insurance activities generally do not create systemic risk and that existing state guaranty fund systems are the appropriate venues to unwind failing insurance companies.

It also states that insurers should not be forced to pay for the resolution of failing systemically risky non-insurers.

And the coalition of 11 insurance companies have also sent a letter to Sen. Dodd and Sen. Corker, as well as other members of the committee.

"Property and casualty insurers have been an oasis of relative stability, weathering the crisis well without presenting any risk to the broader financial system," the letter said.

They say in their letter that property and casualty insurance operations 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.

Those signing the letter include the chairman and CEOs of Allstate, Ace, CNA, Travelers, Chubb Corp., USAA, Berkley Corp., Liberty Mutual, Nationwide Insurance, State Farm and Zurich.