Proposed Systemic Risk Fund Draws Fire From Industry, State Lawmakers

Washington

A provision in financial services reform legislation to be introduced in the Senate this week–which will subject large insurers to federal systemic risk oversight and force them to help bail out even non-insurance firms–is running into heavy fire from various industry groups, including state legislators.

Drawing particularly heavy criticism is a provision of the systemic risk provision that would require insurers with assets of more than $50 billion to contribute to a fund that would be used to pay for winding down troubled large financial services firms.

The proposal is running into strong resistance 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 that are likely to be among the group of financial services companies with assets of $50 billion or more has also joined the battle.

The provision will be included in financial services reform legislation to be introduced this week. Sen. Chris Dodd, D-Conn., chair of the committee, and Sen. Bob Corker, R-Tenn., are coordinating the drafting of the bill.

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 the large companies to be responsible for providing additional funds if necessary to pay for resolving a troubled, systemically risky firm.

The provision is expected to designate the Federal Deposit Insurance Corp. as responsible for winding down troubled companies.

It is unclear whether the provision will mandate that states be responsible for dealing with operating subsidiaries, such as insurance carriers.

But the industry is opposed. Generally, they argue that the insurance industry has a viable resolution system for failed carriers and should be excluded from the federal system that would be created under the emerging Senate bill.

A letter to Sens. Corker and Dodd sent by officials of the National Organization of Life and Health Insurance Guaranty Associations 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 that 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.

In addition, a resolution adopted by the National Conference of Insurance Legislators 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.

Meanwhile, the coalition of 11 insurance companies also sent a letter to Sens. Dodd and 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 added 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.

Moreover, the letter said, "property and casualty insurers are already subject to stringent regulatory capital, investment and product standards that focus on maintaining their financial health and strength."

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