Insurers Jockey For Adjustments As Vote Nears On Fin'l Reform Bill

The Dodd-Shelby amendment removed from the legislation a provision that would have required financial institutions with more than $50 billion in assets to pre-pay into a $50 billion resolution fund that would be used to resolve so-called "too-big-to-fail" financial institutions.

Under this amendment, the Federal Deposit Insurance Corp. would liquidate faltering firms by borrowing money from the Treasury to cover initial costs. The government would recover the costs by selling off the firm's assets, with creditors and shareholders incurring losses.

Other large financial institutions could be assessed to pay for additional costs as a last resort–a requirement another amendment aims at exempting insurers from.

That amendment–SA-3838, sponsored by four New Englanders (John Kerry, D-Mass.; Scott Brown, R-Mass.; Jeanne Shaheen, D-N.H.; and Judd Gregg, R-N.H.)–mandates that no nonbank financial services company that is subject to liquidation or rehabilitation under state law will be subject to any assessments by federal regulators to pay for resolving systemically risky financial institutions.

"The Dodd-Shelby amendment that passed the Senate has improved the bill and limits insurers' exposure to assessments. However, it does not eliminate it," noted Blain Rethmeier, a representative for the American Insurance Association. "We support the bipartisan Shaheen-Brown amendment because insurers would continue to operate in the state-based regulatory environment and not be forced to pay for the failures of riskier institutions."

At the same time, according to Ben McKay, senior vice president of federal government relations at the Property Casualty Insurers Association of America, large insurers would still be subject to a provision in the legislation that would give oversight of those carriers to a new Systemic Risk Council.

That body would primarily be composed of federal bank and securities regulators with authority to monitor the solvency of all financial institutions and subject them to added oversight if they are deemed troubled.

Mr. McKay said the industry believes that considering asset size as a determinative factor is flawed because it fails to consider a firm's level of interconnectedness in relation to the larger financial system.

He cited a PCI commissioned study by NERA Economic Consulting which argues that the insurance industry does not have the same exposures as other financial institutions, and does not rely heavily on outside capital for funding.

Because of these factors, "the transmission of systemic risk is unlikely to be observed in the property and casualty industry," the study concludes.

The bill would create a new Office of National Insurance to monitor insurers and recommend to the council whether an insurer constituted a potential threat to the financial system.

However, there is some controversy over how much authority the ONI should be given in terms of negotiating international insurance trade deals.

Sen. Jeff Merkley, D-Ore., introduced an amendment that would drastically reduce the ONI's authority, so that the ONI could only preempt those state insurance laws and rules that treat non-U.S. insurers less favorably than U.S. insurers. Co-sponsors of the Merkley amendment include Sen. Sherrod Brown, D-Ohio; Sen. Barbara Boxer, D-Calif.; Russ Feingold, D-Wis.; Sen. Olympia Snowe, R-Maine; and Sen. Bernard Sanders, I-Vermont.

Eight insurance trade groups reacted by voicing objections in a May 11 letter to all senators, opposing the Merkley amendment.

Cincinnati Companies, which supports the amendment, said the provision would prohibit non-U.S. insurers and reinsurers whose own business decisions and business outcomes may result in unfavorable application of neutral state insurance laws, from evading application of those laws to their U.S. operations.

The amendment would also require a consideration of the effect of preemption on:

o Consumer protections.

o The safety and soundness of U.S. insurance markets.

o Whether the preemption action would create gaps and voids in financial or market conduct regulation by the states.

The amendment would also allow the states to appeal the preemption decision to the federal courts. Moreover, any preemption action would be subject to a notice and comment period under the federal Administrative Procedures Act.

The amendment would also revise the current language in the bill by transferring authority to conduct a study of how current insurance laws could be updated from the Treasury Department to the Government Accountability Office.

It also revises the mandate of the study that would be conducted to effectively concentrate on how federal preemption authority should be used to improve existing state insurance regulation.

According to a letter sent to members of the Senate by an official of the Cincinnati Companies, the amendment has the support of the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America.

The National Conference of Insurance Legislators also wrote a letter to every member of the Senate voicing support for the new amendment.

The NCOIL letter lauded the amendment by Sen. Merkley, saying that "by confining ONI scope to 'covered agreements' rather than 'international insurance agreements on prudential measures' and providing criteria for action, NCOIL believes you have narrowed the broadly drawn authority of the current Senate proposal and weakened the opportunity for feared 'mission creep'."

In doing this, the NCOIL letter added, "you have made what NCOIL has always considered an onerous proposal less onerous."

The eight trade groups opposing the amendment said in their letter that the Merkley amendment "would substantially weaken the Office of National Insurance's power to address international issues that are critical to U.S. companies, and ultimately to U.S. consumers."

Those signing the letter include the American Insurance Association, the Council of Insurance Agents and Brokers, the Reinsurance Association of America, the Association of Bermuda Insurers and Reinsurers, and the Risk and Insurance Management Society, which is the leading representative of commercial insurance buyers.

The letter was also signed by the Financial Services Roundtable, the European Insurance and Reinsurance Federation, the American Bankers Insurance Association, and the American Council of Life Insurers.