We're Not Banks, Insurers Tell G-20

The letter to the G-20 leaders contends that insurance companies have a different risk profile than banks, and that subjecting them to additional capital and reporting requirements in order to prevent systemic risk could well "have the opposite effect by increasing the risk of moral hazard and causing market distortions."

Moreover, the letter said, "the identification of individual insurers as being systemically important financial institutions (SIFIs) and subjecting them to additional capital and reporting requirements would miss the ultimate goal of achieving greater financial stability."

Francine L. Semaya, a New York insurance regulatory attorney, confirmed that international regulation will play a key role in supervision of U.S. companies going forward. "Clearly the objectives of the international financial regulations being discussed at the G-20 summit will have a direct impact on the regulation of the business of insurance here," she said.

With globalization, there must be coordination on an international scale, and the states have been working toward this goal," said Ms. Semaya, who chairs the Federal Involvement in Insurance Regulation Modernization Task Force of the Tort Trial and Insurance Practice Section of the American Bar Association and is the immediate past president of International Association of Insurance Receivers.

But, she noted, concern has been expressed to ensure that the "business of insurance" is looked at and treated on its merit and its strengths, not the weakness of other financial institutions.

Making the same point as the letter to the G-20 leadership, she said that "insurance is not banking and the rules that govern both industries should not be the same."

"The investment philosophy of insurers is unique and regulated by investment laws of the different states," she said, adding that the reserve process required of insurers ensures that claims will be paid.

The G-20 meeting comes against the backdrop of the first meeting of the Financial Stability Oversight Council created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This bill includes provisions that allow federal regulators to monitor insurance companies, and it is gearing up to undertake that role.

David Snyder, vice president and associate general counsel at the American Insurance Association, acknowledges the industry has its work cut out for it.

He said p&c insurers have supported broad systemic risk monitoring for purposes of determining whether there are negative trends anywhere in the financial services system. But, he said the follow-up should be assigned to the appropriate sector regulator.

"We have never supported, whether internationally or in the United States, regulation that is duplicative, or worse yet, contradictory."

He argues that "it benefits no one, especially consumers." The AIA, he said, "thinks the best way to solve any problem identified in any sector should be referral to the sector regulator"–in this case, the current state insurance regulatory system.

The FSOC, which held its first meeting on Oct. 1, has requested comment on how it should implement the provision creating the council and an arm of the agency, the Office of Financial Research.

"It certainly is possible for federal regulators to look over the shoulders of state regulators," said Fred Bellamy, a partner at Sutherland, Asbill & Brennan LLP in Washington. Dodd-Frank "does provide authority for the OFR to look into the insurance companies, not only the holding companies, and therefore get around state regulators," he said.

Mary Jane Wilson-Bilik, another Sutherland partner, noted that "the definition of financial institution in the Dodd-Frank bill explicitly states that 'financial institution' includes insurance companies."

In addition, she said, the OFR has "strong rule-making power to standardize all the types and formats of data that has to be collected–and it also has subpoena power."

Moreover, the OFR, which will be an arm of the Treasury Department, has authority under the law to develop tools for risk management, monitoring and developing best practices, and it will be charged with collecting and maintaining a database on all financial companies, including insurers, she said.

The Treasury's new research and analysis unit also has authority to develop the metrics for reporting risks to financial stability, Ms. Wilson-Bilick said. "These are considerable powers."

Mr. Snyder contends that "whatever the powers are, consumers are best protected when duplication and unnecessary regulatory costs are prevented." That's why paying attention to the implementation of the law is particularly important.

He noted that there are industry representatives on the FSOC.

"Insurers didn't cause the financial crisis and [they] provide significant information to our existing regulators," he said. Carriers have had a consistent pattern of cooperation with both state and federal agencies when they had questions about insurance.

They will continue to cooperate, "but it is our hope that regulation, including disclosure and information, will be efficient and non-duplicative, with benefits that exceed their costs."

"Regulation of insurance is already intensive, and any more regulation should meet a rigorous cost-benefit analysis," Mr. Snyder said.