By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets
The Senate this month will take up overall reform of financial services regulation, which could have some relatively incidental impact on insurance oversight yet remain important enough to keep industry lobbyists toiling to make sure their interests are protected.
Last month, the U.S. House of Representatives passed H.R. 4173. It establishes the first official insurance office in Washington and sets up a systemic risk regulatory regime aimed at banks and other financial services companies, which could nonetheless sweep up insurance in its purview.
While the industry supports the establishment of the Federal Insurance Office (FIO), various segments differ on what powers the office should have, depending for the most part on their view of federal regulation of insurance itself, especially in the form of the Optional Federal Charter.
The industry remains united in doing everything it can to ensure no carrier gets designated as a systemic risk--for fear of not only the increased oversight it would bring, but also the cost of paying into essentially a new federal guaranty system.
As part of the overhaul of the financial regulatory system following the Great Meltdown of '08, lawmakers have attempted to designate those companies that by their nature pose a risk to the entire economy should they fail. Such companies will face stricter regulation and, in the case of insurers, would face a pre-emption from state regulation.
Insurers adamantly maintain that, because of their strict statutory capital requirements and the discrete nature of their service, they do not pose such a systemic risk and should not be included in any such regulatory regime.
So the question of this systemic risk label will consume industry advocates for the next few months as both the Senate and then the bicameral conference work out the final details of the bill before it goes to President Barack Obama for his signature.
David Sampson, president of the Property Casualty Insurers Association of America, said that, while the industry made great strides in the House bill, "it does not go far enough to ensure that nonrisky insurers will not be swept into a federal regulatory dragnet."
PCI Senior Vice President Ben McKay said in an interview that the "main game is now the Senate."
"But keep in mind that these things sometimes bounce, so the House could have further opportunities, and if it goes past next year, the whole thing could start over," he said.
"The biggest problem with the Senate bill, much the like House bill when it started out, (it) does not reflect the fact that insurance is nonsystemically risky," McKay added.
Blain Rethmeier, senior vice president for the American Insurance Association (AIA), said the bank-centric focus of the bill, particularly with its emphasis on holding company regulation, has created many difficult issues for the industry to resolve.
"We have worked hard with Chairman Barney Frank's (D-Mass.) staff to include a risk matrix in the final bill that would recognize the low-risk nature of property/casualty insurers both in the front end 'stricter supervision' determination process, as well as the back-end assessment mechanism," Rethmeier said.
Moreover, McKay said, currently any financial company, including insurance, with more than $50 billion in assets faces the assessment, but it still remains unclear about whether they would face the new federal scrutiny. "They could get the stricter regulation. There are these factors, but Treasury is not required to use the factors. That is part of the problem. It is completely up in the air."
More than a dozen insurance carriers would fall under the category, McKay added. But in theory, any company with, say, $1 billion in assets could face the systemic regulation merely by what kinds of insurance they offer, McKay added.
The bill could also require that those insurance companies that own small thrifts divest themselves or face new regulation by virtue of their newly designated bank holding company status. "Forcing their holding companies to convert to a bank holding company status or to divest of their thrifts would impose a costly burden with no benefit to the consumer," McKay said.
Insurers could get another chance to make their case about systemic risk thanks to an amendment in the bill that directs the Treasury to conduct a study on how best to fund the resolution authority created under the bill.
Yet McKay warned, "There is not enough money if you don't throw us (insurance) into the pool," referring to the proposed fund aimed at propping up those systemically risky companies in danger of imploding. The fund would consist of contributions from both the federal government and pre-event assessments of companies deemed to pose a systemic risk to the economy.
The main part of the Senate bill, and the part over which all the fights will be fought, concerns just how the Federal Reserve, Treasury and all the traditional oversight agencies will divvy up regulatory responsibilities over banks and other financial institutions to avoid a repeat of the 2008 crisis.
SAME AS IT EVER WAS?
But because no optional federal regulation will be attempted in this bill, insurers will fall for the most part under the same regulations and regulators in 2010 as they did in 2009 and 2008.
For the better part of this decade, life and reinsurance carriers and some property/casualty insurers have fought for the right to choose federal oversight as opposed to the current state-based regulatory system, in the form of the so-called Optional Federal Charter. OFC advocates maintain that national companies with 50 separate state regulators are at a disadvantage when it comes to competing on a global scale. They face the opposition of state regulatory and legislative officials who say that the current system better protects the interests of consumers.
OFC backers and their opponents on the Hill, however, are putting off their fight for another day.
"As for the insurance components in both the Senate and House bills, you are not a big enough part of the bill to get the attention you need, but you are not so insignificant that they will just cut you out," McKay said. "So you are somewhere in between."
THE FEDERAL INSURANCE OFFICE
As for the new FIO, concerns span the spectrum. Start with the AIA, whose president, Leigh Ann Pusey, said the new agency might not have sufficient clout to negotiate international agreements on prudential insurance matters. As a prime backer of the Optional Federal Charter along, with the American Council of Life Insurers, the AIA would like to see as powerful a presence as possible for the insurance industry in Washington, D.C.
The spectrum concludes with out and out opponents of the FIO such as the National Conference of Insurance Legislators and the Professional Insurance Agents (PIA), which fear it will be just the first step toward overall federal regulation.
Leonard Brevik, executive vice president of the PIA, said creation of the new federal insurance office "is not something that should be cheered by independent insurance agents."
He warned that the proposal for the agency to conduct a study of federal regulation of insurance could in no way provide any objective answers.
The Independent Insurance Agents and Brokers of America, the so-called "Big I," on the other hand, expressed support for the new federal office.
Illinois Director of Insurance Michael McRaith expressed satisfaction with the structure of the new agency, noting that its potential pre-emption powers had been pared back considerably since its inception several months ago. But he voiced concern that the Senate version favors the more powerful office generally opposed by state regulators and the National Association of Insurance Commissioners.
On a side note, insurance lobbyists did succeed in deleting any of their products (such as mortgage, credit and bond insurance) from the realm of the proposed new Federal Consumer Protection Agency, which is aimed primarily at credit-card abuses.
The primary property/casualty component in the healthcare reform bill now evolving on the Capitol Hill is the possibility of the removal of the antitrust exemption for health insurance as well as medical-malpractice insurers.
The move came seemingly in a fit of pique from Sen. Pat Leahy, D-Vt., who chairs the Judiciary Committee after the health insurers took a more vociferous stand than expected against the public option last fall. Leahy asserted removal would serve as a way of "ending this cozy arrangement to strengthen consumer choice through a competitive marketplace."
But the AIA's Pusey countered that it would "completely disrupt the industry's business environment and create substantial legal uncertainty and unnecessary litigation."
The antitrust exemption removal, though, was itself removed from the Senate version of the bill that passed on Dec. 24. It's to be determined what will appear in the final healthcare reform bill when House and Senate Democrats finish hammering out their differences in the coming weeks.
As for the OFC, the measure that was taken out of the current reform bill will gain a hearing this year, according to Rep. Frank. If nothing else, this will keep lobbyists on both sides of the long-simmering issue well employed in an otherwise challenging economy.
January 1, 2010
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