Posted on 20 Apr 2009
Responding to a "New York Times" op-ed written by Allstate CEO Tom Wilson last week, New York state insurance regulators called for the insurer to report all of its participation in "unregulated insurance markets" and its knowledge of any insurance companies that conducted unregulated writing of credit default swaps.
The New York State Insurance Department (NYSID) in a letter to Allstate was responding to an opinion article in the April 16, 2009 New York Times by Mr. Wilson in which he wrote: "...we [Allstate] played only a small role in unregulated insurance markets…." He also wrote, "The insurance companies that wrote credit default swaps were happy not to be regulated."
“In New York and in other states, it is illegal for an insurance company to write a credit default swap unless approved by the state insurance regulator under limited conditions. If Allstate broke the law or is aware of any other insurance company that broke the law, Allstate should immediately report that conduct to the appropriate state insurance regulator. I have asked Allstate’s New York companies to report immediately any inappropriate or unregulated use by them of credit default swaps,” Superintendent of Insurance Eric Dinallo said.
“I have said for more than a year that credit default swaps should be regulated and that those who write them should be required to hold adequate reserves. But one thing should be clear. While the credit default swap market is not regulated, insurance company use of credit default swaps is. In New York, no insurance company can use credit default swaps except under very specific and limited ways and only with approval,” Dinallo said.
The Allstate opinion article argues for federal regulation of insurance based on a number of inaccurate and misleading statements: that credit default swaps are insurance; that AIG sold credit default swaps as an insurer; and that insurance companies were unregulated in selling credit default swaps. In fact, most credit default swaps are not insurance because most buyers were not insuring something they owned, which is a requirement for insurance. AIG purposely sold huge numbers of credit default swaps through a federally-regulated non-insurance subsidiary because it would not have been allowed to sell swaps with no limits, no controls and no reserves through a state-regulated insurance company. Insurance company sales of credit default swaps are highly regulated and limited.
“I am also concerned that the Allstate opinion article makes a number of broad statements that could risk unnecessarily undermining consumer confidence in the insurance industry as a whole. It states that insurance companies wrote credit default swaps and were not regulated and their solvency was not protected. Wilson’s column does not name those companies, leaving consumers to wonder which companies. It says A.I.G. sold credit default swaps as an insurer, suggesting any insurer could do the same, which is not true. It says Allstate itself was involved in unregulated insurance, without defining what that means. The column says insurance contributed to the market failure, but is not clear if it means only credit default swaps or insurance generally. Consumers should know that insurance companies are weathering this crisis better than the rest of financial services and that state regulators are focused on ensuring insurers are solvent and can pay claims. I welcome a principled debate about federal regulation of insurance, but the last thing an insurance executive should be doing now is undercutting consumer confidence,” Dinallo said.