Posted on 15 Jan 2009
American International Group’s bailout by Washington does not prove the need for a national regulator, but if a federal charter is established by Congress it should not be optional, according to New York Insurance Superintendent Eric Dinallo.
“AIG is not Exhibit A for a federal regulator. It is exactly the opposite,” Mr. Dinallo told leaders of insurance companies and their trade organizations last night in a talk that also discussed the chances of bringing back the failed New York Insurance Exchange.
“The strength of AIG’s insurance units and the regulatory moats that were built around their capital is actually proof that state regulators had a better handle on their end of the business” than did federal regulators overseeing the banking and securities markets, he added during a dinner speech before the annual Property-Casualty Insurance Joint Industry Forum.
While conceding that AIG’s financial woes exposed regulatory gaps “at the holding company level” that must be closed somehow, and that the federal government should certainly explore the idea of establishing a “systemic risk regulator” of some sort, Mr. Dinallo predicted that making a national charter “optional” would prove to be counterproductive.
“It’s a bad idea,” he said. “The regulatory relationship should be like a marriage—you should be stuck with one another. It should not be like dating, where you can just take a walk whenever you’re not happy with your partner.”
He argued that having an optional regulatory structure would “create an inevitable distancing” between carriers and those overseeing them—state or federal.
“If you can always go somewhere else to be regulated, that creates its own gaps, since every five years you may have to endure a spasmodic churning of the industry” as insurers choose a different regulator.
However, if Congress does create a federal oversight system, optional or otherwise, he said, “it should not bifurcate solvency from rate and market conduct regulation” but instead should supervise all under one roof, as separating functions would create regulatory conflicts of interest.
Still, having Washington assume complete responsibility for all insurance activities is problematic, since “I don’t honestly see the feds handling all these consumer complaints” about insurers, as the states do now, Mr. Dinallo said.
Even if federal regulation does become a reality, “I think you’re at least two years away from that,” according to Mr. Dinallo, citing the number of more critical issues to be addressed in Washington, including broader financial services overhaul.
In the interim, he said Congress might create an Office of Insurance Information to serve as a point agency on international trade and to alleviate the “blind spots” he said Washington has when it comes to this industry. That would be fine with him, he added.
Mr. Dinallo also emphasized that the idea of resurrecting the New York Insurance Exchange, floated last year by his office and Gov. David Paterson, has not been sunk by the financial meltdown and capital crunch.
“It remains a great potential alternative to Bermuda,” he said. “We already have the statute on the books.”
Even though the economy is in crisis, Mr. Dinallo argued that with the insurance market hardening, and given the lessons learned from the launch of the first exchange, the concept could work this time.
“One of the reasons it failed in the 1980s is because it was made up of just a bunch of insurers who put on masks in a masquerade ball. It was really the same capital funding all the other risks through traditional insurance,” he explained.
Today, he added, even with capital harder to come by—and with new suppliers, such as hedge funds, having financial problems—there remains enough private equity investors seeking sound opportunities to make a well-managed insurance exchange viable. “We also have a lot more technology and modeling capabilities at our disposal than we did back then,” he said.
“With people beating the drums about the tax disparity with Bermuda, this would be a huge opportunity for New York to come out as an insurance market leader,” according to Mr. Dinallo.
He urged industry officials to contact his office with feedback. “Is this a good idea or bad idea? We want to explore that this year,” he said.