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P&C Insurers Tell Congress They Don't Pose Systemic Risk

Source: WSJ

Posted on 09 Apr 2009

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Property/casualty insurers are making the case that they don't pose a risk to the financial system, drawing a sharp contrast with other insurers that have argued their collapse could drag down other companies or markets.

Property/casualty insurers are worried they will be lumped with such insurers as lawmakers seek to overhaul financial regulation with an eye toward increasing scrutiny of non-bank financial businesses whose operations have ripple effects through the economy.

In a letter Thursday to key House and Senate lawmakers, the two major organizations that represent the property/casualty insurance industry contended that the industry is competitive and well capitalized and relies on minimal leverage.

The letter sought specifically to refute an assertion by American International Group Inc. (AIG) that, as the largest U.S. P&C insurer, its collapse would cause a major disruption in that marketplace.

"The document's suggestion that customers would pay more for their insurance if AIG's P&C companies failed ignores the effects of supply and demand, competition and regulatory oversight," American Insurance Association President and Chief Executive Leigh Ann Pusey and Property Casualty Insurers Association of America President and CEO David A. Sampson argued.

The letter was sent to the chairman and ranking member of the Senate Banking Committee, Sens. Christopher Dodd, D-Conn., and Richard Shelby, R-Ala., and the chairman and ranking member of the House Financial Services Committee, Reps. Barney Frank, D-Mass., and Spencer Bachus, R-Ala.

U.S. insurance companies are regulated by the states, not at the federal level. But lawmakers may seek to establish an optional federal charter for the industry, a change that is heavily backed by life insurers. The proposal, which is gaining momentum in Congress, could be folded into the effort to revamp the financial system.

Property/casualty insurers are split on the matter of federal regulation for insurers, with smaller carriers worried that it will hurt their competitive position. Yet they share the worry that they will be tagged along with life insurers and other firms as posing a potential threat to the financial system. They are particularly concerned that they could be subjected to additional regulation under a proposal to give a federal regulator the power to wind down troubled nonbank financial firms.

In contrast to property/casualty insurers, life insurers have been pummeled by the financial crisis. The U.S. Treasury Department this week said it would extend aid to several life-insurance companies that have suffered sharp losses on investments in corporate bonds and other securities.

Meanwhile, the federal government has given AIG more than $170 billion in taxpayer assistance on the belief that the insurance giant is so intertwined with other companies that its failure would wound the global financial system. Its problems arose from bad derivatives bets, not from its life-insurance or P&C businesses.

AIG last month submitted a 21-page presentation to Congress entitled "AIG: Is The Risk Systemic?" In the presentation, AIG said the systemic risk of insurance operations was mostly concentrated in its life-insurance unit. But it also argued that the failure of its commercial unit, which provides P&C coverage to businesses, would leave a gaping whole in that marketplace.

AIG predicted such a failure would cause insurance costs for U.S. businesses to spike, prompting smaller companies to self-insure for some risks. It also said it could disrupt the U.S. municipal-bond market, because AIG's commercial unit is the largest investor in such securities.

In their letter, the insurance trade groups said this view wasn't "fully accurate" and that the AIG document may have "created confusion and a misperception that the financial crisis has somehow exposed our industry itself to be a systemic risk to the economy."

The trade groups also warned that providing selective federal support to the insurance companies could distort the market and create moral hazards, or the prospect of investors or companies lowering their guard against risk.

"If the government is supplying capital to a company in a manner allowing continued underwriting losses, this could undermine the health of the P&C marketplace and further deplete the taxpayer capital invested," they wrote.