Posted on 19 Jun 2009
State insurance regulators on Thursday gave a cautious, and brief, endorsement to an idea they have long fought against: federal oversight of the insurance industry.
"We want to move towards more consistency without losing our strengths," Terri Vaughan, chief executive of the National Association of Insurance Commissioners, said in a Thursday press briefing in Washington.
Vaughan was responding to the proposal for a new Office of National Insurance, or ONI, to reside within the Treasury Department, as part of the Obama Administration's proposal for financial regulatory reform. Insurers have sought the option of oversight by a single federal regulator. The Obama proposal doesn't yet allow insurers to opt out of state regulation in favor of federal regulation, but it suggests this could be a possibility in the future.
Currently, the proposal criticizes the lack of consistency in the current state-based system and "it preserves the concept of a functional regulator at the state level," Vaughan said.
In response to insurer interest in a federal regulator, state regulators are trying to streamline state-based regulation, but it takes time, Vaughan said.
One current state initiative is to set up a national system to review new life and annuity products. So far, 36 states have signed up, and they "continue to plug away," Vaughan said.
Most of the problems at troubled insurance giant American International Group Inc. (AIG) were in business units that weren't under state insurance supervision, Vaughan said.
However, one insurance issue at AIG and some other insurers was that some became over-extended in their securities lending programs. AIG's federal bailout included money to prop up that program. The securities lending problem was "a learning experience" that didn't present systemic risk, Vaughan said.
"On securities lending, we have gone back and created a new risk-based capital chart" to prevent such problems in the future, she added.
One responsibility of the ONI will be to identify insurance companies that should be supervised as Tier 1 financial holding companies. The government's draft white paper says Tier 1 FHCs are "firms whose failure could pose a threat to financial stability."
The details on how that will work "are not completely clear," she said. "I would hope it is not a two-tiered system in insurance regulation."
But a key representative for insurers, who have fought against the state-based system, seemed to take the proposal as a welcome step in exactly that direction.
Leigh Ann Pusey, president of the American Insurance Association, said in a Wednesday statement that giving insurers the option of choosing federal regulation "will prove to be the correct vehicle for achieving the necessary reforms outlined by the Administration today."