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US House Passes Financial Reforms, Includes Federal Insurance Office, Systemic Regulator

Source: AM Best

Posted on 14 Dec 2009

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The establishment of a federal office of insurance awaits only a U.S. Senate debate now that the House of Representatives passed the legislation within a massive collection of financial reforms. Also contained in the nine-bill package was a national regulator of systemically risky financial firms -- which puts the largest insurance companies in its grasp.

Though the supervisory office for the insurance industry wasn't as widely debated as some of the other Obama Administration-inspired financial system reforms -- such as the Consumer Financial Protection Agency, regulation of the derivatives markets, systemic risk regulation or the increased transparency of credit-ratings agencies -- it has been among the insurance industry's most closely watched pieces of legislation in this busy congressional session.

Early discussions among lawmakers had seen clashes over state pre-emption questions and how much information-gathering authority the office would have, but by the time it had been modified by a series of amendments, both Republicans and Democrats passed the insurance supervisor with little debate. Lawmakers from both parties predicted that, if the bill had stood alone on the House floor, it would have received bipartisan support. As it was, the reform package passed 223-202, mostly along party lines.

Reaction to the House's support for a federal office -- which would collect information on the U.S. insurance industry from within the Department of the Treasury and act in a limited way as a international representative for American insurers -- was mixed among insurance industry and state-based regulatory groups.

"We've long advocated that we needed some expertise at the federal level," said Leigh Ann Pusey, president and CEO of the American Insurance Association. Especially after lawmakers dialed back some of the state pre-emption authority the office had, she said the office would be "tremendously helpful going forward." She said the AIA will stay involved with the legislation as it moves through the Senate and potentially through a compromise process between the chambers.

"This bill respects the state-based regulatory framework for property/casualty insurance while creating an office to serve as a national information center," said Charles M. Chamness, president and CEO of the National Association of Mutual Insurance Companies, in a statement. He said NAMIC was "encouraged by the efforts made to narrowly tailor the purpose and authority" of the office.

A statement from Charles Symington, senior vice president for government affairs at the Independent Insurance Agents & Brokers of America, echoed that support: "We appreciate the recent efforts by committee leadership to narrow the scope of the office and to reiterate that this informational office would have no regulatory authority whatsoever."

But the National Conference of Insurance Legislators has been against the idea from the start, fearing it's a step toward an optional federal charter. The group's new president, Kentucky state Rep. Robert Damron, wrote a letter to the House leadership, saying: "If we enhance communication between state and federal regulators, there is little need for an FIO. What an FIO would do is lead to federal insurance regulation." He said NCOIL believes the office would "quickly expand" into a bureaucracy.

As for the systemic-risk regulation, the legislation would call for the major financial companies -- with over $50 billion in assets -- to pay assessments with which an emergency fund would be built. The fund would be used -- instead of taxpayer dollars -- to unwind companies determined to be posing a risk to the U.S. financial system. It's widely opposed among insurers, who argue that -- besides in the unique case of American International Group Inc. -- the industry isn't a threat to the wider system.

NAMIC's Chamness argued: "There's no metric by which a property/casualty insurer would be considered 'systemically significant.' Property/casualty insurers are required by state regulators to maintain high reserves, low leverage ratios and to participate in resolution mechanisms to mitigate against insolvencies."

And AIA feels the same. "The insurance industry does have a system," Pusey said, "that contemplates a regime for unwinding insurance companies. And it works." She argued that having insurers pay into a fund is "a one-way street for them."

"The fact is insurers already have obligations at the state level," Pusey said. "It just seems like a system that is not going to work. You can't have companies paying into both at the same time."

If the "Wall Street Reform and Consumer Protection Act" is matched by the Senate in the coming months, the legislation could mark the most significant regulatory overhaul of the U.S. financial system since the presidency of Franklin D. Roosevelt. If it does pass early in 2010, it will be well over a year since the period that inspired the legislative effort -- the near-collapse of major portions of the country's financial sector.

The insurance office language in the existing Senate bill, which was authored by Sen. Chris Dodd, D-Conn., lends the agency more authority than this House version -- more similar to the original proposal from the Obama Administration. Also, insurance groups expressed gratitude that the House hasn't included insurance under the authority of the CFPA, but the agency still contains some limited oversight of insurance products in Dodd's version.

Also deep within the House reform bill is a provision being praised by the National Association of Professional Surplus Lines Offices. The association has been pushing for reform on tax remittance and regulation of multistate surplus lines transactions, the group said. "By establishing that the home state of the policy holder governs a transaction, the surplus lines industry would no longer face trying to comply with confusing and conflicting laws and regulations of multiple states on a multistate transaction," said Executive Director Richard Bouhan in a statement. This legislation would give the surplus lines industry "one set of consistent rules on a transaction."