Posted on 14 Oct 2009
As proponents of federal insurance regulation continue to invoke the collapse of American International Group (AIG) as evidence of the significant risk posed by insurers to financial system, Scott E. Harrington, a professor at the Wharton School of the University of Pennsylvania offered a contrary perspective to reporters and congressional staffers at a Capitol Hill briefing Tuesday.
Harrington is the Alan B. Miller Professor in the Health Care Management and Insurance and Risk Management departments at the Wharton School, University of Pennsylvania and the author of a recent report, “The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation” published by the National Association of Mutual Insurance Companies.
“What happened in the past year shouldn’t be a factor” in the debate over whether to establish optional or mandatory federal chartering of insurance companies, Harrington said, since AIG’s problems cannot be attributed to any alleged defects in the current system of insurance regulation. Instead, said Harrington, numerous federal regulatory agencies in the U.S. and Europe had authority over AIG and the units that caused its collapse, but those regulators were “asleep at the switch,” failing not only to properly assess the riskiness of AIG’s credit default swap portfolio, but also the degree to which regulated commercial and investment banks were over-exposed to the risk that AIG might be unable to meet its obligations to counterparties.
In the report, Harrington identifies the factors leading up to the worldwide financial collapse of September 2008, plainly explaining what was and wasn't to blame for the crisis. The analysis digs deep into the role of AIG and credit default swaps in bringing down the economy and the federal oversight that allowed it to happen. In addition, Harrington examines the idea of designating certain institutions as “systemically significant,” as the Obama Administration proposes to do by classifying certain institutions, including insurers, as so-called “Tier 1 Financial Holding Companies” that would be subject to special oversight by a new systemic risk regulator.
“If you designate certain insurance companies as systemically significant you might as well yell from the rooftops that they will be bailed out and they are ‘too big to fail’” Harrington said. Even with the more stringent regulation and increased capital standards promised by the federal government, Harrington said that investors and consumers would know that they would be made whole by the government in the event of an insolvency of a systemically significant company, giving those companies a distinct competitive advantage.
Each year, NAMIC publishes an issue analysis examining a significant public policy issue involving risk management and insurance. Through these studies, NAMIC seeks to elevate public discourse, inform policymakers and improve the functioning of insurance markets for consumers, insurers and taxpayers.
“Financial services regulatory reform will be one of the main issues debated in Congress for the remainder of this year,” said Jimi Grande, senior vice president of federal and political affairs for NAMIC. “We’re glad Prof. Harrington was able to provide his insight and hope that it will guide policymakers as they craft financial regulatory reform legislation.”