Insurance News

New rules proposed for financial sector

Posted on: March 23, 2010

WASHINGTON?Insurance industry representatives had mixed reactions last week to the latest Senate financial services regulatory overhaul legislation, applauding some changes but vowing to seek further modifications to distance insurers from some of the proposed regulations.

Senate Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd, D-Conn., un-veiled his latest version last week and said his committee would begin marking up the financial services regulatory bill this week.

?We will have financial reform adopted this year in the Congress of the United States,? Sen. Dodd said at a press conference last week. ?Our regulatory structure, constructed in a piecemeal fashion over many decades, remains hopelessly inadequate.?

The Restoring American Financial Stability Act of 2010 would create an Office of National Insurance in the Treasury Department to monitor the insurance industry and coordinate international insurance issues. It would establish a council to monitor systemic risks caused by large, complex financial companies. The legislation also includes language from the Nonadmitted and Reinsurance Reform Act, which would simplify reinsurance regulation across states, establish a common system to allocate surplus lines premium taxes and allow risk managers to access surplus lines markets more directly.

Some industry representatives expressed concern and argued that it is banks?not insurers?whose risks need to be monitored more closely. Others were pleased with aspects of the latest Senate bill compared with Sen. Dodd’s previous draft in November.

?We are concerned over many provisions in the bill, such as subjecting state-regulated insurers to a duplicative federal resolution and assessment authority,? David A. Sampson, president and CEO of the Property Casualty Insurers Assn. of America, said in a statement.

?A more detailed review suggests there’s improvement in lots of areas and we give the committee credit for that,? said Leigh Ann Pusey, president and CEO of the Washington-based American Insurance Assn.

Insurers seemed most concerned with language aimed at mitigating systemic risk. The bill would set up a $50 billion fund, paid with assessments from the nation’s largest financial firms, to be used to liquidate large, interconnected corporations, if needed. Insurers already pay into state guaranty funds, which are used to liquidate insolvent insurers. This system means insurers don’t pose systemic risks and should not have to pay for a new system they won’t use, representatives said.

?We don’t cause systemic risk and we shouldn’t be held responsible for other people’s bad actions,? said Dylan Jones, a Washington-based federal affairs director at the National Assn. of Mutual Insurance Cos.

While the Senate bill excludes insurers from paying into the $50 billion fund, Ms. Pusey and others are concerned that large insurers would have to pay into the liquidation system should the $50 billion fund be depleted. Lawmakers argued that such a scenario is unlikely and that, given the uncertainty about the future, they wanted to err on the side of including too many sectors as potentially being responsible to finance the fund, several observers said.

?They clearly recognize (insurers) don’t pose a risk and that’s been reflected in the front-end funding,? by specifically excluding insurers, Ms. Pusey said. ?To have that carried out throughout the rest of the bill, we look to continue to work with them on that.?

Still, some representatives seemed pleased that the bill largely leaves the state guaranty fund system in place. Under Sen. Dodd’s proposal, the Federal Deposit Insurance Corp. could step into the shoes of a state regulator if it failed to take appropriate action, but the FDIC still would liquidate the insolvent firm under the state-based system, Ms. Pusey said.

Even if a large holding company became insolvent and needed to be liquidated by the $50 billion fund, its insurance subsidiaries still would be unwound through the state guaranty funds, she said.

The other aspect of the bill’s efforts to mitigate systemic risk is the Financial Stability Oversight Council, which would make recommendations to regulators about capital, leverage and other requirements for large, complex financial firms.

Similar to the House-passed legislation and the previous version of his bill, Sen. Dodd’s latest proposal would establish the Office of National Insurance to provide a federal clearinghouse for insurance information. Mr. Jones said he is pleased that the legislation prohibits the Office of National Insurance from becoming a federal insurance regulator, thus preserving the state-based regulation system. But he said the office would be granted strong authority to subpoena information from insurers and NAMIC would like to see that authority tempered.

?Most of that information, if not all, is publicly available,? Mr. Jones said. ?We’d like to see a requirement where the office would have to go through the normal process (to request information) before a subpoena, which is a bit heavy-handed.?

However, Ms. Pusey said the AIA wanted the Office of National Insurance to have stronger powers to pre-empt some state regulations. ?For a variety of reasons, I think the language is much milder in the pre-emption area than we’d like,? she said.

But Ms. Pusey and other industry representatives are pleased that the new legislation includes the NRRA, which industry representatives said would bring much-needed simplicity to the placement of surplus lines coverage for multistate policyholders.

States’ regulations vary on how premium taxes are allocated, which surplus lines insurers are eligible and how many quotes from admitted insurers a policyholder must seek, said Joel Wood, senior vp at the Washington-based Council of Insurance Agents & Brokers. For example, if a Michigan-based company were to buy surplus lines cover for a plant in Kentucky, the two states could have competing claims for premium taxes and there is no established way to settle the discrepancy, he said.

?It’s an individually negotiated thing that involves a massive amount of lawyering,? Mr. Wood said. ?It’s not that we feel like any of the regulations that govern surplus lines are in and of themselves unworkable. It’s just that it breaks down when you have more than one state.?

Mr. Wood said the legislation would provide an incentive for states to develop interstate compacts.

Scott Clark, director and secretary for the New York-based Risk & Insurance Management Society Inc., said the legislation also would give qualified risk managers more direct access to nonadmitted markets than current law allows.

?RIMS truly believes we have a much better chance now of (the NRRA) being passed into law,? Mr. Clark said. ?It’s got a lot of traction.?

Copyright © 2010 Crain Communications, Inc.

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