Key Senator Calls For Federal Regulation Of Insurers
BY ARTHUR D. POSTAL
National Underwriter News
January 15, 2009
WASHINGTON --An influential senator said today that federal lawmakers need to consider U.S. regulation of the insurance industry, which now has only state oversight.
Sen. Richard Shelby, R-Ala., made his comments during a Senate Banking Committee hearing citing the debacle at American International Group, which has required billions in government bailout money as a reason to consider federal regulation of the sector.
"I want to pick up on regulatory reform," Sen. Shelby said today at the committee's hearing to consider confirmation of Mary Schapiro as chairman of the Securities and Exchange Commission.
"You and I know we have to face reality," he said. "I never thought I would say this, but I think we have to visit insurance--look at AIG."
"Who regulated AIG?" he asked Ms. Schapiro, before responding to his own question. "Primarily, [it was] the New York insurance commissioner. My gosh, does anybody in this room believe the New York insurance commissioner knew anything of the risk they were taking, they have on their books? The answer is obviously, --no.'"
Actually, the fact is that American International Group's holding company and its Financial Products unit--which traded credit default swaps on what turned out to be toxic, subprime-mortgage-backed securities, prompting the company's financial crisis and subsequent federal bailout--was regulated by the U.S. Office of Thrift Supervision, not by the New York State Insurance Department. AIG's state-regulated insurance units remain sound.
The New York Insurance Department had no comment about Sen. Shelby's remarks, other than to point out the inaccuracy of his characterization of Mr. Dinallo's involvement.
Sen. Shelby has particular clout as ranking Banking Committee minority member and virtual gatekeeper of financial services regulation in the Senate.
On the last two pieces of insurance legislation, bills reauthorizing the National Flood Insurance Program in 2008 and extending the Terrorism Risk Insurance Act in 2007, Sen. Shelby has virtually told the House to "take or just leave it" legislation that he and Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, had drafted.
In the case of TRIA, the House was forced to take the Senate version, scrapping provisions in its version of the bill that provided extra protection for New York and other particularly vulnerable areas, and providing coverage for nuclear, chemical, biological and radiation risk.
Sen. Shelby was also opposed to a provision in the House bill that extended the program to group life insurance, despite intense lobbying by some insurers.
The House was also forced to accept a seven-year extension instead of its proposal for a 15-year extension, Sen. Shelby also wouldn't support a provision that would have reduced the retention rate by insurers for terrorism risk claims to 5 percent.
In the case of the NFIP, the House, led by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, decided to leave it, agreeing only to extend the current law until March 6.
Blain Rethmeier, a spokesman for the American Insurance Association, said in the wake of Sen. Shelby's comments that, "The federal intervention with respect to AIG is the prime example of the need for debate and sound proposals for federal regulatory modernization that include insurance."
He added that, "This should not be a debate about assigning blame for what went wrong, but should be a thorough examination of what regulation must look like in the future to assure a healthy, vibrant, and competitive financial services marketplace."
But Robert Gordon, senior vice president, policy development and research for Property Casualty Insurers Association of America, took issue with the implication of Sen. Shelby's comments that AIG's problems concerned overall regulation of the company.
"AIG is a thrift holding company regulated by the Office of Thrift Supervision," Mr. Gordon said.
"Their primary vulnerabilities and problems all stem from AIG Financial Products, which is an unregulated entity engaged in derivative activities based in London that obligated the parent company for the loss of billions of dollars," Mr. Gordon said.
"The insurance portion of AIG has been kept relatively sound and functioning despite significant problems in an unregulated securities affiliate," he added. "The property casualty industry in particular has remained extremely solvent and the strongest of all financial segments," Mr. Gordon added.
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