Regulators Say State Funds Can Handle Insurer Failure (Update3)

By Andrew Frye
Bloomberg News
March 17, 2009

March 17 (Bloomberg) -- State insurance regulators said it's "unlikely" any U.S. carrier is too big to fail and guaranty funds are ready to pay claims should one collapse.

"Even a major insurer failure, while traumatic in terms of job displacement and, perhaps, for shareholders, will generally not impose systemic risk," Michael McRaith, director of insurance for Illinois, said in prepared testimony to the Senate Banking Committee today on behalf of the National Association of Insurance Commissioners.

Regulators are seeking to reassure policyholders after investment declines cast doubt on whether insurers have enough assets to back their policies. American International Group Inc. fueled concern earlier this month by saying the U.S. had to bail it out a fourth time or face a cascade of failures among insurers that would overwhelm state guaranty funds.

"Regulation, of course, cannot ensure that insolvencies will not occur in extreme circumstances," McRaith said. "A wholesale collapse" of stock or bond markets could lead to insurance company failures, McRaith said.

Bob Hunter, a former industry regulator in Texas and currently director of insurance for the Consumer Federation of America, questioned the ability of state guaranty funds to protect policyholders.

"State guaranty funds may create the illusion of safety where it does not exist," Hunter said in prepared testimony. "CFA has grave concerns about the adequacy of state guaranty funds."

AIG's Assets

The U.S. government took a majority stake in AIG, the insurer that almost collapsed from a liquidity crunch in September, to help limit losses at banks that had outstanding derivative contracts with the carrier. Regulators led by New York Insurance Superintendent Eric Dinallo have said AIG's insurance customers were protected because there were enough assets backing their policies.

The 24-company KBW Insurance Index has plunged by more than half in the past 12 months, making it harder for the industry to raise capital to replace funds lost on declines in corporate debt and mortgage bonds. In 2008, surplus at U.S. life insurers slipped by $32 billion, or 13 percent, according to Moody's Investors Service.

Some companies have turned to the U.S. Treasury for help in replacing capital. MetLife Inc., the biggest U.S. life insurer, said this month it may be selected for a government capital infusion, while No. 2 Prudential Financial Inc. and Hartford Financial Services Group Inc. await replies from the U.S. on aid applications filed last year.

Life insurers haven't heard yet from Treasury, Frank Keating, head of the Washington-based American Council of Life Insurers, told senators in response to questions. There are 12 applications pending, and Keating said on March 4 he expected to hear from Treasury "in the next several weeks."

"We all want you to be involved," Senator Mark Warner, a Virginia Democrat, told Keating today.

McRaith and state regulators including Susan Voss of Iowa and Thomas Sullivan of Connecticut helped life insurers boost capital earlier this year by granting some of their requests for looser reserve requirements.

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