Csiszar: Fed Regulators Look Like Keystone Kops

By Fran Matso Lysiak
A.M. Best Company
March 01, 2011

The state-based insurance regulatory system can sometimes be frustrating and costly but over the past few years since the U.S. financial crisis, federal regulators "have looked like the Keystone Kops," says the chairman of a newly formed group of insurance companies that seeks to improve state-based regulation.

Ernst Csiszar is chairman of the States Alliance for Balanced Insurance Regulation. The group's immediate focus is "to oppose federal regulation of the insurance industry" while seeking to improve on the state regulation insurance, according to its website.

Csiszar, a former president of the National Association of Insurance Commissioners, met with BestWeek to discuss SABIR and several industry issues. Excerpts from his interview follow:

SABIR's website states, "alarmingly," the American Insurance Association and the American Council of Life Insurers "are inclined to support federal regulation." With our members and good many others in the industry, these are companies that often organize themselves and compete via the state-based system. We think it would be completely unfair to develop a parallel federal system because I can see conflict arising from that. We have companies large and small. For instance, Aflac is organized around a state-based regulatory process; other companies may be smaller. But Aflac is very successful in competing in that system.

Discuss regulation, in light of financial services regulatory reform and the Federal Insurance Office: We're going through the issue of whether the insurance industry, life in particular, plays a role in this systemic nature of the process. Quite frankly, if I'm a customer and I look at a company that's systemic versus a company that might be a state-chartered bank and isn't systemic, wouldn't I ask myself the question, "where am I going to put my money?" If I know that the systemic one will be bailed out and my money is 100% safe, I know where I'm going to turn. Even if it sounds like a fair choice between one system or another, you're setting up potential conflicts.

Concerns about commercial real estate mortgages and commercial mortgage-backed securities for this year and 2012 on the life insurance industry: I've always had concerns about the securitized products because we are seeing the default rates as a result of the recession just increase. Commercial mortgages work differently from residential mortgages. They typically are three- to 10-year terms so they are reset whenever they come up. That means there's a balloon payment at the end that must be refinanced. If the developer's loan to value isn't there, if the default rates are up, the developer doesn't get the money to refinance.

Life insurers make direct commercial mortgage loans to developers. Elaborate. That's a huge difference. The default rates are going to go up because the underwriting standards have tightened in the meantime and the loan-to-value ratios have dropped from 80% to 85% down to 60% to 65%

The size of that market?: The entire commercial real estate -- both securitized and unsecuritized -- is roughly $3.5 trillion. We estimate over the next few years, default rates to reach the same level or potentially higher than we're seeing in the residential area. That means about $2 trillion to $2.5 trillion worth of losses.

How does this relate to mark-to-market accounting?: Mark-to-market is an accounting methodology that serves an investor. As an investor, I would like to know what any one asset is worth at any given time. The industry has made an argument that mark to market shouldn't be adopted. Congress has always stepped in. FASB, which was at the point of promulgating mark-to-market rules, has now stepped back. The fact of the matter is companies are able to hide a lot of evil on their balance sheet when things are not marked to market.

So, the extent of commercial mortgage-related losses aren't known? Correct. Not only those but any kind of derivative instrument. It also applies to swaps; it applies to all derivatives.

About SABIR: We have about 15 founding members that come from the property/casualty side of the industry, some from the life side and some from health. The objective is to bring some balance to the regulatory process. We think that can be done at the state level but if occasion requires federal intervention, we're going to work that as well. Our focus is primarily on middle-market companies, particularly companies that have gone through the agony of federal reforms in health care and financial services.

To see the entire interview with Csiszar, where he discusses Dodd-Frank, including regulation of derivatives and the debate over systemic risk, along with U.S. health reform, go to http://www.ambest.com/media/media.asp?RC=183594.

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