Legal Expert Foresees More U.S. Insurance Regulation

Congress will insist on “more uniform, more national regulation” next year in the wake of American International Group’s liquidity meltdown, a lawyer who heads an American Bar Association task force on insurance modernization says.

“I see some form of federal regulation, maybe not in all lines and in all areas of regulation, but I predict more strict financial regulation of insurers,” said Fran Semaya, a partner at Cozen O’Connor in Philadelphia.

She chairs the ABA’s Task Force on Federal Involvement in Insurance Regulation Modernization Task Force, a part of the ABA’s Tort Trial and Insurance Practice Section. She is also president of the International Association of Insurance Receivers.

“I don’t see more deregulation, as in an optional federal charter, but we will see more regulation, more than we bargained for,” she said.

Ms. Semaya made her comments after attending the hearing of the House Oversight and Government Reform Committee that examined the reasons that AIG needed an $85 billion loan from the federal government as an alternative to bankruptcy.

But, she said, the level of federal involvement with insurance regulation will depend on who is elected president, with Sen. Barack Obama, D-Ill., supporting greater regulation than Sen. John McCain, R-Ariz.

“I think federal regulation will be on top of, rather than an alternative to state regulation,” she said.

She said she “got the feeling” at the hearing that Congress “was not happy that the government bailed out a private corporation the way it did.”

Her feeling based on the hearing is that Congress also believes AIG management did not do a good job of overseeing the financial products unit based in London that got it into trouble and that the firm allowed the unit to continue to engage in speculative activity and did not heed “what their accounting firm was telling them about what was going on in London.”

Her perception of Congress’ view that she gleaned from yesterday’s hearing is that management “did not examine properly this business, and management was not involved as much as it should have been. ‘They made their bed, they should lie in it,’” Ms. Semaya said is her feeling of congressional reaction to the hearing.
She also said that “some members thought there should be criminal accountability for what went on.”

“I think that at the hearing, members of Congress were really going after the CEOs, their big bonuses and their golden parachutes.”

She said New York Insurance Superintendent Eric Dinallo was asked by one member of the committee “whether anyone should go to jail for this.”

“I got the feeling that some members of Congress believe someone should go to jail for what happened to AIG, that blame should be fixed,” she added.

She said one member asked whether the McCarran-Ferguson Act should be replaced, and that Superintendent Dinallo “did a decent job of defending state regulation.”

Ms. Semaya also acknowledged that when Congress takes a look at insurance regulation next year, that there is bipartisan support for an optional federal charter, “even though the industry is split.”

Ms. Semaya noted, “I think those who favor an OFC see it at a panacea.”

But, she said, “I am concerned about holding company regulation and the split between state and federal regulation it would create.”

She said there are “definitely lines of business where it would easily fit, such as life insurance, surplus lines and reinsurance,” and she sees one option for Congress to look at is “a one-state portal,” or domiciliary state-based regulation.

But, she said, “I can’t see an OFC working for homeowners’ and auto insurance, any personal lines and small business insurance line.”