Industry Reps See Finance Bill Exempting Big Insurers

Insurance representatives said they may get a deal for Senate financial services reform legislation with no financial assessments and little regulatory impact for high-asset insurers.

But nothing is certain at this point, said an industry lobbyist who asked not to be identified because of the sensitivity of the negotiations.

In talks going on now, the insurance industry is seeking to ensure that carriers with assets of more than $50 billion will not be subject to the assessments in the pre-funding provisions of the resolution authority that the bill would create.

The authority would be, in essence, a guarantee fund for institutions posing a systemic risk to the financial system.

Insurance industry representatives also hope to win clarifying language in the bill ensuring that large insurance companies would be subject to federal oversight only under extremely limited conditions.

The changes being sought by the industry would be included in legislation from the Senate Banking Committee being marked up in a drafting process beginning Monday.

The changes are being negotiated with Sen. Chris Dodd, D-Conn., chairman of the committee, and Sen. Mark Warner, D-Va..

An industry lobbyist said, "While the language will still need some additional clarification, it appears the intent of Chairman Dodd was not to have insurers assessed to capitalize the initial $50 billion fund." The lobbyist cautioned that the compromise is tentative, “and nothing has been secured,” as yet.

The fund is to be used to resolve troubled financial services companies that federal regulators determine constitute a systemic risk to the system.

A copy of the changes the insurance industry has proposed in the regulatory reform bill that Sen. Dodd introduced Monday were obtained today by National Underwriter.

Sen. Dodd hopes to complete the markup of the bill by next Friday, when Congress starts a 10-day Easter recess. But, Sen. Richard Shelby, R-Ala., cautioned today that the bill as proposed by Sen. Dodd may be reported out by the committee on a party-line vote, but is unlikely to pass the full Senate.

Sen. Shelby said the “door remains open a crack” for bipartisan legislation.

The changes in language negotiated by the life and property and casualty insurance companies were made even as a Federal Reserve Board official gave testimony today that insurance companies and other financial institutions whose failure could pose systemic risks should be regulated under the same plan used for banks and financial holding companies.

In his testimony, Jon Greenlee, the associate director for the Fed's Division of Banking Supervision and Regulation, said that, "The current financial crisis has clearly demonstrated that risks to the financial system can arise not only in the banking sector, but also from the activities of other financial firms--such as investment banks or insurance companies."

He added that, "To close this important gap in our regulatory structure, legislative action is needed that would subject all systemically important financial institutions to the same framework for consolidated, prudential supervision that currently applies to bank holding companies and financial holding companies."

He made his comments at a hearing on insurance holding company supervision held by the Capital Markets Subcommittee of the House Financial Services Committee.

Mr. Greenlee said the Fed's customary focus on protecting the bank within a holding company is no longer sufficient because risks can arise outside of a commercial banking unit.

"The crisis has highlighted the financial, managerial, operational, and reputational linkages among the bank, securities, commodity, insurance and other units of financial firms," he said.

The language proposed by life and property and casualty insurance organizations and accepted by Sen. Dodd and Sen. Warner for inclusion in the bill clarifies that the language is intended “to exclude insurance companies (including those that are part of non-bank financial holding company structures) from the pre-event assessment.”

Specifically, “this provision is only meant to apply to banking holding companies that meet the total consolidated asset threshold and to nonbank financial companies that are determined by a 2/3 majority vote of the Financial Stability Oversight Council, pursuant to section 113, to be subject to prudential supervision by the Board of Governors of the Federal Reserve System because ‘material financial distress’ at the company ‘would pose a threat to the financial stability of the United States’.”

Another industry lobbyist, was more specific. “Insurers do not want to be the cash cow that provides the federal government with funding to use its resolution authority against banks, hedge funds, securities firms etc.,” he said.

The lobbyist insisted that, “Just because insurers are big doesn’t mean that they present systemic risk and should be subject to federal assessment. Insurers already pay for their industry competitors’ insolvencies through the state guaranty funds.”

He also noted that the American Council of Life Insurers had at one time suggested that insurers ought to be able to deduct their annual state guaranty fund assessments from any federal assessment.

The concern of both the life and property and casualty industry, he explained, is that the industries do not want the financial services reform bill to constitute dual regulation.

“We are concerned that large insurance companies could be subject to federal solvency standards, such as capital and surplus requirements, reserving restrictions by the federal systemic regulator over and above state insurance regulation or dual and conflicting with state regulation,” the industry official said. “That would be the worst of all worlds.”