Insurers Get A Break In Financial Services Bill

WASHINGTON— Insurers have secured key changes in financial services reform legislation easing a proposed financial requirement for large firms and eliminating tighter regulation of financial product sales.

One revision to the bill reported out of the Senate Banking Committee yesterday means only one life and property and casualty insurer will be required to pay into a fund to finance a Resolution Authority for the liquidation or reorganization of huge financial services companies whose bankruptcy would pose a systemic risk to the economy.

The other change calls for a study of a proposal to establish a “standard of care” for the sale of investment products and create a financial planning oversight board.

Originally the proposal, by Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee, would have created the standard and board creation as part of the bill.

The life insurance industry, both underwriters and agents, strongly opposed such a provision, fearing that it was a back-door way to impose a uniform fiduciary standard on the sale of investment products.

The bill was passed by a party-line, 13-10 vote. But comments from both committee Republicans and Democrats reflected optimism that such legislation could ultimately become law this year.

Specifically, both Sen. Chris Dodd, D-Conn., chairman of the committee, and Sen. Richard Shelby, R-Ala., said they would meet over the coming two-week Easter recess to see if they could craft bipartisan legislation that would secure the 60 votes needed to limit debate on the measure.

The hope is that they could agree to a bipartisan bill that could be put on the Senate floor by the end of April.

That would set the stage for talks with the House and the Obama administration on a final bill. The administration and Democrats in Congress want a final measure approved before Congress leaves in late June for the July 4 recess.

In a statement, Sen. Shelby said that Sen. Dodd’s latest proposal contains a number of positive steps forward and could form the foundation for broad bipartisan agreement.”

“I do not view today’s markup as the end of the road, but rather just another step in the process,” he said.

And Sen. Bob Corker, R-Tenn., who negotiated with Sen. Dodd on a compromise before the Connecticut senator decided to go ahead with his own bill last week, said in comments at the late afternoon committee meeting and in an answer to a reporter’s question, that he thought that there was a 90 percent chance of passage.

"I think it's probably true that we have a better opportunity with a different cast of characters -- the full Senate -- to do something that is sound, policy-wise," Corker said.

For insurers, the bill creates an Office of National Insurance. It also makes systemically risky insurers subject to federal oversight and contains provisions similar to the House financial services reform measure by modernizing and streamlining the surplus lines and reinsurance industry by facilitating regulation of insurers and reinsurers by their state of domicile.

Insurance industry representatives have said they regard inclusion of these provisions as a key step forward, and believe it non-controversial and therefore likely to survive melding of the House and Senate bills into a bill that can be enacted into law.

In a memo to members of the Council of Insurance Agents and Brokers obtained by the National Underwriter, Joel Wood, CIAB senior vice president for government relations, said, “After eight years of effort, and House passage of surplus lines reform legislation on four occasions, we’re closer than ever to final enactment of these reforms.”

“To the extent that Sen. Dodd, Shelby and Corker have all had optimistic statements in the past day that consensus can be reached on the Senate floor, we’re optimistic too,” he said adding that, “the Senate is the Senate, and this is a tough political environment.”

Richard Bouhan, executive director of the National Association of Professional Surplus Lines Offices, said, "We are pleased to see the Senate make this important first step toward approving needed surplus lines reform legislation. With the inclusion of these reforms in the bill we are moving closer to more efficient and effective regulation of the surplus lines insurance market."

Under the bill section dealing with Resolution Authority pre-funding issue, use of the fund would be determined by a new Financial Stability Oversight Council, consisting of 11 federal regulators led by the Treasury secretary and one insurance representative appointed by the president.

According to Sen. Dodd, this body will focus on identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms.

It will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States, Sen. Dodd explained.

Under the original bill, any financial services company with assets of more than $50 billion would have been assessed for the creation of a $50 billion fund in 5 years.

But, in a manager’s amendment Sen. Dodd changed the provision to read, “and any nonbank financial company supervised by the Board of Governors [of the Federal Reserve System]. According to a lawyer for one of the insurance companies involved, who asked not to be quoted by name, that means that only MetLife would have to contribute to the pre-funding of the Resolution Authority.

However, if the failure of a large company depletes the fund, a larger universe of companies, likely to include all non-health insurers with assets of more than $50 billion, would be forced to contribute, the industry lawyer said.

Amongst the companies that will benefit from the change will be 11 property and casualty companies, ACE, Allstate, Chubb, CAN, Liberty Mutual, Nationwide, State Farm, Travelers, W.R. Berkley, Zurich and Hartford Insurance Group.

Amongst the life companies who will benefit are Prudential, New York Life, Northwestern Mutual, Mass Mutual, TIAA-Cref, ManuLife, Lincoln Financial Group, The Principal, Pacific Life, Aflac, Riversource, Jackson National, Genworth, Sun Life and Thrivent Financial, the source said, citing the American Council of Life Insurers annual Fact Book.

This change was a priority of both the property casualty and life insurance industries.

Leigh Ann Pusey, American Insurance Association president and CEO, said in a statement that, AIA appreciates the bill’s changes. However she said insurers will continue to lobby to be exempt from the post-funding and other provisions that the industries fear would impose dual regulation on property and casualty and life insurers.

AIA, she said, is “concerned with a resolution mechanism that envisions assessing low-risk, low-leveraged property and casualty insurers for losses outside our industry, particularly where the failing firms are high-risk, high-leveraged entities.”

Under the mandate for the Government Accountability Office to study the effectiveness of state and federal financial product sales regulations the GAO would have to report back to Congress within six months of the date of enactment of the bill.