White House Eyes Regulatory Revamp

Treasury Secretary Timothy F. Geithner's assertion that there is a ``good case'' for allowing insurers to choose an optional federal charter could rejuvenate the debate over the proper role of the federal government in regulating insurance during a time of economic turmoil.

OFC proponents say Mr. Geithner's comments fit into the ongoing debate over regulating systemic risk. But opponents say the government should focus on pressing economic matters and leave insurance regulation to the states.

Mr. Geithner also said some insurers should be subject to systemic risk regulation by a sort of superregulator overseeing financial services if their condition is deemed to present a threat to the economy as a whole. But industry experts say few, if any, property/casualty insurers are likely to present such a problem.

Mr. Geithner testified last week before the House Financial Services Committee about the Obama administration's plans to tighten financial services regulation. Mr. Geithner made clear that some insurers could fall under the purview of a new systemic risk regulator, although exactly what that regulator would be and how to determine which entities present a systemic risk remained unclear. He indicated details would be forthcoming.

``We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the (Federal Deposit Insurance Corp.),'' Mr. Geithner testified. ``Let me be clear: The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end,'' he said in a clear reference to American International Group Inc.

However, federal oversight of holding companies with insurance operations ``does not mean we should take away'' the powers of state insurance regulators, but more consolidated oversight of certain institutions is needed, he said.

Later in the hearing, Rep. Ed Royce, R-Calif., asked Mr. Geithner whether having a federal insurance regulator would make sense. But before Mr. Geithner could answer, Mr. Royce's time for questioning ran out.

A few minutes later, Rep. Paul Kanjorski, D-Pa., asked Mr. Geithner if he had a position on possible federal treatment of insurers.

``I think there is a good case for introducing an optional charter for insurance companies,'' Mr. Geithner responded.

Rep. Kanjorski then asked whether he would oppose establishing an Office of Insurance Information within the Treasury Department. Rep. Kanjorski introduced legislation in the last Congress to establish such an office, which would advise federal officials on insurance matters, including international matters.

``I would not be opposed,'' Mr. Geithner said.

OFC supporters welcomed the Treasury secretary's words.

``RIMS has long been a proponent of the concept of an optional federal charter,'' said Deborah M. Luthi, director-external affairs for the New York-based Risk & Insurance Management Society Inc. ``We are pleased to have two strong, recent endorsements for an optional federal charter: from Federal Reserve Chairman Ben Bernanke in early March and then from Secretary Geithner...RIMS is hopeful the secretary will support an OFC not only for life insurance but for property/casualty insurance as well.

``We were also encouraged when the secretary said he would not oppose the creation of an office of insurance information,'' said Ms. Luthi, who also is director-enterprise risk management for Matheson Trucking Inc. in Sacramento, Calif.

``We were very encouraged by his comments,'' said Leigh Ann Pusey, president of the American Insurance Assn. in Washington. ``It's hard to think about how you can do this resolution facility or system of systemic risk oversight without functional federal regulation of insurance.''

``The secretary's comments are terrific and hopefully galvanizing,'' said Joel Wood, senior vp at the Council of Insurance Agents & Brokers in Washington.

``This is also the logical extension of a proper way to deal with the insurance consequences of the systemic risk outline released by Treasury. Everyone accepts the need for a federal role in filling the regulatory gap for financial services holding companies. But in the case of a holding company with insurance (subsidiaries), there are many unanswered questions about how a receivership model would work for state-regulated entities with state-based guaranty funds.''

The OFC concept, however, would help avoid conflicts and duplication, he said.

``Very significant political hurdles remain, but the secretary's instincts are clearly on the mark,'' Mr. Wood said.

But a lobbyist for a group supporting state regulation said interpreting Mr. Geithner's comments depends on the listener's position.

``We have companies on both sides, but what they all agree on is that OFC is not a systemic risk issue; it's a prudential regulatory issue,'' said Ben McKay, senior vp with in the Property Casualty Insurers Assn. of America's Washington office. ``I think whenever somebody of his stature says anything even hinting at something being a potentially good idea, it will be interpreted depending on the listener. If you're for OFC, you'll interpret it as being he's for OFC; and if you're against OFC, you say, `If he was for OFC, he would have said he was for OFC.' ''

An OFC opponent issued a statement expressing concern.

``We are concerned that the secretary and some members of Congress may use the current crisis as an opportunity to establish federal regulatory authority over insurance activities,'' said Jimi Grande, vp in the National Assn. of Mutual Insurance Cos. Washington office. ``Property/casualty insurance regulation should remain at the state level since efforts to establish an optional federal charter or federal oversight of property/casualty insurance would lead to inefficient, costly and confusing dual regulation. We urge Congress and the administration to tread carefully as they craft solutions to the current turmoil and target only those elements of the financial services industry where there are regulatory gaps.''

There was general agreement, though, on the issue of the proposed super regulator's effect on property/casualty insurers.

``I don't know how many more AIGs exist. I represent 1,400 companies and none of them look like or act like AIG did,'' said NAMIC's Mr. Grande. ``AIG's problems were in their holding company, certainly not in the property/casualty side.''

``It remains to be seen how much impact this would have on insurers,'' said Howard Mills, a former New York insurance superintendent and now chief adviser in the insurance industry group for Deloitte Services L.P. ``AIG is very rare entity and not many insurance companies would have had such extensive tentacles.