Treasury Department Proposes an Office of National Insurance

The Systemic Risk Legislation proposed this week by the Treasury Department would create an Office of National Insurance (ONI) that would monitor all aspects of the insurance industry. This would include identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the country’s financial system.

The ONI, which would be an office with the Treasury Department, would also have the following functions:

• Assist the treasury secretary in administering the Terrorism Insurance Program.
• Coordinate federal efforts and establish federal policy on aspects of international insurance matters, including representing the United States in the International Association of Insurance Supervisors and assisting the secretary in negotiating International Insurance Agreements on Prudential Measures;
• Determine whether State insurance measures are preempted by International Insurance Agreements on Prudential Measures;
• Consult with the States regarding insurance matters of national importance and prudential insurance matters of international importance

The ONI could also recommend to the Federal Reserve System an insurer as an entity to be supervised as a “Tier 1 Financial Holding Company (FHC).”

Under the proposal, Tier 1 FHC is defined as financial firms that could pose a threat to the economy's financial stability if they failed due to their size, leverage and interconnectedness to the financial system.

The Obama administration’s financial reform report released in June cited the findings of Congress that inadequate consolidated supervision and regulation of Tier 1 FHCs was a major contributor to the recent financial crisis. “The sudden collapses of large investment banks and insurance companies based in the United States were among the most destabilizing events of the financial crisis,” according to the report.

As a result, the Treasury Department proposes strong, consolidated supervision and regulation by the Federal Reserve, regardless of whether they own insured depository institutions, for Tier 1 FHCs to maximize financial stability at the least cost to long-term financial and economic growth.

Although the scope and details of the proposed regulation of Tier 1 FHCs have not been clarified, the proposal said these “prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by Tier 1 financial holding companies.”

Insurance carriers that would be categorized as Tier 1 FHCs would be regulated in the following (but not be limited to) areas:

• Risk-based capital requirements
• Leverage limits
• Liquidity requirements
• Overall risk management practices
• Corrective actions to be taken by the regulators
• Market discipline and disclosure
• Resolution plans made by the Tier1 FHC

Economy

The Unemployment Situation and State of the Economy 

The number of unemployed persons has increased by 7.2 million to 14.7 million since the recession started in December 2007, according to the Department of Labor’s data for June 2009. The unemployment rate for the same period has risen by 4.6 percentage points to 9.5 percent –the highest in more than 25 years.

Job loss or the unemployment rate is measured by the Department of Labor using monthly surveys conducted by the Census Bureau and/or the Bureau of Labor Statistics. The term “unemployed,” however, does not apply to everyone who does not have a job.

The Labor Department only considers people unemployed if they do not have jobs but have engaged in at least one active job search activity four weeks prior to the survey and are currently available for work. The operative word is active. Actively looking for a job includes contacting potential employers, employment agencies, friends or relatives to find work.

People who passively look for work, e.g., attending job training programs, reading posted job openings without taking any appropriate actions or other activities not likely to result in any job offers, are not considered by the Labor Department as unemployed.

Workers expecting to be recalled from temporary layoff are counted as unemployed, whether or not they have actively searched for any jobs. It also includes people have quit their jobs to look for other employment, workers whose temporary jobs have ended, persons looking for their first jobs, and experienced workers looking for jobs after exiting the labor force.

The unemployment rate is one of the important economic indicators. The loss of jobs threatens to undermine consumer spending and represents a downside risk to the economy, said Federal Reserve Chairman Ben Bernanke. Mounting unemployment is one of the reasons rebounds the economy is likely to be drawn out.

However, the rate of unemployment lags behind other economic indicators. Unemployment rises during recessions but often reaches it peak months after a recession has ended. In the last two recoveries, the peak unemployment rate occurred about a year and a half after the recession ended White House Office of Management and Budget Director Peter Orszag told the Council on Foreign Relations in New York City.

 “Part of this is because to create enough jobs to reduce the unemployment rate, the economy must grow at approximately 2.5 percent a year,” he said. “And firms tend to respond to a recovering economy by increasing hours for workers they already employ – rather than hiring new workers.”

But there is some good news though. Although the unemployment rate is expected to climb to 10 or 11 percent in the next few months it appears to be slowing down. In June, the unemployment rates for the major worker groups (men, women teenagers, whites, blacks and Hispanics) remained stable. The number of people who lost their jobs and those who completed temporary jobs (9.6 million) remained basically the same last month after increasing by an average of 615,000 per month during the first 5 months of 2009.