AIG Impact on State/Federal Debate Unclear

American International Group Inc.'s near-death experience brought new vigor to the state versus federal insurance regulatory debates, but its lasting impact is unclear.

For better or for worse, AIG vaulted the insurance industry into place as a key part of the financial system and the economy as a whole, said Stef Zielezienski, senior vice president and general counsel for the American Insurance Association.

"It's no longer a conversation just about banks," he said.

State regulators and defenders of the long-standing state-based regulatory structure have feared that backers of an optional federal charter or other stringent measures would use the AIG crisis to give the federal government a place of prominence in insurance regulation. They have taken pains to point out that AIG's troubles stemmed from derivatives trading and other actions at the holding company level and not under the authority of the states.

Those who use AIG to make the federal case amount to "a small handful of federal officials who are still confused and think what happened at AIG had to do with insurance," said Jimi Grande, vice president of federal and political affairs with the National Association of Mutual Insurance Companies.

With or without the near-collapse of AIG in September 2008, optional federal charter legislation would still be on the back burner today, industry representatives said. Between health care reform, climate change legislation and other policy concerns, the sweeping financial regulatory reforms proposed by the Obama administration in June have yet to gain much traction, they said.

"They'll come back to some of it," Grande said.

The deepening recession, post-September 2008, eclipsed the state versus federal insurance debate, said Gary Hughes, executive vice president and general counsel for the American Council of Life Insurers. "The question now is how to avoid the next meltdown," he said.

The whole regulatory system is suffering from a "systemic hangover," said Ann Kramer, a partner at Reed Smith, L.L.P. in New York City. Her clients, mostly large corporations that buy property/casualty products, look at state and federal officials with "a Gimlet eye," she said.