AIG Aftermath Spurs State Regulators to Modernize

Pennsylvania Insurance Commissioner Joel Ario was hiking the Appalachian Trail when he got the news that American International Group Inc. was in danger.

It was a Saturday afternoon, Sept. 13, 2008. From discussions with then-New York Insurance Superintendent Eric Dinallo, Ario knew AIG was headed for ratings downgrades come Monday, but no one yet knew the extent of the problem.

"I was just coming into Harpers Ferry, W.Va., and my BlackBerry rings, and it's Eric saying, 'Remember that e-mail last night about AIG? Well, we need to talk about it right now,'" Ario recalled. "It was literally four hours later before I got off the park bench."

One year later, Ario is still on the AIG trail.

The NAIC and state regulators have consistently made the case that the root of AIG's problems was at the holding company level, regulated by the federal government. Their argument is this: It's not our fault, but we're taking care of it.

The federal bailout of AIG's federally regulated holding company took shape within a week, but state regulators were not left off the hook. Together, New York and Pennsylvania regulate a lion's share of AIG's 71 U.S.-based insurance companies, the parts of the company under the domain of 19 different state insurance regulators. Ario became vice chairman of a new AIG Managing Task Force within the National Association of Insurance Commissioners.

The task force is charged with coordinating NAIC and state regulatory activities related to AIG subsidiaries. Through the "Form A" Subgroup, chaired by Ario, regulators also seek to manage oversight of the sales of AIG units so the holding company can generate revenue.

The NAIC credited the Form A process -- named for the NAIC form that must be filed with the domiciliary state when an insurance company is purchased -- for streamlining the $2 billion sale of AIG's 21st Century Insurance Group to Farmers Insurance Group (BestWire, April 16, 2009). The deal involved 18 automobile insurance companies, 10 noninsurance entities and nine states.

State insurance regulators have done a good job responding to the AIG crisis, and deserve partial credit for the relative health of the property/casualty sector, said Stef Zielezienski, senior vice president and general counsel for the American Insurance Association. However, he said, they can only ever be a partial problem-solver, as they lack the power to oversee and supervise holding company structures.

"It's just a fact of how we're organized as a political system," Zielezienski said.

"AIG Would Have Been In Bankruptcy"

Back on the park bench, for Ario the hours passed in a blur of communications between Pennsylvania and New York regulatory staff and AIG senior management. What initially took shape was an offer from New York -- with other states potentially joining in -- to permit AIG's holding company to use $20 billion of assets from state-domiciled companies as collateral to address what then appeared to be a "liquidity crisis" (BestWire, Sept. 15, 2008).

Even then, however, state regulators were quickly realizing the depths of AIG's "capital crisis" were far beyond state regulators' ability to solve. Describing an emergency phone meeting of the NAIC, Ario said, "Everybody on the phone was hoping there would be some help from the federal government."

He added, "If the federal government hadn't done something in a matter of hours, certainly a matter of days there, then AIG would have been in bankruptcy."

State regulators have "continued to deliver value for the policyholder," Ario said. "There's an efficiency to a single regulator, but you're putting all of your eggs in one basket."

Along with the AIA, the American Council of Life Insurers has been a strong proponent for an optional federal insurance regulator. But Gary Hughes, executive vice president and general counsel of the ACLI, conceded that much of the AIG debacle came because federal regulators failed in their task.

Going forward, new systems will have to tightly integrate state and federal oversight, federal charter supporters say. Hughes pointed to the Obama administration's support for an Office of National Insurance to monitor the industry and play an international role and for a federal systemic risk regulator to ensure the next AIG does not happen.

Absolutely a Rebuttal

The Obama plan for financial regulatory reform stopped short of endorsing a federal regulator, but cautioned that the state system has to work together more efficiently -- or the federal concept could be revisited.

Eli Lehrer, director of the Competitive Enterprise Institute's Center for Risk, Regulation and Markets, said the NAIC is fundamentally flawed as a modern regulator. "This is a 19th century system operating in the 21st century. It's a Civil War relic," he said.

The push for a greater federal role in insurance regulation is spurring the NAIC to do more to put on a 21st century face, Ario said. While efforts like the Insurance Compact go back years, he said initiatives like the AIG Managing Task Force are "absolutely" a rebuttal to those who say state regulators cannot adapt.

"The pressures do help concentrate people's minds on the task at hand," Ario said.