SOURCE: InsuranceNewsNet.com

March 5, 2009

By Steven A. Morelli, senior editor

One of the architects of a pending insurance federal regulation bill defended the plan during an insurance policy forum as a way to deal with large insurance companies such as AIG. But other attendees at the sixth annual Insurance Reform Summit doubted the proposed system would have done much good in the big insurer’s case.

“Recent events are a call to action,” Rep. Melissa Bean, D-Ill., told attendees at the summit on Wednesday in Washington, D.C., conducted by Indiana State University’s Networks Financial Institute.

Bean and other long-time supporters of a federal system of insurance regulation are raising the AIG example as one of the symptoms of a fractured state-based regulatory system although they have fought for a federal regulator for years. On Feb. 11, Bean and Ed Royce, R-Calif., announced the National Insurance Consumer Protection and Regulatory Modernization Act (although Bean offered the shorter name National Insurance Modernization Act at the summit). Bean said the bill will be introduced in a matter of days.

The legislation would create an optional federal system overseen by the Office of National Insurance acting as a systemic risk regulator. The office would also have the authority to gather financial data, recommend regulations and have enforcement authority over some insurance holding companies.

Bean said the AIG crash was too difficult “if not impossible” for a state regulator to handle. The federal regulator would be able to identify problems and keep large holding companies like AIG from failing.

Even attendees who support the idea were skeptical of the national regulator’s ability to have prevented the AIG problems because the insurer problems stemmed from complicated financial products that were not considered insurance and were essentially unregulated. The company’s insurance operations were and remain fundamentally strong.

Some were also antsy about the concept of a systemic regulator. In fact, one said it could help create another AIG. Scott E. Harrington, insurance and risk management professor at the University of Pennsylvania’s Wharton School, asked Bean if the regulator’s attention could mean a company could be deemed “too big to fail,” attracting more business from consumers looking for safety and growing even bigger.

Bean admitted that is an issue to discuss and is among the details that should be considered after the bill is introduced. Bean said the proposal is based on the NAIC model in structure and would have offices in each state.

The new National Association of Insurance Commissioners CEO Therese M. Vaughn had some issue with the plan, though. Many have pointed out that a federal regulator failed to spot Bernard Madoff’s $50 billion Ponzi scheme, but Vaughn had an example of how state regulators caught a big scam artist in the past.

That was the strange case of Martin Frankel, who had acquired insurance companies to siphon their reserves. Although Frankel had operated for years under the purview of the Securities and Exchange Commission, it was getting into insurance  that was Frankel’s undoing. Frankel talked big and claimed connections to the Vatican. The Mississippi insurance commissioner got  suspicious and started poking around.

“The story I heard was he (the commissioner) called the Vatican and said ‘I want to talk to the Pope!’ ” Vaughn said.
He didn’t talk to the Pope but he did bring down Frankel’s $200 million scheme, among the biggest until Madoff. Vaughn said the 1999 case is a lesson today.

“Big regulators,” Vaughn said, “make big mistakes.”

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