By Steven A. Morelli, Senior Editor

InsuranceNewsNet

Published: Oct. 2, 2009

A congressional subcommittee has a long-awaited regulatory reform bill establishing a Federal Insurance Office that would be able to supersede states and identify companies that pose a systemic risk.

Besides advising the federal government, the Treasury Department office would:

• Monitor all aspects of the insurance industry, including identifying issues or gaps in regulation that could contribute to a systemic crisis in the insurance. Health insurance would be excluded. The office would recommend to the Federal Reserve System that it designate an insurer, including its affiliates, as an entity subject to regulation as a Tier 1 financial holding company.
• Coordinate federal efforts and establish federal policy on prudential aspects of  international insurance matters. It would determine whether state insurance measures are preempted by international insurance agreements.
• Assist in administering the Terrorism Insurance Program.

The provisions are in the Federal Insurance Office bill within a package of regulatory reform bills proposed by Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government. Much of it mirrors the reform proposed by the Obama administration earlier this year.

Kanjorski has been a longtime supporter of the optional federal charter (OFC), which would give insurers and producers the choice of being regulated on the federal level. The idea has not gotten far in the past several years, but some say the federal office is a step toward an OFC.

Insurance companies and others in the industry back a federal office or the OFC because it gives insurance a place at the national table with the rest of the financial industry. It would also increase efficiency by helping establish standards nationally rather than from state to state.

The office can pull a company under the federal umbrella through the systemic risk provision. This is where the office would identify companies to be considered Tier 1 financial holding companies, a move largely in response to the AIG crisis.

Supporters of federal regulation pointed to AIG as an example of the state regulatory failure. States responded that the AIG entities under their purview were still strong at the time of the company’s financial trouble, but those under the federal auspices failed.

The systemic risk provision would put not only the federal parts of a company such as AIG under the Federal Reserve System’s jurisdiction, but all its affiliates. In case of AIG’s many insurance companies, it is not clear if they would still be subject to state regulation even though the Kanjorski proposal requires the federal office to consult with states.

The systemic risk proposal has also been criticized as a “too-big-to-fail” rule that would upset the rest of the market because consumers and lending entities would assume the federal government would prop up the company even in catastrophic failure.   

Here are the bills:

Federal Insurance Office Act
Investor Protection Act
Private Fund Investment Advisers Registration Act

Steve welcomes comment at smorelli@insurancenewsnet.com.