The Group of Thirty, a working group on financial reform that includes several current economic advisors to President Obama, recently concluded that the absence of national regulation of the insurance segment of the U.S. financial system and the current framework of state rather than national laws and regulations has limited the degree and effectiveness of oversight of the capital market activities of large, complex affiliates of regulated insurance companies.

The Chairman of the Trustees of the Group of Thirty is Paul A. Volcker, Chairman of President Obama's Economic Recovery Advisory Board. The Group of Thirty also includes Treasury Secretary Timothy F. Geithner and Lawrence Summers, the incoming Chairman of the National Economic Council.

The Report, entitled "Financial Reform, A Framework for Financial Stability" and published Jan. 15, 2009, focuses on how the financial system might reasonably be organized, once the present crisis has passed, to better assure a reasonable degree of stability.

According to the Group of Thirty, the rapid movement in the United States to a financial system in which a small number of exceptionally large financial institutions are at the core of the system creates public policy issues that, in the past, have been dealt with in a piecemeal and uncoordinated fashion. The Report concludes that that it is important to redefine prudential regulation, strengthen the effectiveness of financial regulation and streamline its structure.

The Group of Thirty concluded that the "nature of the regulation of the insurance sector" is among the characteristics of the U.S. financial system that led to challenges in responding to the current financial crisis. The Report concludes that in several important respects, it was problems at firms that were under regulated or unregulated that became the flash point for the spread of the sub-prime mortgage crisis.

In this regard, one of the principal recommendations of the Report is "for those countries lacking such arrangements, a framework for national-level consolidated prudential regulation and supervision over large internationally active insurance companies should be established." Additionally, the Report recommends that countries should reevaluate their regulatory structures with a view towards eliminating unnecessary overlaps and gaps in coverage and complexity, removing the potential for regulatory arbitrage and improving regulatory coordination.

In a another recent, related development, a bipartisan group of House Financial Services Committee members have asked Treasury Secretary Geithner to establish a division within the Treasury Department to provide national insurance oversight. The representatives encouraged Mr. Geithner to create the division within Treasury to fill a void in insurance oversight and expertise at the federal level. In its letter, the group concluded that "[C]onsidering the critical role the insurance sector plays in our capital markets and the amount of taxpayer money the federal government has committed to assist U.S. insurance companies, it is disconcerting that there remains no expertise within the federal government on insurance matters."

In addition, on Jan. 8, 2009, a report entitled "Financial Oversight Failure Highlights Effectiveness of Insurance Regulation," prepared by the National Association of Mutual Insurance Companies (NAMIC), was sent to members of Congress. This report analyzes the nation's financial crisis and cautions Congress to avoid disturbing the financial markets and regulatory systems that historically have served consumers well. The report notes that credit default swaps, which most experts believe played a major role in the crisis, have been mischaracterized by many as insurance. According to the NAMIC report, this has led some to conclude that insurance companies are inadequately regulated. The report explains, however, that credit default swaps are not insurance products, and concludes that property casualty insurers did not contribute to the financial crisis. The NAMIC urged Congress to avoid imposing costly, unnecessary federal regulation on the insurance industry, but concluded that creating a federal Office of Insurance Information to bolster the federal government's institutional knowledge of insurance markets would be appropriate.

On Jan. 23, 2009, the Independent Insurance Agents and Brokers of America (IIABA) also wrote a letter to President Obama asking him to preserve state regulation in any proposal developed by the administration to reform financial services regulation. The letter encourages the administration and Congress to attempt to fix only those components of the regulatory system that are broken and suggests that no action should be taken that would in any way jeopardize the protection of the consumer. The letter states that the state-based system of insurance regulation has served both policyholders and the insurance industry well for over 100 years, and notes that even the failure of AIG resulted from its financial products division and not its insurance operations. In the view of the IIABA, this is a further testament to the strength of the current insurance regulatory system.