Chairman Paul Kanjorski (D-PA) declared today that, “Only ostriches can now deny the need for establishing a federal insurance resource center and a basic federal insurance regulatory structure.” But others on the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises remained sharply divided between defenders of the current state-based regulatory regime and proponents of some form of federal functional regulation for insurance. One thing that seemed certain was that first-step bill, the Insurance Information Act of 2009 (H.R. 2609), gained momentum thanks to consensus from all sides that, at a minimum, the federal government must develop insurance expertise. With the Obama Administration poised to unveil its white paper on financial regulatory reform tomorrow and Treasury Secretary Timothy Geithner set to testify before both the Senate Banking Committee and the House Financial Services Committee on Thursday, just how far this newfound momentum will carry the bill is an open question.
Focusing on the extent to which systemic risk regulation and oversight should involve insurance, the hearing is the latest signal from Congress of increasing interest in insurance regulation as a component of regulatory reforms for the financial industry. Kanjorski expressed his hopes that the Obama Administration will call for regulation of insurance holding companies and other reforms. He stated that the federal government should regulate, at a minimum, certain lines of insurance including bond insurance, mortgage insurance, and reinsurance that may be systemically important.
Rep. Melissa Bean (D-IL) and Rep. Mike Royce (R-CA) highlighted the presence of systemic risk regulation provisions in the National Insurance Consumer Protection Act (H.R. 1880). Bean stated that effective systemic risk regulation requires the presence of a federal functional regulator. Royce questioned how effectively Kanjorski’s proposed Office of Insurance Information could implement international agreements without strong preemption authority.
In contrast, Illinois Director of Insurance Michael McRaith, testifying on behalf of the NAIC, argued that insurers do not pose systemic risk in part because of the existence of state guaranty funds and prudential regulation. If a federal systemic risk regulator is created, the NAIC favors a council of regulators to monitor systemic risk. McRaith testified that the NAIC should have a seat on this systemic risk council and that the privilege of filling that seat should rotate amongst the states. According to McRaith, systemic risk oversight at the federal level is consistent with preserving state functional regulation of insurance. The NAIC, he said, agreed that the federal government needs insurance expertise and welcomes the creation of an Office of Insurance Information to facilitate this process, but reiterated NAIC’s objections to federal functional regulation of any sort.
Recognizing the need for federal oversight but in search of a compromise, Rep. Michael Capuano (D-MA) floated the idea of partial federal regulation of insurance by leaving traditional consumer protection oversight in the hands of state regulators while shifting solvency and other prudential concerns to a functional federal regulator. Patrick Baird, testifying on behalf of ACLI, argued that such bifurcated regulation could be harmful. Solvency regulation and consumer protection appear linked for both sides of the debate at this point.
The hearing was an important step on the path towards some form of federal insurance regulatory involvement. Chairman Kanjorski managed diverse interests toward a recognition of the need for some federal role in insurance oversight. The unveiling of the Obama Administration’s white paper on financial regulatory reform tomorrow may reshape the continuing debate on how insurance will be regulated.
Witness List & Prepared Testimony:
The Honorable Peter Skinner, Member, European Parliament
The Honorable Michael T. McRaith, Director, Illinois Department of Insurance on behalf of the National Association of Insurance Commissioners
Ms. Teresa Bryce, President, Radian Guaranty Inc. on behalf of the Mortgage Insurance Companies of America
Mr. Sean McCarthy, Chief Operating Officer, Financial Security Assurance, Inc.
Mr. Kenneth F. Spence, Executive Vice President and General Counsel, Travelers
Mr. Franklin Nutter, President, Reinsurance Association of America
Mr. Patrick S. Baird, Chief Executive Officer, AEGON USA, LLC on behalf of the American Council of Life Insurers
Mr. John T. Hill, President and Chief Operating Officer, Magna Carta Companies on behalf of the National Association of Mutual Insurance Companies