NAIC, Trades Spar at Congressional Hearing on Insurer Investments

September 20, 2006

The National Association of Insurance Commissioners (NAIC) President and Maine Insurance Superintendent Alessandro A. Iuppa told the House Finanacial Services Subcommittee panel that strong financial regulation of insurance companies is essential to consumer protection and state officials are committed to an open, transparent process for accurately analyzing insurers’ investments.

“Without the consumer protection afforded by strong financial regulation, an insurance policy may not be worth the paper it is written on,” Iuppa said. “State insurance officials serve the public by means of independent and honest financial oversight to safeguard insurers’ capacity to pay claims.”

Iuppa welcomed congressional interest in the NAIC’s recent decisions on hybrid securities, which are highly complex, often customized, non-conventional and constantly evolving financial instruments.

“We stand by our recent analysis, both in the substance and the process,” he said. “Although some asserted that our reclassification of a relatively small number of securities would have dire consequences, we have uncovered no insurer that would become financially impaired or unable to meet the minimum capital and surplus level required by our risk-based capital formula as a result of these decisions.”

Not everyone agreed with Iuppa’s position.

The Washington, D.C.-based American Insurance Association (AIA) voiced its concern and told the subcommittee hearing that examining how insurer investments are regulated by the states points to the vitally important need for comprehensive reform of the state regulatory system.

The AIA said the authority to examine investments is carried out, in part, through the SVO, a service agency for regulators. The SVO provides analysis and important information to regulators regarding the investments held by insurers.

“Because of this fact, the SVO’s policies and procedures can materially affect insurers’ investment strategies,” said Phillip Carson, AIA assistant general counsel. “Transparency is as much an overriding principle for effective regulation of the insurance industry as it is for allowing the capital markets to function properly,” Carson said.

“The NAIC and the SVO should understand that their actions impact other participants in the capital markets.”

AIA believes that regulation of insurer investments is one part of the total state-based system of regulation that needs to be reformed so that insurance markets can function at peak performance. To this end, AIA has been a supporter of the National Insurance Act of 2006 (S. 2509), a bipartisan measure that establishes an optional federal chartering system.

“Modernizing insurance regulation, including reforming oversight of insurer investments, will result in healthy, robust insurance markets that benefit insurance consumers,” said Drew Cantor, AIA vice president and director, federal affairs.

The Illinois-based Property Casualty Insurers Association of America (PCI) supported the efforts of Iuppa.

“PCI supports Chairman Baker’s efforts to encourage greater transparency in the SVO’s methods and activities. In something as important as valuing the securities insurers hold in their portfolios, having transparency and equal access to information are vital to all participants in the market, said Gregory W. Heidrich, senior vice president, Policy Development and Research. “We’re encouraged by the NAIC’s recent efforts to address the issue, but think Chairman Baker has performed a real service by giving this issue his and the subcommittee’s attention.”

Iuppa said state officials have taken seriously the concerns raised. He said that the NAIC held a public hearing in July, and last week it adopted a year-end financial statement filing, which essentially provides for the classification and reporting of recently issued hybrid securities as preferred stock with some adjustment in the rating classification to include investment risks not accounted for by the national credit rating agencies.

The NAIC, led by the New York Department of Insurance, continues to evaluate the appropriate risk-based capital treatment of hybrid securities to develop a permanent solution.

“The NAIC is continuously evolving and improving to keep up with the changing markets, and I am confident in the integrity of our open and transparent process,” Iuppa said. “Nonetheless, like any effective organization working in a dynamic market, we have initiated a review with respect to the issue of disclosure and transparency of our classification process covering hybrid securities in order to identify any improvements that should be made.”

The National Association of Insurance Commissioners (NAIC) identifies itself as a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and the five U.S. territories.

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