Insurance Associations Concerned on Financial Stability Improvement Act

November 18, 2009

In an open letter addressed to Barney Frank, the Chairman of the House of Representatives Committee on Financial Services, the largest U.S. insurance trade associations expressed their concerns over the recently passed Financial Stability Act’s possible implications.

The letter, signed by the American Insurance Association, the Independent Insurance Agents and Brokers of America , the National Association of Mutual Insurance Companies , the Property Casualty Insurers Association of America and the Reinsurance Association of America, centered on proposals to include the insurance industry within the ambit of all “financial companies,” which would be subject to additional regulation.

“The discussion draft allows the Financial Services Oversight Council to designate ‘financial companies’ – which expressly include U.S. and foreign non-bank financial institutions such as insurers – for heightened prudential regulation,” the letter said. “We are concerned that holding companies of insurers and insurers themselves could be subject to bank-centric regulatory provisions that fundamentally conflict with the insurance regulatory model.”

The Act, which stems directly from the banking failures that led to the current economic crisis, should not include the insurance industry, which, as the letter points out, played a very small role in creating the financial failures, and isn’t in a position to precipitate any in the future.

“The property and casualty insurance industry did not pose systemic risk to the U.S. financial system or to the economy during this crisis,” said the letter. “Indeed, while the property and casualty insurance industry serves a key role in propelling commerce and innovation, the industry is unlikely to be the source of any systemic contagion because these are generally low-leveraged businesses, with lower asset-to-capital ratios than other financial institutions, more conservative investment portfolios, and more predictable cash outflows that are tied to insurance claims rather than “on-demand” access to assets.”

It also noted that P/C “insurance has its own resolution mechanisms in place at the state level, and a guaranty system funded by private insurers that ensures the continued payment of policyholder claims in the rare event of an insurer insolvency.”

As a result of these factors the signers said that “property and casualty companies engaged in insurance activities should not be subject to such supervision. This is particularly important because the discussion draft relies on bank-centric regulatory standards that are inapposite to the insurance regulatory model.”

In addition, the letter said that as the “discussion draft already exempts insurance company subsidiaries from the enhanced resolution authority, the draft should carry that exemption through the rest of its provisions.

“Congress should establish a mechanism that does not improperly assess exempted entities for the systemic failures of others. Failure to do so would generate added costs for the property and casualty industry and consumers, and potentially destabilize a healthy insurance marketplace. Moreover, if assessments are made to recover federal aid to a failing institution with property and casualty subsidiaries, we run the risk of distorting marketplace competition.”

The final concern, expressed by the organizations, noted that an amendment, to be offered in Committee, ” would subject insurers to pre-event assessments to fund a resolution mechanism. We strongly oppose the idea of pre-funding because it runs counter to our own resolution system, amounts to a tax, and exacerbates the problems we have noted above. We see no benefit to our industry and its customers that would flow from adopting an amendment to pre-fund the enhanced resolution authority.”

Sources: American Insurance Association –
Independent Insurance Agents and Brokers of America –
National Association of Mutual Insurance Companies –
Property Casualty Insurers Association of America –
Reinsurance Association of America –

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