Property/Casualty Insurers Have Issues with Dodd Financial Reform Bill

Even though they are largely excluded from the federal financial regulatory overhaul proposed in the Senate, property/casualty insurers say there are some elements they fear could negatively affect them and their customers.

Sen. Chris Dodd, D-Conn., unveiled his “Restoring American Financial Stability Act of 2010” this week. He is chair of the Senate Banking, Housing and Urban Affairs Committee that is scheduled to markup the bill on March 22.

The legislation calls for the creation of a new council to regulate large financial entities for systemic risk, a consumer protection agency within the Federal Reserve Bank and a national office within Treasury to monitor the insurance industry.

The Dodd bill also incorporates legislation sought by excess and surplus lines insurance brokers to streamline their tax and licensing procedures.

Insurers see some of the proposals in Dodd’s bill as duplicating states’ current regulatory efforts and others, under which some insurers could face further regulation and assessments, as unfair.

Very large insurers that fall under the definition of bank holding companies with assets of $50 billion or more could come under the authority of the Federal Reserve Bank and the proposed systemic risk regulator, the nine-member Financial Stability Oversight Council. They and all large insurers could be assessed for a fund that would backup troubled companies that pose a systemic risk. The Federal Reserve under this measure could regulate an insurer the size of the former AIG.

The oversight council will make recommendations to the Federal Reserve for changing capital and risk management rules as companies grow larger and more complex and would be responsible for monitoring and fixing any companies that could pose risks to the financial system.

This expansion of insurance regulation rankles property/casualty insurers because, they say, they did not cause the financial crisis and have never posed a systemic risk to the economy.

Leigh Ann Pusey, president and CEO of the American Insurance Association, said that trying to “prevent future crises by forcing property/casualty insurers to pay into a prefunded resolution mechanism or arbitrarily including insurers in a systemic risk regulatory regime penalizes stability, leading those same consumers and investors to unfairly conclude that the property/casualty sector is unstable and unreliable.”

She said state guaranty funds already do a good job protecting insurance consumers and they could have withstood even the collapse of AIG’s property/casualty units if that had happened as a result of the risky activities of AIG’s non-property/casualty division.

“AIA and its members cannot see any justification for eroding these processes and undermining consumer and investor confidence in them by including the property/casualty industry in the funding of non-insurance resolutions, as outlined in this draft,” Pusey said.

David A. Sampson, president and CEO of the Property Casualty Insurers Association of America (PCI), echoed this concern over subjecting state regulated insurers to further federal regulation and assessment authority as well as monitoring by a new Office of National Insurance (ONI) within the Treasury.

“Property casualty insurance is not systemically risky, and has been strong and stable throughout the financial crisis. Our industry honors our promise to policyholders. The proposed duplicative regulation for the property/casualty industry would only add red tape, kill more jobs and ultimately hurt our customers,” Sampson said.

This ONI is supposed to monitor and collect data on all lines of insurance, except health, and is not being given any regulatory authority. However insurers are concerned that the ONI would duplicate what state regulators already do.

Also the ONI may force insurers to submit data or information that the ONI “may reasonably require.” Small insurers are exempt from the provision. However, there is still concern.

The National Association of Mutual Insurance Companies (NAMIC) thinks the subpoena powers granted to the ONI might be too broad.

“Insurance is the most regulated industry in the country, and there is no shortage of data that would be available to the ONI either publicly or through the National Association of Insurance Commissioners,” Jimi Grande, senior vice president of federal and political affairs for NAMIC said. “The use of subpoena authority in this context could have unintended negative consequences by creating a duplicate and excessive process that would ultimately harm the consumer it seeks to protect.”

Independent agents are worried that the current language in Dodd’s bill could “inadvertently” subject insurance agents to mandatory requests for data and the Independent Insurance Agents and Brokers of America vowed to make sure agents are exempt in any final version.

The proposed Bureau of Consumer Protection is of less concern to the industry as insurance firms appear to be excluded from its jurisdiction.

“As with the stand alone agency that would be created by the House legislation, Sen. Dodd’s bill respects the strong regime of consumer protections with regard to property/casualty insurance at the state level,” said Grande. “This will help avoid regulatory confusion and ensure a more responsive consumer protection system.”

Wholesale insurance brokers should be pleased because the Dodd bill incorporates legislation they want to resolve conflicts in their state tax and licensing requirements. This amendment offered by Rep. Dennis Moore, D-Kan., and Scott Garrett, R-N.J., establishes that the tax policies, licensing and other regulatory requirements of the home state of policyholders govern surplus lines transactions.

“By establishing that the home state of the policy holder governs a transaction the surplus lines industry would no longer face trying to comply with confusing and conflicting laws and regulations of multiple states on a multistate transaction,” said NAPSLO Executive Director Richard Bouhan of the amendment.