WASHINGTON—A funded consumer representative to the National Association of Insurance Commissioners today questioned insurance industry and NAIC arguments that insurance companies do not pose systemic risks to the economy. As such, this also questioned the argument that insurers do not, in fact, need federal oversight.
In testimony before Congress, Daniel Schwarcz, an associate professor at the University of Minnesota Law School, argued that even traditional insurance activities can pose some systemic risks, particularly in the domain of life insurance.
He also cited the experience of American International Group.
"Perhaps most importantly, our experience with AIG in 2008 taught us that we do not fully understand the systemic risks involved in insurance holding company systems," Schwarcz said.
Schwarcz made his comments in testimony before the Housing and Community Opportunity Subcommittee of the House Financial Services Committee on insurance oversight and legislative issues.
The hearing dealt with three legislative proposed being considered by the panel that would scale back the authority of the Financial Stability Oversight Council, the Federal Insurance Office and the Office of Financial Research, both within Treasury, to independently monitor insurers.
Officially, the NAIC is not pushing this legislation, and has stated it has no official postion on Dodd-Frank or on any proposals to modify it. At the same time, in his testimony before the Subcommittee on Insurance, Housing and Community Opportunity of the Committee on Financial Services, Deputy Director and Superintendent of Insurance and Banking for the State of Rhode Island Joseph Torti did stress that any implementation or modification of Dodd-Frank should keep state-based regulation in mind.
"The NAIC does…strongly believe that the implementation ofDodd-Frank by the federal financial agencies or any legislative efforts to amend it should beconsistent with Dodd-Frank's recognition of the uniqueness of the insurer business model andthe strength of the national state-based system of insurance regulation," Torti testified.
One of the legislative proposals being considered would revoke the authority of the Federal Insurance Office and the Office of Financial Research within the Treasury to subpoena information from insurance companies.
The second would "explicitly and entirely" exclude insurance companies, including mutual insurance holding companies from the Federal Deposit Insurance Corporation's "orderly liquidation authority" for troubled large non-banks.
The third would "preclude" the Federal Reserve from establishing higher prudential financial standards to troubled insurance companies it would oversee as ordered by the Financial Stability Oversight Council.
All of these powers were given to federal regulators through the Dodd-Frank financial services reform law.
While the law left insurance regulation mostly in the hands of the states, it did give federal financial regulators authority to monitor the industry and regulate an insurer as systemically significant, if the FSOC so determined.
Michael Lanza, executive vice president and general counsel of Selective Insurance Group, Inc., Branchville, N.J., testified before the panel that the legislation is appropriate.
He said DFA provisions regarding insurers should be "clarified" to ensure that federal regulators do not impose conflicting or duplicative regulatory requirements.
Lanza testified on behalf of Selective and the Property Casualty Insurers Association of America.
In his testimony, Lanza said that "We do not believe that the proposals – in any way – scale back any powers that Dodd-Frank granted federal agencies to regulate the types of risky activities that gave rise to the financial crisis."
He said that. "Home, auto, and business insurers, while important to our customers in times of need, did not cause the financial crisis and generally are not systemically important to the financial markets."
Lanza added that the property & casualty industry "is stable and healthy."
