The drive to create a federal regulator for insurance companies gained steam Tuesday in the wake of public outrage over American International Group's bonus packages and a growing concern among lawmakers that the states' oversight is insufficient.
Several lawmakers at a Senate Banking Committee hearing weighed in, including Sen. Richard Shelby, the panel's top Republican, who said the lack of supervision of AIG's far-flung operations "raises some serious questions about the adequacy of state supervision."
"If insurers are managing risk on a national basis, it may make sense to consider regulating them on a national basis as well," Shelby said.
Senate Banking Committee Chairman Chris Dodd also raised concerns about the effectiveness of current oversight.
"If it's going to be dispersed among 50 jurisdictions, then you're going to end up with a spotty system—some places it works, some places it doesn't," Dodd said. "The idea is a national system; we could have one strong system of rules."
Dodd also sought to knock down a key defense made by state banking and insurance regulators, who argue that they are better than the federal government at protecting consumers.
"Do you believe that federal regulation is necessarily weaker in terms of consumer protection than state regulation?" Dodd asked Robert Hunter, the director of insurance at the Consumer Federation of America.
Hunter replied, "It really has a lot to do with the laws and the people who are administering them. I think a federal regulator could do a great job."
Just how far Congress will go was unclear. Shelby clearly backed broad powers for a federal agency, but Dodd proposed a narrower starting point: establishing a federal office dedicated to managing information about insurers in different states and countries.
"We'd all agree that there's certainly a lack of expertise at the federal level on insurance issues," Dodd said. "There's no central repository of information and analysis on the federal level."
But Frank Keating, the president and chief executive of the American Council of Life Insurers, which has pushed for creating a federal insurance regulator for several years, argued that reform of the insurance industry would never be effective without a strong supervisor.
"Without a federal insurance regulator and without direct jurisdiction over insurance companies, and given clear constitutional limitations on the ability of the federal government to mandate actions by state insurance regulators, how will national regulatory policies be implemented with respect to the industry?" he said.
Shelby also argued that leaving the insurance industry out of a regulatory overhaul could create more problems.
"If we establish a systemic-risk regulator and leave insurance regulation to the states, what opportunities for regulatory arbitrage would we create, and would it actually undermine a systemic-risk regulator?" he asked.
These questions have been batted around Congress for years but gained momentum in the wake of the government's four attempts to stabilize AIG and caught fire after it was revealed that some of the executives most responsible for AIG's problems were paid big bonuses.
Without a witness representing AIG, lawmakers at the hearing directed much of their ire to Michael McRaith, the director of the Illinois Department of Insurance.
They asked whether Illinois-regulated subsidiaries of AIG had paid bonuses to their employees and whether the state's insurance guarantee funds could handle the resolution of a company as large as AIG.
"It's not whether there is a regulator, it's whether there's an effective regulator," McRaith said after Shelby argued that states could not handle big conglomerates on their own.
The state regulator pointed a finger of blame at the Office of Thrift Supervision, which oversaw AIG because it had a thrift subsidiary. "What we saw at the holding company level was a regulator who was not effective."
But Shelby disagreed, pressing another witness, Hunter of CFA, to dispute McRaith.
"It would be too big for him to handle it, wouldn't you say?" Shelby asked Hunter.
After Hunter agreed, Shelby added, "I thought so, too."
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