Hearing Assesses Systemic Risk

One of the thornier issues facing legislators—how to address systemic risk posed by insurers—was grappled with at a hearing held by the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

In his opening remarks, Subcommittee Chairman, Paul Kanjorski (D - PA), cited American International Group’s use of its holding company structure, and the purchase of a small thrift to choose the Office of Thrift Supervision as its regulator, as ample cause for greater federal oversight.  

“Currently, several other insurance holding companies have a federal banking regulator as their primary supervisor, and more than six dozen similar entities avoid any form of federal oversight, with selected states instead monitoring them on a consolidated basis,” he said. “Because a number of these businesses could pose systemic risk, I believe that the federal government should directly examine all complex financial holding companies, including those whose primary activities involve underwriting insurance and those who play with credit default swaps.”

In his testimony, Kenneth Spence, EVP and general counsel for The Travelers Cos. Inc., said determining whether a company is systemically important should depend less upon its size, and more on its degree of inter-relation with other institutions. “Limiting sensible systemic oversight to only large financial institutions may thus leave significant risk in the economy unaccounted for in any meaningful way,” he said.

In addition to size, Spence said line of business also should be a consideration. By the nature of their business, a reinsurer may pose greater risk than a property/casualty insurer.

“If there is an insolvency of a property/casualty insurer, individual policyholders would be largely protected by the existing guaranty fund system, and the policyholders could easily and quickly switch their coverage to other insurers,” he testified. “That system has worked well historically. There is, however, no such guaranty fund protection to pay the claims of an insolvent reinsurer.”

Rep. Scott Garrett (R - N.J.) raised the question of resolution or “bailout” authority, and wondered if insurers deemed “too big to fail” would gain an unfair advantage in the marketplace.

“Further complicating the resolution authority proposal is the question of how to pay for it,” he said.  “If only large firms potentially subject to the authority are asked to pay for it, then they will be fairly explicitly seen as the beneficiaries of such a resolution regime.  Asking a broader swath of the financial industry to pay for it would not be equitable, since smaller firms that would have no chance of benefiting from the funds would be asked to contribute to a system designed to prop up their larger competitors.”