With various bills intending to reshape how the insurance industry is regulated now advancing in both houses of Congress, Leigh Ann Pusey stepped into the legislative equivalent of a maelstrom when she became president and CEO of the American Insurance Association in February. INN asked Pusey for her take on these vital pieces of legislation.
INN: Given recent events, do you think legislation establishing an optional federal charter is more likely to pass?
LAP: The concept of federal regulation of insurance has been building momentum for the past few years. Looking back, both the Treasury Department's "Blueprint" for Financial Modernization and the Bloomberg/Schumer Report recommended enactment of optional federal charter legislation as a hallmark reform to help our industry maintain competiveness.
Today, the news out of Washington is understandably dominated by the efforts to stabilize the economy, but talk about federal regulation continues to attract a lot of attention. There is more focus on safety and soundness issues, but both Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have indicated that they believe federal regulation of insurance has merit and should be considered. Further, Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Calif.) have introduced legislation that would create an Office of National Insurance, and put in place a functional federal regulator. We view the new legislation as a positive development. It's still too early to tell where the debate will end up, but it's hard to imagine a world where insurance regulation isn't part of the issues being discussed.
INN: What's your take on the contention that a federal charter should only cover life insurers?
LAP: The current economic crisis was caused by gaps in the financial regulatory system. Promoting further fragmentation by artificially dividing out one sector from the rest of the industry makes little sense.
INN: Do you think insurers should be eligible for TARP funds?
LAP: AIA has supported legislative measures to stabilize the financial markets and the U.S. economy, but we have also warned policymakers about the potential for private market distortion when the government provides subsidized capital in exchange for an ownership stake in private companies.
Late last year, after surveying the members of our Board of Directors, AIA released a public statement noting that a substantial majority of the AIA Board members do not support the inclusion of property/casualty insurers in the Treasury's Capital Purchase Program under TARP, and that those members would elect not to participate in the CPP even if it were made available.
INN: The prospect of making the federal charter mandatory for carriers that pose systemic risk has been floated. Do you think the obligatory nature of such a provision would sit well with insurers who may not see themselves as posing such a risk?
LAP: It's not clear that Congress will define "systemic risk" by an industry or institution out of concern of creating "winners and losers." So, while we have endorsed the concept of a systemic risk oversight mechanism to coordinate functional regulation, it is important to recognize that notwithstanding the industry's critical role in the economy, traditional P&C companies do not pose the same types of systemic risk as other financial sectors. P&C companies generate relatively minor counterparty risk, their liabilities are generally independent of economic cycles or other systemic failures and their failure rates are relatively low historically as a percentage of industry premiums.
INN: What type of regulatory structure do you think would best address systemic risk?
LAP: Because P&C insurance is so essential to the functioning of the economy, and is especially critical in times of crisis and catastrophe, we believe that functional federal insurance regulation will enhance the industry's effectiveness, and thus should be included as part of any well-constructed federal program that helps understand systemic risk through coordination with functional regulators.
Given the national and global nature of risk assumed by P&C insurers, establishment of an independent federal insurance regulator is the only effective way of including P&C insurance in such a program. And, it ensures that insurance will have an equal place at the table.
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