As the inception of the financial crisis recedes into the distance, it’s easy to forget the depth of the anger leveled at the firms at its epicenter. To a public justifiably outraged at the thought of bailing out fantastically wealthy corporations, the line between the insurance operations of American International Group and its doomed financial products division seemed a distinction without a difference.
Given this, not to mention the memory of the how the Sarbanes-Oxley Act emerged in the wake of the Enron scandal, insurers rightfully had cause for concern as legislators began to craft a legislative response to the crisis in 2009. The bill that emerged this week from the conference committee, H.R. 4173 the Dodd-Frank Wall Street Reform and Consumer Protection Act, while sweeping, leaves the central tenets of the regulatory structure for insurance companies intact.
Insurers fearing a brute-force, broad-brush approach seemed to have their fears justified early in the process, as legislators seeking to bring systemically risky companies to heel lumped insurers in with banks and investment banks.
“When all this started, AIG was front and center,” Leigh Ann Pusey, president of American Insurance Association (AIA), tells Insurance Networking News. “We had the public challenge of AIG having been the poster child for the crisis, and also a legislative process that was very bank-centric. That was a dangerous combination.”
To reinforce the contention that AIG was unique, and to counter the perception that the size and interconnectedness of insurers made them a danger, individual insurers and a variety of associations pressed their case to legislators. The legislation does not exclude insurers, but puts enough checks in place that it’s highly unlikely that an insurer will be named systemically risky.
“With the benefits of time, shoe leather and a lot of smart people, we kept at the message that we don’t pose a systemic risk,” Pusey says. “As a result we were successful in getting insurers distinguished from banking.”
With that battle won, other skirmishes soon presented themselves. One in particular was the fight over whether to put insurers under the purview of the proposed Consumer Finance Protection Agency. “We were concerned it would compromise the protections afforded at the state level if there was a new federal role,” Pusey recalls. Here, too, the industry position prevailed.
Less clear is the situation surrounding resolution funding. Insurers had hoped to be excluded from any pre-funding mechanism for systemically risky institutions, arguing that they already pay into state-based resolution funds, and should not be asked to cover for companies in other industries. Nonetheless, the version of the legislation that emerged from the conference committee contains a broad assessment on financial institutions with assets over $50 billion, which includes many insurers. However, Pusey notes that it is not an upfront assessment, and that the final language also stipulates a risk matrix that levies the heaviest assessment on those institutions that engage in the riskiest transactions. “Our conviction is that since insurers do not pose that type of risk, they will be way down the list,” she says.
Another somewhat indistinct outcome is the creation of the Federal Insurance Office (FIO). Housed within the Treasury Department, the office is tasked with representing the United States during international insurance agreements, and establishing a repository of insurance knowledge in the federal government.
Regarding the FIO, the dispute was less between the industry and legislators, than within the industry. Proponents of state-based regulation wanted a FIO with limited preemptory powers, while others, including AIA, argued that the office would require ample authority to be able to negotiate international agreements successfully. Although the former position ultimately prevailed, Pusey is pleased to have a federal insurance presence.
“Even though it expressly does not have any regulatory authority, we thought it was important step to address the bank-centric nature of Washington by bringing in insurance expertise,” she says. “For us, the concern was a lack of knowledge in Washington about this industry.”
Bill Kenealy is a senior editor with Insurance Networking News.
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