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Insurance Industry Groups React to Treasury Secretary’s Statements to House Committee

Speaking before the House Financial Services Committee, Geithner was forthright about the need for systemic risk regulation but his comments on optional federal charter were subject to interpretation.

The comments of Treasury Secretary Timothy Geithner, speaking yesterday before the House Financial Services Committee, elicited reactions from various insurance trade associations monitoring federal government activity potentially affecting the future regulatory regime under which insurers will operate. Geithner called for a systemic risk regulator in his prepared statement. Later, in response to a question from long-time optional federal charter (OFC) proponent Rep. Ed Royce (R-Calif.), Geithner said a "good case" could be made for OFC.

Frank Keating, president ad CEO of the American Council of Life Insurers (ACLI, Washington, D.C.) expressed great appreciation for Geithner's comment on OFC, in a statement issued late yesterday. "Optional federal charter legislation is inextricably linked to proposals by the secretary and other policymakers to enhance the federal government's ability to monitor and address potential threats to our nation's financial services system," he said. "Without the federal insurance regulatory office that would be established by OFC legislation, any effort to oversee systemic risk would necessarily fall short.

Jimi Grande, vice president for federal and political affairs, National Association of Mutual Insurance Companies (NAMIC) issued a statement of appreciation for Geithner's comments but remarked that they left many questions unanswered. Grande made specific comment on the Treasury Secretary's having "left the door open" to discussion of an optional federal charter. "We are concerned that the secretary and some members of Congress may use the current crisis as an opportunity to establish federal regulatory authority over insurance activities," Grande reacted. "Property/casualty insurance regulation should remain at the state level since efforts to establish an optional federal charter or federal oversight of property/casualty insurance would lead to inefficient, costly, and confusing dual regulation."

Geithner's favorable reference to optional federal charter was ambiguous, according to Ben McKay, senior vice president, federal government relations, Property Casualty Insurers Association of America (PCI; Des Plains, Ill.), in a conversation with I&T. "A 'good case' doesn't necessarily mean 'I support' or 'I oppose'," McKay commented. "If you're a pro-OFC person you hear "Oh, he's with us!"; if you're an anti-OFC person you say, "If he meant, 'I support OFC' he would have said, 'I support OFC.'"

McKay acknowledged that other comments by Geithner could be argued to be inconsistent with support for OFC. During his prepared testimony, the Treasury Secretary said, "We can't allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints." While the comment was made in the context of systemic risk regulation, it nevertheless articulated a principle of opposition to regulatory arbitrage — which OFC has been argued to enable.

"There is an argument made every day that creating a federal charter, particularly an optional federal charter, creates another opportunity at the federal level for regulatory arbitrage," McKay said. "But then it also creates something that doesn't exist now, which is a vertical opportunity for arbitrage between federal versus state regulators."

Jack Dolan, a spokesman for the ACLI, challenged the arbitrage charge saying that proponents of OFC seek a federal system that represents the "best of the best" of both solvency requirements and consumer protection. "Companies effectively can cherry pick now, and theoretically move from state to state," Dolan said. "Do they do that? No. They're not going to start under an OFC."

Dolan added that under the new regulatory regime insurers should be prohibited from switching from one regulator to another, if that should emerge as a concern for policymakers and lawmakers. "The goal is for companies to have a choice between strong federal or strong state regulation," he said.

Namic's Grande disputed the contention that insurers can choose their regulator under the current system. "Companies domiciled in Illinois, where there is no rate regulation, still have to abide by the regulations of every other state they do business in," he said. "That's the reason insurers don't move from state to state."

Grande asserted that by definition, an optional charter creates regulatory arbitrage because it allows an insurer to choose its regulator. "Secretary Geithner made clear that allowing companies to cherry-pick among competing regulators was no longer acceptable," he said. "He said that in the context of AIG, and we can only assume that same principle will translate to regulation of the insurance industry."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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