Systemic Risk Discussion on Capitol Hill

Consideration of risks to the entire financial services system has risen to the forefront of debate in Washington, especially with the discussion of the American International Group (AIG) and other financial services conglomerates that have been considered to be potentially “too big to fail” or “too interconnected to fail.” Although a clear definition of “systemic risk” has yet to be accepted, many believe the economic crisis has demonstrated the need for special scrutiny of the limited group of unique entities that engage in services or provide products that could pose systemic risk to the overall market. Federal action therefore appears increasingly likely to determine and supervise systemic risk concerns. With AIG front and center in these discussions, insurance is expected to be included in any proposal.

In what is expected to be the first of several legislative efforts, Sen. Susan Collins (R-Maine) recently introduced a bill that would form an inter-agency council to specifically address systemic risk. Other ideas being considered on Capitol Hill include housing systemic risk oversight in the Federal Reserve, the Federal Deposit Insurance Corporation or creating a new agency tasked with the oversight of systemically significant financial institutions.

While acknowledging that there may be a role for the federal government to play in the oversight of systemic risk, the Big “I” has argued that, in general, the insurance markets are stable and the state regulatory system is strong. Additionally, states already have strong financial and market regulations in place for insurers and effective solvency regulations to protect consumers. The Big “I” believes that systemic risk oversight therefore should not displace or interfere with the competent and effective level of functional insurance regulation being provided today. Any systemic risk overseer should have carefully defined powers and operate under a tight definition of what entities or activities are systemically significant. In the end, while the Big “I” is not in the position to assess whether other financial services industries need more effective day-to-day solvency regulation, insurance regulation, especially for the property-casualty market, should remain the province of the functional regulators—the states.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.



Big “I” Testifies on Capitol Hill

Spencer Houldin, chairman of the Big “I” government affairs committee, represented the Big “I” before the U.S. Senate Banking Committee in a March hearing titled, “Perspectives on Modernizing Insurance Regulation.” The Big “I” was the only agent/broker association to testify at the hearing.

Houldin is an independent agent, president of Ericson Insurance and the Connecticut representative on the IIABA board of directors.

In his testimony, Houldin focused on small businesses, like his, in the independent agency system.

“We must carefully examine the causes of the current crisis, and determine how or if regulatory policy should change to ensure we do not repeat the mistakes of the past,” he said. “It is a daunting task, and as a small businessman who must conduct business in the regulatory environment of the future, I implore policymakers to act judiciously and make sure that when you act, you get it right.”

Houldin emphasized that the insurance market is stable and state regulation is working, although it could use some targeted reforms.

In his remarks, Houldin emphasized that, “IIABA believes that, with the exception of a properly crafted systemic risk overseer at the federal level, targeted modernization is the prudent course of action for reform of insurance regulation. Therefore, any efforts to use this crisis and the failure of AIG as an opportunity to promote misguided measures that would allow a regulated insurance entity to choose its own regulator should be summarily dismissed as unacceptable in today’s financial environment.”

The Big “I” has long asserted that the best method for addressing regulatory deficiencies is by enacting targeted legislation or federal legislative ‘tools’ that establish greater interstate consistency and streamline redundant oversight, not an optional federal charter (OFC), which would result in regulatory arbitrage by allowing companies to pick and choose a regulatory system. The use of targeted and limited federal legislation on an as-needed basis can improve rather than dismantle the current state-based system and in the process produce a more efficient and effective regulatory framework.

-M.T.