WASHINGTON—Property/casualty insurers remain concerned that financial services regulatory reform could force some insurers to bail out other financial institutions even though insurers already pay for their counterparts' insolvencies through state guaranty funds.

The U.S. Senate last week took up financial services reform legislation after Democratic leaders agreed to strip a provision that would have established a $50 billion resolution fund to cover failing institutions. The fund, which Republicans argued would lead to endless bailouts, would have been paid for though pre-event assessments on financial institutions.

After days of wrangling, Sen. Richard Shelby, R-Ala., played a leading role in getting Banking, Housing and Urban Affairs Committee Chairman Chris Dodd, D-Conn., to drop a proposed $50 billion resolution fund from financial services regulatory reform legislation. That allowed the bill to proceed to the Senate floor, where it is expected to be the subject of numerous amendments.

But large insurers—those with consolidated assets of more than $50 billion—still could be assessed to cover the costs of other types of financial institutions that collapsed, industry observers say. Insurers hold that doing so would be unfair, because they already cover the cost of insurer insolvencies through state guaranty funds.

“Dropping the $50 billion fund on the front end is significant because post-event is better than pre-event, but from an insurance perspective, paying once is better than paying twice,” said Ben McKay, senior vp in the Property Casualty Insurers Assn. of America's Washington office.

“We think that's inequitable,” he said. “Unfortunately, the politics are such that it's hard to explain the guaranty funds in a way that makes politicians comfortable in changing the law so that insurers only pay once.”

“The Senate is going to spend at least the next two weeks looking at this legislation,” said Leigh Ann Pusey, president and CEO of the American Insurance Assn. in Washington. “We haven't seen the details, but our understanding is the $50 billion pre-fund will dropped. That's good news.

“We remain very concerned that insurers with consolidated assets of more than $50 billion would still be included in a post-event assessment,” Ms. Pusey said. “We've opposed that because the bill provides that insurers will be resolved through the existing state-based regulatory system,” she said, adding that “we don't think we should be taxed to pay for” the failure of other types of financial institutions.

“In lieu of an assessment across the whole financial industry, we would support the concept of recouping those dollars from entities that had benefited from the resolution,” she said.

Jimi Grande, senior vp in the National Assn. of Mutual Insurance Cos.' Washington office, said of the proposed $50 billion find: “It wasn't 100% clear whether the fund would impact property/casualty insurers, so we're glad it's gone.”

Regarding possible post-event assessments, “paying into the fund should be limited to those that would require the fund. The property/casualty industry has a long-established record of a working, proven guaranty fund system combined with strict state regulation that has prevented insolvency. When it comes to solvency, we know it works,” Mr. Grande said.

Copyright © 2010 Crain Communications, Inc.