Last Tuesday, Senate Banking Committee Chairman Chris Dodd unveiled a sweeping financial services regulatory reform bill that would restructure how virtually every financial institution in the country is regulated.

We appreciate the hard work that Sen. Dodd has done on this legislation. He has shown during the past year that he understands there are thousands of companies operating on Main St., like NAMIC members, who did not contribute to causing the financial crisis and should be made to suffer in the name of fixing it. However, we have some concerns with how the bill would determine what companies are “systemically significant” and how it would address insurance specifically.

The National Association of Mutual Insurance Companies (NAMIC) is the largest trade association representing property/casualty insurance companies. We have many members of various sizes operating across the country that would never be considered “systemically significant.” Because of our conservative and liquid investment portfolios, low leverage ratios, strong solvency regulation, and a highly competitive and diverse marketplace, the property/casualty insurance industry does not pose a systemic risk.

Virtually every examination of what happened last year has found that property/casualty insurance played no significant role in the crisis and that property/casualty insurers inherently pose no systemic risk to the economy. This is because insurance companies don’t operate in the same way that other financial services companies do. As an example insurers are required by state regulators to maintain higher levels of capital. Even at AIG, the insurance operations remained on solid financial ground. The problem was in their financial products unit that dealt in credit default swaps and other derivatives with seemingly no regard to their own exposure.

The states have also already tackled another issue for property/casualty insurers in the Dodd bill, that of resolution authority. Through state guaranty funds and other mechanisms, insurers already pay an assessment to ensure that policyholders are protected in the event of a rare insolvency. It’s worth noting that there have been few, if any, insurance company insolvencies during the past year, while over 130 banks have gone under. A federal assessment against insurers would be duplicative at best, and more likely would be asking an insurance company and its policyholders to pay for a bank failure. 

Sen. Dodd’s bill would also establish a new federal Office of National Insurance. NAMIC is a strong supporter of a reformed state-based insurance regulatory system, but we have indicated that a properly constructed, non-regulatory federal insurance office could help streamline and create more uniformity in that system. The Dodd bill removed some of the more onerous provisions proposed by Obama administration earlier this year; reducing the subpoena authority granted to the office to conduct duplicative data calls that lacked adequate privacy protections for the data collected and limiting its ability to preempt state insurance regulations.
 
There are some other good things for insurers in Sen. Dodd’s reform bill. It clarifies how non-admitted or “surplus lines” risks are regulated, establishing a surplus lines insurer as the primary regulator for a multi-state risk that will streamline the market and benefit insurers, consumers and the overall economy.

At NAMIC, we understand that the economic crisis of the past year was the result of complex problems that will require complex solutions. We hope to work with Sen. Dodd, Ranking Member Shelby and the rest of the committee to ensure that this legislation will address the regulatory failings that contributed to the financial crisis.

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