US reform proposals put forward by Senator Chris Dodd on Tuesday called for far-reaching government powers to regulate the financial services industry, in the widest-ranging reforms since the financial crisis began. The industry is hitting back, citing gross concerns over the funding of a resolution fund included in the bill.
Leaders from 10 insurance groups today sent a letter to Dodd, who is the chairman of the US Senate Committee on Banking, Housing and Urban Affairs, and Richard Shelby, a ranking member of the committee. In the letter, the insurers said they opposed the "misdirected regulation that would shift the cost of failures of financial institutions outside of our sectors to our customers."
The letter, signed by executives from Ace, Allstate, Chubb, CNA, Liberty Mutual, Nationwide, State Farm, Travelers, WR Berkley and Zurich, said: "In particular, we have grave concerns over a provision of the draft bill that goes beyond the initial $50bn pre-event resolution fund that includes property/casaulty insurers of a certain asset size on a post-event basis to fund the resolution of failing systemically risky institutions. This approach is fundamentally at odds with the overall purposes of the regulation."
The issue in insurers' minds is they think the bill is unfair to the industry because it will means some companies will get charged twice.
As well as keeping many of the bank-focused supervisions as first proposed by Dodd back in November, the bill would allow a council of regulators to supervise non-bank financial firms that are deemed systematically risky. The federal government would have the power to oversee the bank holding companies, insurance holding companies and insurance companies associated with conglomerates with assets of $50bn or more.
A fund would also be created that regulators would be able to access in order to fund wind-down operations or prevent bankruptcy. However, this part of the legislation forces property/casualty insurers to pay into the prefunded resolution mechanism.
Insurers that are, or part of, companies that have assets of $50bn or more will be assessed based on the needs of the new systemic dissolution fund and will be subject to a new tax on large companies.
The insurers' letter said that because insurers are already assessed through state guarantee funds the bill "arbitrarily elevates company size and dilutes the bill's stated purpose of infusing greater caution in the behaviour of those firms that present the greater risk of another crisis."
Industry trade groups have strongly objected to this as they see it as duplicative to the state guarantee system already in place in the US.
“Any time there is failure in the banking industry or in any financial services industry you would be assessed,” Ben McKay, senior vice-president of federal government relations, told Reactions. “You would get a bill from the Federal Deposit Insurance Corporation (FDIC) saying you owe a pro rata share of that company’s dissolution costs.
“The double impact on insurers is we actually already pay for this. It is a double billing of certain insurers because we have the guarantee system in the US. Now certain insurers are not only going to be on the hook for insurance companies that fail but every other kind of financial company that fails.”
Leigh Ann Pusey, president and CEO of the American Insurance Association, has similar objections. “Insurers are most likely never going to need this resolution mechanism because we have our own,” Pusey told Reactions. “We are going to pay for our own failures as an industry so to tap us as an additional financing mechanism for other industries that are posing systematic risk and engaging in riskier, highly leveraged activities makes absolutely no sense to us. Not to mention it’s not fair. We are paying into a system we are never going to use and we are still on the hook paying for system that we might have to use – the state resolution system.”
Dylon Jones, federal affairs director for the National Association for Mutual Insurance Companies (Namic), is also concerned that the resolution authority will negatively affect some of the largest companies that Namic represents. These companies will get pulled into the resolution authority, whereas in the original draft they were virtually excluded. “While we are not a direct target of where the resolution authority has gone in the new draft, we are definitely included,” Dylon told Reactions.
“We are of the opinion that mutual and reciprocal, policyholder owned companies – where instead of having shareholders our policyholders are our owners – engage in such low risk conservative investment and business schemes that we don’t really pose a systemic risk. Our consumers are our owners so we wouldn’t be engaging in systemic risk,” he adds.
Even though McKay, Pusey and Jones are voicing concerns with the Dodd bill, they do feel like progress has been made on the issue of systemic risk for insurers and the hope is that before Dodd holds a full committee mark-up on the week of March 22 2010, insurers will have been entirely excluded from being labelled systemically risky.
“We are being listened to,” says Jones at Namic. “I just think there are an awful lot of concerns coming from a lot of different places so in many of ways this bill is a Frankenstein’s monster.”
McKay at PCI agrees. “We are being heard. In fact Senator Corker said in our office last Thursday: ‘We know you are not systemically risky, Senator Dodd knows you are not systemically risky, but [the federal government] are not sure how to handle insurance companies that are part of conglomerates and other financial services holding companies,’” says McKay.
“It is particularly difficult because insurance companies in the US are regulated at the state level so there is a fear among the federal government that if there is systematic risk identified, they would have no power to then go regulate the insurance company.”
McKay believes companies should be regulated by activity, as there is a substantial difference between insurers that simply offer homeowners or auto insurance compared with those that delve into credit default swaps or other more risky products.
“The reality is what your corporate charter says has nothing to do with whether you are systemically risky,” says McKay. “It is what you do that makes you systemically risky.”
To ignore this fact would lead to a mismatch between the regulatory structure and the risk characteristic asserts McKay.