Wednesday, May 5, 2010

Don’t Assess Insurers For Failed Banks, Senate Urged

WASHINGTON—Legislation to fund the unwinding of failing companies that threaten the nation’s financial system should not put assessments on insurers, three trade groups have written the Senate leadership.

The three property and casualty insurance organizations in seeking an exemption cited insurers’ existing participation in the state funds that guaranty support for failed insurers.

Their plea was made in a letter to Sen. Harry Reid, D-Nev., Senate majority leader, and Sen. Mitch McConnell, R-Ky., minority leader.

The American Insurance Association, the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America wrote their letter as floor debate continues on the bill, S. 3217, “the Restoring Financial Stability Act of 2010.”

Assessment provisions are part of the legislation dealing with financial institutions deemed “too big to fail.”

As currently written, the bill creates a Financial Stability Oversight Council of regulators whose role it will be to monitor the financial system for companies that have become so large or interconnected that their failure could threaten the economy.

Under the scheme as currently designed, if such an institution were to be declared insolvent, it would be liquidated by a Resolution Authority run by the Federal Deposit Insurance Corporation.

The Resolution Authority would be prefunded through assessments levied on institutions with assets of $50 billion or more.

Under the current language, the only insurer that would be assessed would be MetLife.

However, if the funds are inadequate, under the provision as currently written, a post-funding assessment would be mandated, and all insurers with assets of more than $50 billion would be required to participate, whether or not they have a federally regulated subsidiary.

It is this provision that p&c insurers seek to amend.

The issue has become more important since it is likely that the prefunding provision will be removed as debate continues on the legislation.

“We ask that you recognize the existing state insurance guaranty system and not subject the property and casualty industry to inequitable, dual resolution authority,” the letter said.

“Making property and casualty insurers pay twice for resolution threatens to increase costs for the 270 million home, auto and business policies that we honor across the nation,” the letter said.

“Instead, these assessments should only apply to non-bank financial companies that are deemed systemically significant and subject to heightened supervision by the Federal Reserve under section 113 of that legislation,” the letter said.

The letter argued, “It simply does not make sense for non-risky property and casualty insurers to be subject to two regimes—a state fund to address their own industry’s insolvencies, and a federal fund to address the insolvencies of unrelated financial services companies.

“It is inequitable to hold insurers responsible for the risky behavior of others,” the letter said.

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