Authority to regulate health insurers at the federal level—including the power to roll back rate increases—will be included in President Obama's proposal for a new health care reform bill.
The new proposal attempts to “bridge the gap” between the current House and Senate bills, according to a copy of the proposal obtained by National Underwriter.
Among other provisions, it includes a requirement that everyone have health insurance or pay a penalty, as well as elements of both the House and Senate health care bills restricting the compensation rate for private providers who serve the Medicare Advantage program.
It also would extend prescription drug program coverage. At present Medicare stops paying for prescriptions after the plan and beneficiary have spent $2,830 on prescription drugs, and only starts paying again after out-of-pocket spending hits $4,550. This gap or “doughnut hole” would be removed under the proposal.
It would also implement health insurance exchanges but does not indicate whether these would be state, regional or nationally based.
The president’s proposal would also include the Community Living Assistance Services and Supports (CLASS) Act, which would amend the Public Health Service Act to create a national, voluntary disability insurance program.
The summary said the president’s proposal “makes a series of changes to the Senate bill to improve the CLASS Act program’s financial stability and ensure its long-term solvency.”
Concerning the Senate’s so-called “Cadillac tax” on expensive health insurance plans, the president’s proposal changes the effective date from 2013 to 2018 to provide additional transition time for high-cost plans to become more efficient.
It also raises the amount of premiums that are exempt from the assessment from $8,500 for singles to $10,200 and from $23,000 for families to $27,500, and indexes these amounts for subsequent years at general inflation plus 1 percent.
The proposal imposes a responsibility on employers to shoulder the cost of health insurance for employees.
Under a complex process, the bill does not impose a mandate on employers to offer or provide health insurance, but does require them to help defray the cost if taxpayers are providing a subsidy. At the same time, small businesses will receive $40 billion in tax credits to support coverage for workers beginning this year.
“Consistent with the Senate bill, small businesses with fewer than 50 workers would be exempt from any employer responsibility policies,” the summary said.
In dealing with health insurer rate increases, the president’s proposal would seek to ensure that, if a rate increase is unreasonable and unjustified, health insurers must lower premiums, provide rebates, or take other actions to make premiums affordable.
“A new Health Insurance Rate Authority will be created to provide needed oversight at the federal level and help states determine how rate review will be enforced and monitor insurance market behavior,” the summary said.
In responding to the proposal, a spokesman for America’s Health Insurance Plans defended the current spate of large increases in health insurance, especially in the individual and smaller markets.
“Premiums are increasing because of soaring medical costs and a weak economy that is causing younger and healthier people to drop their health insurance,” said Robert Zirkelbach, an AHIP spokesman.
He explained, “In every state, health plans must provide data showing that requested premium increases are necessary to meet the expected rise in health care costs.”
He added, “Creating a new duplicative layer of federal premium regulation on top of what states are already doing is unnecessary and will only add regulatory complexity and increase health care costs.”
Currently, only 26 state insurers have the power to set rates.
The summary also said the president’s proposal would seek to strengthen a provision of the Senate bill that includes a “grandfather” policy allowing people who like their current coverage to keep it.
The president’s proposal would add certain important consumer protections to these “grandfathered” plans.
Specifically, the summary said, “Within months of legislation being enacted, it requires plans to cover adult dependents up to age 26, prohibits rescissions, mandates that plans have a stronger appeals process, and requires state insurance authorities to conduct annual rate review, backed up by the oversight of the secretary of the Department of Health and Human Services.”
When the exchanges begin in 2014, the president’s proposal adds new protections that prohibit all annual and lifetime limits, ban pre-existing condition exclusions, and prohibit discrimination in favor of highly compensated individuals.
Beginning in 2018, the president’s proposal requires “grandfathered” plans to cover proven preventive services with no cost sharing.
Regarding Medicare Advantage, the president’s plan creates a set of benchmark payments at different percentages of the current average fee-for-service costs in an area.
“It phases these benchmarks in gradually in order to avoid disruption to beneficiaries, taking into account the relative payments to fee-for-service costs in an area,” the summary said.
It provides bonuses for quality and enrollee satisfaction and adjusts rebates of savings between the benchmark payment and actual plan bid to take into account the transition as well as a plan’s quality rating.
Under the proposal, plans with low quality scores receive lower rebates (i.e., can keep less of any savings they generate).
Finally, the president’s proposal requires a payment adjustment for unjustified coding patterns in Medicare Advantage plans that have raised payments more rapidly than the evidence of their enrollees’ health status and costs suggest is warranted, based on actuarial analysis.
“This is the primary source of additional savings compared to the Senate proposal,” the summary said.
Joel Kopperud, a director of government relations at the Council of Insurance Agents and Brokers, reacted to the president’s proposal by voicing concern rate regulation “in a vacuum.”
He explained, “It is hard to tease out that piece while leaving the rest of the state regulatory oversight authority intact. We don't fear federal oversight; we fear Balkanization of the oversight.”
Monday, February 22, 2010
Thursday, February 18, 2010
Louisiana Insurance Commissioner rejects a rate revision filed by State Farm
Louisiana Insurance Commissioner Jim Donelon has rejected a rate revision filed by State Farm that would have raised homeowners insurance rates by a statewide average of 19.1 percent.
After reviewing the request, filed in December 2009, the Louisiana Department of Insurance determined the increases, which would provide the company with an estimated $67,625,043 in additional premiums, were unreasonable and that in its filing, State Farm relied on an excessive loss trend, as well as an unreasonable hurricane risk provision.
Regulators noted State Farm relied heavily on the latest version of the EQECAT hurricane model in justifying its revision. The EQECAT model’s projected hurricane loss provisions are 150 percent higher than projected hurricane loss provisions in two other industry hurricane models used by State Farm in this filing, without adequate supporting evidence, the department said.
“In this case, State Farm Fire and Casualty falls short of proving the need for an increase of this magnitude,” Donelon said in a statement.
With a market share of 27 percent, State Farm is the largest homeowners policy provider in the state. The company received an average 8.3 percent increase last year in Louisiana after asking for 13.7 percent.
Meanwhile, in Florida, where State Farm also dominates the property insurance market, policyholders are seeing increased premiums – but not as a result of the 14.8percent rate increase the state Office of Insurance Regulation (OIR) approved in December, part of an agreement to keep the insurer in Florida.
Many customers have lost marketing discounts that could cause premiums to rise in addition to the pending 14.8 percent rate increase. The subsidiary of State Farm Mutual Insurance Co. announced last July that it would discontinued the discounts in an effort to bolster the company’s solvency.
“The notice to the customer is the renewal notice,” said State Farm Florida spokesman Justin Glover. “That way they have time to look at the renewal notice before the bill is due.”
Multi-line and claims-free discounts, among others, will no longer be offered for customers who also insure their autos through the firm. Because of the change, policies renewed beginning in December increased by a statewide average of 28 percent.
OIR spokesman Jack McDermott acknowledged that State Farm notified state officials of the plan to discontinue the market discounts, and that the state does not regulate such discounts.
”There’s no requirement they tell you exactly what discounts are discontinued,” he said. ”They just need to notify the office if there is a premium effect.”
Both Glover and McDermott recommended that State Farm Florida customers contact their insurance agents to confirm their policy information.
On February 1, State Farm began sending out letters of nonrenewal to thousands of homeowners.
The 125,000 dropped policies are part of the settlement reached with the OIR. The company claimed it needed to dramatically reduce its hurricane exposure in the state to remain solvent.
The notifications, to be sent out on a rotating basis, give policyholders at least six months to find another insurer.
Most of the policies will be dropped on the west coast of Florida rather than in South Florida, as State Farm no longer insures many homes in the area.
At least 13 companies, including American Integrity, Florida Peninsula, Security First and United Property & Casualty, have been approved by State Farm to work with its agents to provide new coverage for the policies being dropped.
After reviewing the request, filed in December 2009, the Louisiana Department of Insurance determined the increases, which would provide the company with an estimated $67,625,043 in additional premiums, were unreasonable and that in its filing, State Farm relied on an excessive loss trend, as well as an unreasonable hurricane risk provision.
Regulators noted State Farm relied heavily on the latest version of the EQECAT hurricane model in justifying its revision. The EQECAT model’s projected hurricane loss provisions are 150 percent higher than projected hurricane loss provisions in two other industry hurricane models used by State Farm in this filing, without adequate supporting evidence, the department said.
“In this case, State Farm Fire and Casualty falls short of proving the need for an increase of this magnitude,” Donelon said in a statement.
With a market share of 27 percent, State Farm is the largest homeowners policy provider in the state. The company received an average 8.3 percent increase last year in Louisiana after asking for 13.7 percent.
Meanwhile, in Florida, where State Farm also dominates the property insurance market, policyholders are seeing increased premiums – but not as a result of the 14.8percent rate increase the state Office of Insurance Regulation (OIR) approved in December, part of an agreement to keep the insurer in Florida.
Many customers have lost marketing discounts that could cause premiums to rise in addition to the pending 14.8 percent rate increase. The subsidiary of State Farm Mutual Insurance Co. announced last July that it would discontinued the discounts in an effort to bolster the company’s solvency.
“The notice to the customer is the renewal notice,” said State Farm Florida spokesman Justin Glover. “That way they have time to look at the renewal notice before the bill is due.”
Multi-line and claims-free discounts, among others, will no longer be offered for customers who also insure their autos through the firm. Because of the change, policies renewed beginning in December increased by a statewide average of 28 percent.
OIR spokesman Jack McDermott acknowledged that State Farm notified state officials of the plan to discontinue the market discounts, and that the state does not regulate such discounts.
”There’s no requirement they tell you exactly what discounts are discontinued,” he said. ”They just need to notify the office if there is a premium effect.”
Both Glover and McDermott recommended that State Farm Florida customers contact their insurance agents to confirm their policy information.
On February 1, State Farm began sending out letters of nonrenewal to thousands of homeowners.
The 125,000 dropped policies are part of the settlement reached with the OIR. The company claimed it needed to dramatically reduce its hurricane exposure in the state to remain solvent.
The notifications, to be sent out on a rotating basis, give policyholders at least six months to find another insurer.
Most of the policies will be dropped on the west coast of Florida rather than in South Florida, as State Farm no longer insures many homes in the area.
At least 13 companies, including American Integrity, Florida Peninsula, Security First and United Property & Casualty, have been approved by State Farm to work with its agents to provide new coverage for the policies being dropped.
Wednesday, February 3, 2010
House to Vote on Repeal of Health Insurers' Antitrust Exemption
The U.S. House of Representatives will vote next week on repealing the antitrust exemption for health insurers, but Democrats remained uncertain Tuesday on how to proceed on a broader healthcare overhaul.
Senate Democratic leader Harry Reid and House Speaker Nancy Pelosi during a Tuesday meeting reached no decisions on the sweeping healthcare legislation that has been in limbo since Democrats lost their crucial 60th Senate vote in a Republican election upset in Massachusetts last month.
"We have a number of options,'' Reid told reporters after the meeting with Pelosi. "We are going to proceed. We just don't know at this time how we are going to proceed.''
Democratic leaders are searching for a strategy to merge the two versions of the healthcare bill passed last year by the House of Representatives and Senate and pass it again before sending it to President Barack Obama for his signature.
The repeal of the antitrust exemption for health insurance companies was included in the House-passed healthcare overhaul bill but not in the Senate's version. The repeal has been a top priority for some House Democrats.
Health insurers for about 65 years have been exempt from federal antitrust laws, which are designed to protect consumers from price fixing and other anti-competitive acts. The insurance industry has said the exemption is warranted because health insurers are regulated by states.
But a number of lawmakers and consumer groups support repeal of the exemption. They argue that states often lack the resources to regulate the insurance industry effectively.
"Eliminating this industry giveaway will create more choice for consumers and create more competition for insurance companies,'' said Representative Louise Slaughter, chairwoman of the House Rules Committee and one of the authors of the repeal language included in the broader House bill.
"Getting this done is critical to getting real meaningful health insurance reform that will benefit all Americans by lowering costs,'' she said.
'HAPPY TO TAKE A LOOK'
If the House passes the antitrust exemption repeal bill, the Senate would have to approve it before sending it to Obama to sign into law. "We'll be happy to take a look at it,'' Reid said.
Pelosi spokesman Nadeam Elshami said the House antitrust vote scheduled for next week did not signal the House would break up the broader healthcare reform measure and try to move it piecemeal through Congress.
That has been one suggested strategy for the healthcare bill. Under another strategy, the House would pass the Senate bill without changes, eliminating the need for another Senate vote, and use a process known as budget reconciliation to make final changes in the two measures.
That process requires only a simple majority of 51 votes in the Senate.
Obama has urged lawmakers to pass the healthcare bill but has shifted his domestic agenda to make job creation and economic recovery his top priority.
"It's not over,'' Obama said of the healthcare debate during a town hall meeting in Nashua, New Hampshire Tuesday. "We just have to make sure that we move methodically and that the American people understand exactly what's in the bill.''
Reid said reconciliation remained an option for passing the bill, but refused to say if a strategy would be agreed upon before Congress leaves town for a one-week break at the end of next week.
"As I've learned, especially on healthcare -- no arbitrary deadlines. It just doesn't work,'' Reid said.
Senate Democratic leader Harry Reid and House Speaker Nancy Pelosi during a Tuesday meeting reached no decisions on the sweeping healthcare legislation that has been in limbo since Democrats lost their crucial 60th Senate vote in a Republican election upset in Massachusetts last month.
"We have a number of options,'' Reid told reporters after the meeting with Pelosi. "We are going to proceed. We just don't know at this time how we are going to proceed.''
Democratic leaders are searching for a strategy to merge the two versions of the healthcare bill passed last year by the House of Representatives and Senate and pass it again before sending it to President Barack Obama for his signature.
The repeal of the antitrust exemption for health insurance companies was included in the House-passed healthcare overhaul bill but not in the Senate's version. The repeal has been a top priority for some House Democrats.
Health insurers for about 65 years have been exempt from federal antitrust laws, which are designed to protect consumers from price fixing and other anti-competitive acts. The insurance industry has said the exemption is warranted because health insurers are regulated by states.
But a number of lawmakers and consumer groups support repeal of the exemption. They argue that states often lack the resources to regulate the insurance industry effectively.
"Eliminating this industry giveaway will create more choice for consumers and create more competition for insurance companies,'' said Representative Louise Slaughter, chairwoman of the House Rules Committee and one of the authors of the repeal language included in the broader House bill.
"Getting this done is critical to getting real meaningful health insurance reform that will benefit all Americans by lowering costs,'' she said.
'HAPPY TO TAKE A LOOK'
If the House passes the antitrust exemption repeal bill, the Senate would have to approve it before sending it to Obama to sign into law. "We'll be happy to take a look at it,'' Reid said.
Pelosi spokesman Nadeam Elshami said the House antitrust vote scheduled for next week did not signal the House would break up the broader healthcare reform measure and try to move it piecemeal through Congress.
That has been one suggested strategy for the healthcare bill. Under another strategy, the House would pass the Senate bill without changes, eliminating the need for another Senate vote, and use a process known as budget reconciliation to make final changes in the two measures.
That process requires only a simple majority of 51 votes in the Senate.
Obama has urged lawmakers to pass the healthcare bill but has shifted his domestic agenda to make job creation and economic recovery his top priority.
"It's not over,'' Obama said of the healthcare debate during a town hall meeting in Nashua, New Hampshire Tuesday. "We just have to make sure that we move methodically and that the American people understand exactly what's in the bill.''
Reid said reconciliation remained an option for passing the bill, but refused to say if a strategy would be agreed upon before Congress leaves town for a one-week break at the end of next week.
"As I've learned, especially on healthcare -- no arbitrary deadlines. It just doesn't work,'' Reid said.
Monday, February 1, 2010
Travelers Sees Record Profits
The Travelers Cos. saw its fourth-quarter profits climb 60 percent, driven largely by investment gains.
The insurer posted record net income for the quarter of $1.285 billion and full year net income of $3.622 billion. It marked the best quarter for profits Travelers has seen since 2002.
“Our retention rates remained high and the impact of renewal rate changes on premiums remained positive across all three of our business segments,” said Jay Fishman, chairman and chief executive officer of Travelers.
Total revenue in the fourth quarter was $6.456 billion, up 11 percent from the year-ago period. The insurer saw a 4-percent decline in net written premiums from the fourth quarter a year ago, which the insurer attributed to reduced insured exposures due to lower levels of economic activity.
Travelers fourth-quarter combined ratio was 83.4, down from 85.9 in the fourth quarter of 2008. For the year, Travelers combined ratio was 89.2, down from 91.9 in 2008.
Travelers Business Insurance segment had a combined ratio of 78.8, down from 85.7 in the prior-year period. “Business Insurance achieved strong underwriting results in the quarter as evidenced by its combined ratio. Although the impact on net written premiums from the economic downturn remained evident during the quarter, we once again produced positive renewal rate changes, strong retentions and stable new business levels,” said Brian MacLean, president and chief operating officer.
Travelers Personal Insurance segment had a combined ratio of 90.4 in the fourth quarter, up from 85.6 in the prior-year period. Personal Insurance net written premiums for the fourth quarter increased 3 percent to $1.735 billion. The company attributed the increase to continued positive renewal premium changes and strong retention rates. “Although we experienced a seasonality impact within our automobile business, we are pleased with our rate levels and new business quality,” MacLean said.
The insurer posted record net income for the quarter of $1.285 billion and full year net income of $3.622 billion. It marked the best quarter for profits Travelers has seen since 2002.
“Our retention rates remained high and the impact of renewal rate changes on premiums remained positive across all three of our business segments,” said Jay Fishman, chairman and chief executive officer of Travelers.
Total revenue in the fourth quarter was $6.456 billion, up 11 percent from the year-ago period. The insurer saw a 4-percent decline in net written premiums from the fourth quarter a year ago, which the insurer attributed to reduced insured exposures due to lower levels of economic activity.
Travelers fourth-quarter combined ratio was 83.4, down from 85.9 in the fourth quarter of 2008. For the year, Travelers combined ratio was 89.2, down from 91.9 in 2008.
Travelers Business Insurance segment had a combined ratio of 78.8, down from 85.7 in the prior-year period. “Business Insurance achieved strong underwriting results in the quarter as evidenced by its combined ratio. Although the impact on net written premiums from the economic downturn remained evident during the quarter, we once again produced positive renewal rate changes, strong retentions and stable new business levels,” said Brian MacLean, president and chief operating officer.
Travelers Personal Insurance segment had a combined ratio of 90.4 in the fourth quarter, up from 85.6 in the prior-year period. Personal Insurance net written premiums for the fourth quarter increased 3 percent to $1.735 billion. The company attributed the increase to continued positive renewal premium changes and strong retention rates. “Although we experienced a seasonality impact within our automobile business, we are pleased with our rate levels and new business quality,” MacLean said.
Friday, January 29, 2010
Louisiana Comp Costs Per Claim 35% Higher than Most States
The costs per all paid workers’ compensation insurance claims in Louisiana averaged 35 percent higher than the typical study state, according to a Massachusetts-based research group that studies workers’ comp.
In its “CompScopeBenchmarks for Louisiana, 10th Edition,” the Workers Compensation Research Institute (WCRI) found that injured workers in Louisiana were off the job longer than in other states with similar workers’ compensation benefit systems, resulting in higher-than-typical indemnity benefits per claim than in other study states, even though the workers’ weekly benefits were capped at lower levels in Louisiana.
In addition, medical costs and expenses per claim were among the highest of the 15 states in the study.
The study found that indemnity benefits per claim with more than seven days of lost time were 36 percent higher than the typical study state as a result of a longer duration of temporary disability.
WCRI reported that injured workers in Louisiana were off work 34 weeks on average, which was nine to 10 weeks longer than Massachusetts and Pennsylvania and 15 weeks longer than Michigan.
Medical costs per claim were 20 percent higher than in the typical study state, the result of higher utilization and higher nonsurgical prices paid. In addition, the duration of medical treatment was 6.5 weeks (16 percent) longer than in the median study state.
Despite little change in the medical fee schedule rates since 1994, the 2006 medical fee schedule in Louisiana was higher than the median of 42 states with fee schedules for all service groups except surgery.
Payments per claim for hospital outpatient services also were higher than the median study state, WCRI said. Hospital inpatient payments per claim, however, were lower compared to other study states.
Expenses to manage claims were among the highest of the study states, including higher than average medical cost containment expenses per claim, defense attorney payments, and medical-legal expenses per claim.
WCRI reported defense attorney payments per claim with more than seven days of lost time were the highest among the 15 study states, at an average of nearly $6,500 per claim with defense attorney payments greater than $500.
In its “CompScopeBenchmarks for Louisiana, 10th Edition,” the Workers Compensation Research Institute (WCRI) found that injured workers in Louisiana were off the job longer than in other states with similar workers’ compensation benefit systems, resulting in higher-than-typical indemnity benefits per claim than in other study states, even though the workers’ weekly benefits were capped at lower levels in Louisiana.
In addition, medical costs and expenses per claim were among the highest of the 15 states in the study.
The study found that indemnity benefits per claim with more than seven days of lost time were 36 percent higher than the typical study state as a result of a longer duration of temporary disability.
WCRI reported that injured workers in Louisiana were off work 34 weeks on average, which was nine to 10 weeks longer than Massachusetts and Pennsylvania and 15 weeks longer than Michigan.
Medical costs per claim were 20 percent higher than in the typical study state, the result of higher utilization and higher nonsurgical prices paid. In addition, the duration of medical treatment was 6.5 weeks (16 percent) longer than in the median study state.
Despite little change in the medical fee schedule rates since 1994, the 2006 medical fee schedule in Louisiana was higher than the median of 42 states with fee schedules for all service groups except surgery.
Payments per claim for hospital outpatient services also were higher than the median study state, WCRI said. Hospital inpatient payments per claim, however, were lower compared to other study states.
Expenses to manage claims were among the highest of the study states, including higher than average medical cost containment expenses per claim, defense attorney payments, and medical-legal expenses per claim.
WCRI reported defense attorney payments per claim with more than seven days of lost time were the highest among the 15 study states, at an average of nearly $6,500 per claim with defense attorney payments greater than $500.
Thursday, January 28, 2010
AIG Without Help Would Have Killed U.S. Economy, Say Paulson, Geithner
Former Treasury Secretary Henry Paulson and current Secretary Timothy Geither both told a skeptical congressional committee today that if U.S. action was not taken to bail out American International Group it would have been a catastrophe for the nation.
Their comments came at a hearing before the House Oversight and Government Reform Committee, which has questioned all elements of federal bank and U.S. Treasury actions to supply billions of dollars to bail out the insurance conglomerate and pay its bank trading partners in full for claims against depreciated assets.
Mr. Geithner was scrutinized about his role as Federal Reserve Bank of New York president before he became secretary and the FRBNY's steps to squash disclosure of how much the banks were getting.
Two lawmakers on the committee doubting his denials in that effort asked for his resignation.
Mr. Geithner said that Federal Reserve Board acted to bail out American International Group because it was “the only fire station in town.”
Republicans on the panel, in a report, have said the FRBNY), which Mr. Geithner headed in 2008, pushed through the bailout by the Federal Reserve that provided a bonanza to banks that were AIG trading partners. They attacked the decision to pay off AIG’s bank counterparties to complex and highly speculative collateralized debt obligations in full and not to press them to take “a haircut” and accept only a percentage of what was owed.
At the conclusion of the testimony from Mr. Geithner, who denied he was part of the FRBNY demands that AIG withold information about the 100 percent payout to bank counterparties Rep. Darrell Issa, R-Calif., the committee’s ranking Republican member, said he “no confidence” in the secretary and called for his resignation. He told him “you are either incompetent” or tried to cover up the details of what was going on through payoffs of the CDS [credit default swaps].”
Rep. John Mica, R-Fla., said Mr. Geithner had given "lame excuses" and asked, "Why shouldn't we ask for your resignation." Mr. Geithner said that was his right, but, he still takes pride in decisions made by federal banking officials.
Committee Chairman Edolphus Towns, D-NY, while complianing in opening remarks that, "In the case of AIG nobody got a haircut. Instead, everybody got a piggy bank full of taxpayers money, said after questioning Geithner, “I don’t know what else you could have done.”
Mr. Geithner testified it was “important to remember that the Federal Reserve, under the law, had no role in supervising or regulating AIG, investment banks,.." but Congress gave the Federal Reserve authority to provide liquidity to the financial system in times of severe stress, he added.“Given that responsibility, the Federal Reserve had to act,” he said, because the Federal Reserve was “the only fire station in town.”
The AIG bank trading partners had hedged their investment in collateralized debt obligations backed by U.S. residential mortgages through purchase of insurance through credit default swaps issued by AIG.
Mr. Geithner said that “imprudent risk-taking in better times” at AIG “meant that, when the financial cycle turned, AIG had hundreds of billions of dollars in commitments without the capital and liquid assets to back them up.”
He said such “excessive risk-taking should not have been allowed. But it was.”
He added, “Despite regulators in 20 different states being responsible for the primary regulation and supervision of AIG’s U.S. insurance subsidiaries, despite AIG’s foreign insurance activities being regulated by more than 130 foreign governments, and despite AIG’s holding company being subject to supervision by the Office of Thrift Supervision (OTS), no one was adequately aware of what was really going on at AIG.”
He defended the decisions of the FRBNY, the Board of Governors of the Federal Reserve and the U.S. Treasury by saying that the steps the government took to rescue AIG “were motivated solely by what we believed to be in the best interests of the American people.”
“We did not act because AIG asked for assistance,” he said. “We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks.
“We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Mr. Paulson called AIG “an unregulated holding company” and a “mismanaged and misguided enterprise.”
The former treasury secretary said, “Although the road to complete recovery is slow and unemployment is still high, had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25 percent level reached in the Great Depression.”
The committee as part of its inquiry is probing whether the FRBNY acted inappropriately in limiting disclosures that as part of the bailout arrangements AIG would be paying off the banks in full.
“The rescue of AIG was necessary, and I believe that we in government who acted to rescue it—including [Treasury] Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and me—acted properly and in the best interests of our country,” he said.
Mr. Paulson said AIG needed rescue because it was “incredibly large and interconnected,” it was “seriously underregulated,” and because “it could not have been effectively wound down.”
Specifically, he said it had a $1 trillion dollar balance sheet; a massive derivatives business that connected it to hundreds of financial institutions, businesses and governments; tens of millions of life insurance customers; and tens of billions of dollars of contracts guaranteeing the retirement savings of individuals.
“If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens,” Mr. Paulson said.
The second reason was that it was not effectively regulated. “Although many of AIG’s subsidiaries—including its insurance companies—were subject to varying levels of regulation, the parent entity was, for all practical purposes, an unregulated holding company.”
Consequently, there was no one regulator with a complete picture of AIG or a comprehensive understanding of how it was run. “It was not until AIG started to fail that regulators began to understand how badly managed it had been and how much the toxic aspects of parts of its business had infected otherwise healthy parts,” Mr. Paulson said.
Third, AIG could not be effectively “wound down,” he said. “Unlike failed depository institutions which can be taken over by the FDIC with little or no harm to depositors, or the GSEs [government sponsored enterprises] which were seamlessly placed into conservatorship by Treasury and the Federal Housing Finance Agency, there was—and is—no resolution authority available to wind down a failing institution like AIG.
“The only option is bankruptcy, a process that is simply not capable of protecting the millions of Americans whose finances are intertwined with AIG’s,” he said.
Mr. Paulson commented, “I do not mean to say that I am happy that we needed to intervene,” noting that taxpayer money should not have to be spent to save a “mismanaged and misguided enterprise.”
But, he added, “the fundamental problem lies not in how we intervened, but in why we needed to intervene.”
He said the U.S. needs to modernize its regulatory structure by creating a systemic risk regulator and resolution authority so any large firm that fails can be liquidated without de-stabilizing the system.
“Large financial enterprises in this country will always play a role that is essential to our economic growth, but they must only be permitted to grow and interconnect throughout our economy under careful oversight and with a mechanism for allowing those connections to be broken safely,” he added.
Meanwhile, Federal Reserve Board Chairman Ben Bernanke said stabilizing AIG, not the financial health of the trading partners, was the reason the Fed decided to pay off the AIG credit default swaps at par.
His statement came in a written response to Rep. Issal, who oversaw the minority report suggesting AIG bank counterparties were paid too much and the FRBNY and Federal Reserve attempted a cover up of bailout details.
Mr. Bernanke said, “The overriding motivating factor in structuring the payments to the counterparties was to relieve AIG of the destabilizing drains on its liquidity caused by the requirement to continue to post collateral as required by the CDS [credit default swaps] contracts.
“All counterparties were treated the same for payment purposes. Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them.”
Mr. Geithner In response to a question, said the Fed had no legal or other authority to take any other action than it did in paying off the CDS. He said there was no way to put AIG in bankruptcy.
“To stand back and let it burn,” he said would be irresponsible and the Fed acted to protect the innocent through the bailouts and made an effort to reduce the cost to the American taxpayer to the lowest amount possible,.
He noted that the protections in place against bank bankruptcy do not exist for insurance companies.
Their comments came at a hearing before the House Oversight and Government Reform Committee, which has questioned all elements of federal bank and U.S. Treasury actions to supply billions of dollars to bail out the insurance conglomerate and pay its bank trading partners in full for claims against depreciated assets.
Mr. Geithner was scrutinized about his role as Federal Reserve Bank of New York president before he became secretary and the FRBNY's steps to squash disclosure of how much the banks were getting.
Two lawmakers on the committee doubting his denials in that effort asked for his resignation.
Mr. Geithner said that Federal Reserve Board acted to bail out American International Group because it was “the only fire station in town.”
Republicans on the panel, in a report, have said the FRBNY), which Mr. Geithner headed in 2008, pushed through the bailout by the Federal Reserve that provided a bonanza to banks that were AIG trading partners. They attacked the decision to pay off AIG’s bank counterparties to complex and highly speculative collateralized debt obligations in full and not to press them to take “a haircut” and accept only a percentage of what was owed.
At the conclusion of the testimony from Mr. Geithner, who denied he was part of the FRBNY demands that AIG withold information about the 100 percent payout to bank counterparties Rep. Darrell Issa, R-Calif., the committee’s ranking Republican member, said he “no confidence” in the secretary and called for his resignation. He told him “you are either incompetent” or tried to cover up the details of what was going on through payoffs of the CDS [credit default swaps].”
Rep. John Mica, R-Fla., said Mr. Geithner had given "lame excuses" and asked, "Why shouldn't we ask for your resignation." Mr. Geithner said that was his right, but, he still takes pride in decisions made by federal banking officials.
Committee Chairman Edolphus Towns, D-NY, while complianing in opening remarks that, "In the case of AIG nobody got a haircut. Instead, everybody got a piggy bank full of taxpayers money, said after questioning Geithner, “I don’t know what else you could have done.”
Mr. Geithner testified it was “important to remember that the Federal Reserve, under the law, had no role in supervising or regulating AIG, investment banks,.." but Congress gave the Federal Reserve authority to provide liquidity to the financial system in times of severe stress, he added.“Given that responsibility, the Federal Reserve had to act,” he said, because the Federal Reserve was “the only fire station in town.”
The AIG bank trading partners had hedged their investment in collateralized debt obligations backed by U.S. residential mortgages through purchase of insurance through credit default swaps issued by AIG.
Mr. Geithner said that “imprudent risk-taking in better times” at AIG “meant that, when the financial cycle turned, AIG had hundreds of billions of dollars in commitments without the capital and liquid assets to back them up.”
He said such “excessive risk-taking should not have been allowed. But it was.”
He added, “Despite regulators in 20 different states being responsible for the primary regulation and supervision of AIG’s U.S. insurance subsidiaries, despite AIG’s foreign insurance activities being regulated by more than 130 foreign governments, and despite AIG’s holding company being subject to supervision by the Office of Thrift Supervision (OTS), no one was adequately aware of what was really going on at AIG.”
He defended the decisions of the FRBNY, the Board of Governors of the Federal Reserve and the U.S. Treasury by saying that the steps the government took to rescue AIG “were motivated solely by what we believed to be in the best interests of the American people.”
“We did not act because AIG asked for assistance,” he said. “We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks.
“We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Mr. Paulson called AIG “an unregulated holding company” and a “mismanaged and misguided enterprise.”
The former treasury secretary said, “Although the road to complete recovery is slow and unemployment is still high, had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25 percent level reached in the Great Depression.”
The committee as part of its inquiry is probing whether the FRBNY acted inappropriately in limiting disclosures that as part of the bailout arrangements AIG would be paying off the banks in full.
“The rescue of AIG was necessary, and I believe that we in government who acted to rescue it—including [Treasury] Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and me—acted properly and in the best interests of our country,” he said.
Mr. Paulson said AIG needed rescue because it was “incredibly large and interconnected,” it was “seriously underregulated,” and because “it could not have been effectively wound down.”
Specifically, he said it had a $1 trillion dollar balance sheet; a massive derivatives business that connected it to hundreds of financial institutions, businesses and governments; tens of millions of life insurance customers; and tens of billions of dollars of contracts guaranteeing the retirement savings of individuals.
“If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens,” Mr. Paulson said.
The second reason was that it was not effectively regulated. “Although many of AIG’s subsidiaries—including its insurance companies—were subject to varying levels of regulation, the parent entity was, for all practical purposes, an unregulated holding company.”
Consequently, there was no one regulator with a complete picture of AIG or a comprehensive understanding of how it was run. “It was not until AIG started to fail that regulators began to understand how badly managed it had been and how much the toxic aspects of parts of its business had infected otherwise healthy parts,” Mr. Paulson said.
Third, AIG could not be effectively “wound down,” he said. “Unlike failed depository institutions which can be taken over by the FDIC with little or no harm to depositors, or the GSEs [government sponsored enterprises] which were seamlessly placed into conservatorship by Treasury and the Federal Housing Finance Agency, there was—and is—no resolution authority available to wind down a failing institution like AIG.
“The only option is bankruptcy, a process that is simply not capable of protecting the millions of Americans whose finances are intertwined with AIG’s,” he said.
Mr. Paulson commented, “I do not mean to say that I am happy that we needed to intervene,” noting that taxpayer money should not have to be spent to save a “mismanaged and misguided enterprise.”
But, he added, “the fundamental problem lies not in how we intervened, but in why we needed to intervene.”
He said the U.S. needs to modernize its regulatory structure by creating a systemic risk regulator and resolution authority so any large firm that fails can be liquidated without de-stabilizing the system.
“Large financial enterprises in this country will always play a role that is essential to our economic growth, but they must only be permitted to grow and interconnect throughout our economy under careful oversight and with a mechanism for allowing those connections to be broken safely,” he added.
Meanwhile, Federal Reserve Board Chairman Ben Bernanke said stabilizing AIG, not the financial health of the trading partners, was the reason the Fed decided to pay off the AIG credit default swaps at par.
His statement came in a written response to Rep. Issal, who oversaw the minority report suggesting AIG bank counterparties were paid too much and the FRBNY and Federal Reserve attempted a cover up of bailout details.
Mr. Bernanke said, “The overriding motivating factor in structuring the payments to the counterparties was to relieve AIG of the destabilizing drains on its liquidity caused by the requirement to continue to post collateral as required by the CDS [credit default swaps] contracts.
“All counterparties were treated the same for payment purposes. Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them.”
Mr. Geithner In response to a question, said the Fed had no legal or other authority to take any other action than it did in paying off the CDS. He said there was no way to put AIG in bankruptcy.
“To stand back and let it burn,” he said would be irresponsible and the Fed acted to protect the innocent through the bailouts and made an effort to reduce the cost to the American taxpayer to the lowest amount possible,.
He noted that the protections in place against bank bankruptcy do not exist for insurance companies.
Wednesday, January 27, 2010
Lloyd's Ordered to Pay Alleged Swindler Stanford's Defense Costs
A U.S. federal judge ordered insurer Lloyd's of London Tuesday to pay for alleged swindler Allen Stanford's defense.
Stanford and three other defendants sued the insurer after Lloyd's stopped providing coverage last year under a directors and officers policy, citing a money laundering exclusion.
"Without access to the funds for which plaintiffs duly contracted, through the Stanford entities, and upon which they relied, the court finds plaintiffs will be unable to mount the defense required in such complex cases as the criminal action and the SEC action,'' U.S. District Judge David Hittner said in a 42-page order.
Lloyd's must pay all costs and expenses that have been submitted within 10 days, the order said.
Stanford, his former chief investment officer Laura Holt and former accounting executives Gilbert Lopez and Mark Kuhrt and an Antiguan regulator face criminal and civil charges for for defrauding investors in a $7 billion Ponzi scheme involving certificates of deposit.
Stanford, 59, is in jail awaiting a January 2011 trial. Stanford, Holt, Kuhrt and Lopez have denied any wrongdoing.
The Lloyd's case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District of Court, Southern District of Texas, No. 09-03712.
Stanford and three other defendants sued the insurer after Lloyd's stopped providing coverage last year under a directors and officers policy, citing a money laundering exclusion.
"Without access to the funds for which plaintiffs duly contracted, through the Stanford entities, and upon which they relied, the court finds plaintiffs will be unable to mount the defense required in such complex cases as the criminal action and the SEC action,'' U.S. District Judge David Hittner said in a 42-page order.
Lloyd's must pay all costs and expenses that have been submitted within 10 days, the order said.
Stanford, his former chief investment officer Laura Holt and former accounting executives Gilbert Lopez and Mark Kuhrt and an Antiguan regulator face criminal and civil charges for for defrauding investors in a $7 billion Ponzi scheme involving certificates of deposit.
Stanford, 59, is in jail awaiting a January 2011 trial. Stanford, Holt, Kuhrt and Lopez have denied any wrongdoing.
The Lloyd's case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District of Court, Southern District of Texas, No. 09-03712.
Subscribe to:
Posts (Atom)