After AIG’s bailout began in September (it had drawn $90 billion from the Federal Reserve by the end of October), the uncertainty in the industry hasn’t stopped. The $700 billion bailout from Congress set the stage for even more taxpayer-funded assistance for the financial industry, and rumor is that more insurance companies want a cut.
But the National Association of Insurance Commissioners (NAIC) pointed out very firmly at the time that the AIG-owned insurance companies subject to state regulations needed no assistance. Those companies were prohibited from indulging in risky investments, and had to have adequate reserves to honor all their obligations. The parent company, on the other hand, was free to invest in credit default swaps, which were its downfall.
NAIC has some ideas about how companies should behave that may affect how the industry does business going forward. Says NAIC president, Sandy Praeger, “This has brought to the forefront the difference between state regulation and federal.” To that end, NAIC is looking at a number of areas.
The group has formed a subcommittee to examine credit default swaps with an eye toward regulating the swaps–less than 20%, perhaps as little as 10%–that carry some element of risk transfer. These, says Praeger, could be pulled in by NAIC and “regulated as insurance, and we’re going to explore that in a coordinated fashion.” New York and Illinois have already begun reviewing that possibility, and whether it may require amendment of current laws or can be done simply through the definition of risk transfer, that is one option NAIC is considering. However, the majority of swaps, says Praeger, are “[t]he naked ones, the ones betting on whether a company will default; it’s just a bet that’s out there in thin air.”