WASHINGTON BUREAU — Two types of federal regulators should oversee the life insurance industry, the chairman of the American Council of Life Insurers said today.
In testimony before the House Financial Services Committee capital markets subcommittee, Patrick Baird, chief executive of Aegon USA, said life insurers should be regulated both by the same systemic risk regulator that oversees the banking and securities industries, and by a federal functional insurance regulator “made available to all life insurance companies within the industry on a voluntary basis.”
But Baird, who spoke at a subcommittee hearing on systemic risk and insurance, said he agrees with Michael McRaith, Illinois insurance director, that the amount of systemic risk that life insurers pose is limited.
Although the life insurance industry as a whole is systemically important, “we do not believe any individual life insurance company can accurately be characterized as posing systemic risk,” Baird testified.
McRaith, who testified on behalf of the National Association of Insurance Commissioners, Kansas City, Mo., regarding systemic risk, said state insurance regulators do not believe that the “too big to fail” concept applies to insurers.
“While isolated lines of insurance may be susceptible to systemic risk, and while insurers are exposed to market risk as are other investors, the current insurance regulatory system closely supervises and manages any purported insurance sector risk to the economy,” McRaith said.
Life insurers are major participants in the bond and equity markets, and life insurers are affected by problems with mortgage-related products, McRaith said.
“For that reason, the life insurance industry has experienced the effects of systemic risk caused by downturns in the mortgage loan/structured securities and derivatives markets,” he said.
“To be clear, though, the business of life insurance, in and of itself, does not pose systemic risk to the broader economy or the U.S. financial system,” McRaith said.
McRaith also testified that state insurance regulators would support creation of a “council of regulators” that would include federal and state officials and “would build on the existing information and expertise of functional regulators – including state insurance regulators.”
But “vesting broad authority in a single entity creates a consolidation of regulatory power, and increases the potential for regulatory mistakes,” McRaith said.
“Any single authority would duplicate information and expertise that already exists among functional regulators,” McRaith warned.
Optional Federal Charters
Baird called for giving insurers the option of choosing between a traditional state charter and a new type of federal charter.
An optional federal charter approach is “an essential element of sound regulatory reform and comprehensive oversight of systemic risk in the wake of the financial crisis,” Baird said.
“Absent a federal insurance regulatory agency, there will be no federal agency with the necessary expertise on insurance to either advise Congress on relevant policy matters or to implement policy with respect to life insurers,” Baird said.
“Understanding and implementing critical federal policy solely through reliance on hoped-for cooperation on the part of 51 state regulators rather than through an enforceable federal statute is not a model Congress should embrace,” Baird said.