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Obama Unveils White Paper

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WASHINGTON BUREAU — President Obama today presented a package of financial services regulatory reform principles that could pave the way for an expanded federal role in insurance oversight.

The white paper, which deals with many sectors of the financial services industry, including mortgage lending, hedge funds and credit default swaps as well as insurance, suggests strategies for eliminating regulatory gaps and ending incentives for companies and individuals to assume excessive risk.

The changes are necessary because weaknesses in regulation contributed to the current financial crisis, Obama said.

In recent years, “where there were gaps in the rules, regulators lacked the authority to take action,” Obama said. “Where there were overlaps, regulators lacked accountability for their inaction…. An absence of oversight engendered systematic, and systemic, abuse.”

The white paper, Financial Regulatory Reform — A New Foundation: Rebuilding Financial Supervision and Regulation, was released under the aegis of the Treasury Department.

Some of the white paper sections that could affect insurers focus on matters such as systemic risk and regulatory agency realignment.

Outside the area of insurance regulation, for example, administration officials are proposing that the Office of Thrift Supervision be dismantled, and that the government offer just one federal banking charter, to be regulated by a strengthened federal supervisor.

Barney Frank, chairman of the House Financial Services Committee, plans to start a series of hearings on the white paper next week, a representative says. Frank hopes to mark up a bill at the end of July.

Insurance Regulatory Principles

In the main insurance section, the Treasury Department says it supports the following principles for insurance regulation.

1. Effective systemic risk regulation with respect to insurance.

The steps proposed in this report, if enacted, will address systemic risks posed to the financial system by the insurance industry. However, if additional insurance regulation would help to further reduce systemic risk or would increase integration into the new regulatory regime, we will consider those changes.

2. Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies.

Although the current crisis did not stem from widespread problems in the insurance industry, the crisis did make clear the importance of adequate capital standards and a strong capital position for all financial firms. Any insurance regulatory regime should include strong capital standards and appropriate risk management, including the management of liquidity and duration risk.

3. Meaningful and consistent consumer protection for insurance products and practices.

While many states have enacted strong consumer protections in the insurance marketplace, protections vary widely among states. Any new insurance regulatory regime should enhance consumer protections and address any gaps and problems that exist under the current system, including the regulation of producers of insurance. Further, any changes to the insurance regulatory system that would weaken or undermine important consumer protections are unacceptable.

4. Increased national uniformity through either a federal charter or effective action by the states.

Our current insurance regulatory system is highly fragmented, inconsistent, and inefficient. While some steps have been taken to increase uniformity, they have been insufficient. As a result there remain tremendous differences in regulatory adequacy and consumer protection among the states. Increased consistency in the regulatory treatment of insurance – including strong capital standards and consumer protections – should enhance financial stability, increase economic efficiency and result in real improvements for consumers.

5. Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business.

As we saw with respect to AIG, the problems of associated affiliates outside of a consolidated insurance company’s traditional insurance business can grow to threaten the solvency of the underlying insurance company and the economy. Any new regulatory regime must address the current gaps in insurance holding company regulation.

6. International coordination.

Improvements to our system of insurance regulation should satisfy existing international frameworks, enhance the international competitiveness of the American insurance industry, and expand opportunities for the insurance industry to export its services.

Other Paper Sections That Could Affect Insurance

The paper calls for adding an agency within the Treasury Department — the Office of National Insurance — that would advise the Treasury Department on various issues, include international trade and industry solvency and market conduct issues.

The ONI also would recommend which insurance companies represent a systemic risk to the system and should be overseen by the Federal Reserve Board, in addition to state regulators.

In a section on providing the tools the government needs to manage financial crises, the white paper says the Treasury Department would decide whether to “resolve a failing bank” in consultation with the presient, and with the approval of two-thirds of the members of the Federal Reserve and Federal Deposit Insurance Corp. boards.

The department would resolve companies that were predominantly broker-dealers after getting approval from the Federal Reserve Boad and two-thirds of the commissioners at the Securities and Exchange Commission.

“If the failing firm includes an insurance company, the Office of National Insurance within Treasury will provide consultation to the Federal Reserve and FDIC boards on insurance specific matters,” according to the white paper.

Still another section proposes creation of a Consumer Financial Protection Agency to oversee consumer financial products.


Frank Keating, president of the American Council of Life Insurers, Washington, says Treasury’s proposals to enhance oversight of the insurance sector of the nation’s economy “will set us on the right path towards a modern, efficient and consumer-oriented regulatory system.

The ACLI “appreciates Treasury’s commitment to work towards modernization of insurance regulation based on the principles of national uniformity, efficiency, effective oversight of systemic risk and better international cooperation,” Keating says.

“The White Paper identifies a federal charter as one possible way to achieve those objectives. ACLI strongly supports an optional federal charter as the only way to achieve them,” Keating says.

Keating took note of a section that proposes the creation of an Office of National Insurance as a first step towards eventual establishment of a federal functional insurance regulator that would regulate federally chartered insurers.

“A federal functional insurance regulator would regulate federally-chartered insurers comprehensively, with an eye towards the close connection between product-design and solvency,” Keating says.

The Financial Services Roundtable, Washington, which represents large financial institutions, says he principles set forth in the administration proposal represent a strong recognition of the need to modernize insurance regulation.

“The Roundtable applauds the initial legislative proposal of an Office of National Insurance, but believes we must go farther,” the Roundtable says.

“The ideals of consolidated supervision, consistent consumer protection, uniform regulatory treatment, among others, necessitate the enactment of a comprehensive, uniform federal charter,” says Steve Bartlett, president of the Roundtable.

“State regulation has simply failed to keep pace with what, today, is a national and international business,” Barlett says. “Taxpayers and insurance consumers can no longer afford the price of this failure,” he said.

The National Association of Insurance and Financial Advisors, Falls Church, Va., has reacted to a section that calls for harmonizing regulation of broker-dealers and investment advisors, and to hold all broker dealers giving investment advice to a fiduciary standard of care.

“NAIFA is currently working to develop policy on how we will approach the issue,” a NAIFA representative says. “Central to our policy considerations is what is the definition of a fiduciary standard and how will that impact registered representatives who are contractually obligated to offer only a suite of products made available through their broker-dealer? Further, what new consumer protections will be gained by a new standard? As we have learned from recent weeks and months, there have been several instances where individuals who had a fiduciary obligation to their clients have been charged, and in some cases, found guilty of fraud. That begs the question, is it possible to legislate morality? These are some of the questions NAIFA will be asking as this debate moves forward.”

Cathy Weatherford, the president of NAVA Inc., Reston, Va., one of the groups that represents the annuity industry, says NAVA welcomes the president’s interest in high ethical standards and consumer protection. “However, we need to ensure we get effective regulation, not just more regulation,” Weatherford says in a statement. “Unless it’s effective, layering on more and more bureaucracy will do more harm than good.”

Pamela Banks, a senior policy counsel at Consumers Union, Yonkers, N.Y., is praising the white paper in a joint consumer group statement distributed by the Consumer Federation of America, Washington. “The days of allowing financial institutions to shop around for the weakest form of regulation are over,” Banks says in the joint statement.

Therese Vaughan, chief executive of the National Association of Insurance Commissioners, Kansas City, Mo., praises sections of the white paper that would preserve the role of states as regulators of insurance. “State regulation’s solvency system and consumer protections have served consumers well, as evidenced by the relative stability insurance market,” Vaughan says. “The [Obama] proposal appropriately focuses on the problems that need fixing, by addressing systemic risk and other regulatory gaps. We are pleased that a council of regulators with functional expertise is included in the proposal, but urge inclusion of state insurance regulators to offer expertise and information on the insurance markets.”

Allison Bell contributed information to this report.


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