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Treasury's OFR to Cast Wide Net for Data Pool from Insurers

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Although the first annual report of Treasury’s Office of Financial Research (OFR) doesn’t mention the traditional insurance industry all that much, what it does say packs a punch for the insurance regulatory system, where a lack of complete data for the central system figures prominently. 

The report concludes that direct measures of the insurance industry are “lacking.”

The OFR, which released its inaugural report Friday, is an office established under 2010’s Dodd-Frank financial regulatory system overhaul law. The growing agency serves as a fortified back bench for the also new, multi-agency Financial Stability Oversight Council (FSOC), a sort of supreme financial services industry data collector, repository and broad research and analysis service for the U.S. government. 

The insurance industry is “an important locus of contingent exposure,” the report stated, in discussing gaps in data and the need to gather even more, perhaps from the insurance industry itself, if not the National Association of Insurance Commissioners.

“These gaps underscore once again the need for a more comprehensive picture of the financial system. The failure of supervisors to foresee the 2007–2009 crisis, despite an elaborate combination of aggregate analysis, regular examinations, and continuous monitoring at the largest commercial and investment banks, illustrates the need for further investment and research to improve the information sources that they have available to monitor financial stability,” the report concluded.

It is unclear if the agencies or the OFR would actually collect the data, or require  the individual regulators to do so, but it is clear the OFR foresees a big project ahead.

OFR is supposed to work  in concert with financial services regulators and  agencies like the Securities and Exchange Commission (SEC), the various federal and state banking regulators, the commodities regulators and the Federal Office of Insurance (FIO) at Treasury to  help prevent a systemic financial calamity like the last one, caused, in part, by the lack of transparency in the housing bubble transfer of risk that led all the way to  AIG.

If OFR had been around in 2005, the report stated, it might have been able to ask broad questions about how the financial system was conducting its basic tasks—and what the risks and vulnerabilities were.  

More to the point, the report suggests, it could have collected enough data to help step the tide of the domino effect of a systemic risk transfer failure.

“Although some data may have been available to explore these questions, an agency with a macro-prudential perspective may have realized that more data were needed,” the report stated. 

Back in 2008 and earlier, few had done the work to follow the risks to their ultimate bearers, and those risk-bearers were themselves too removed from the information to determine the nature of their own risks. It was not well known that American International Group (AIG), the largest insurance company, had already taken significant exposures to the mortgage market, largely through derivatives and the securities lending market, and that several of the largest commercial banks and investment banks had begun to take similar positions, OFR stated. 

Another concern that could result in roping in insurance industry data into a central repository, is the perceived need by OFR for a central information source in the securities lending market comparable to what is available in the repo markets. Typical lenders for securities are insurance companies along with pension funds and investment companies, and they usually lend to borrowers such as hedge funds.

At present, the OFR stated, supervisors receive very little information about securities lending, and private vendors of information about the market rely on voluntary reporting by market participants.

(According to the OFR, securities lending is similar to repo in that both involve a temporary exchange of securities and cash, with an interest payment when the exchange is reversed. The difference is that repo is mainly a mechanism for collateralized lending and borrowing, while securities lending is driven primarily by demand for holding a security temporarily—for example, for purposes of short selling.)

“Given the prominence of these markets in the financial crisis and their anticipated renewed importance as lending rebounds, the absence of a complete picture presents a significant data gap,” the reported concluded.

The OFR said it plans to work closely with FSOC agencies to develop strategies to close this gap weighing different strategies, of course.

Geithner is due to testify before both chambers of Congress this week (the House on Wednesday and the Senate on Thursday) on FSOC’s annual report to Congress.

Meanwhile, the Federal Insurance Office report on modernizing the insurance industry is six months overdue to Congress. Its delay is chalked up to the Treasury Department’s heavy workload with other agencies, sources say. 

However this lynchpin in U.S. insurance regulation’s direction still needs to come to the fore publicly, some say, to offer some sort of clarification. Members of the Federal Advisory Committee on Insurance (FACI) due to meet Aug. 6 have had nothing to say on their work or lack of work since their inaugural meeting in the spring, with  at least a couple pointing to the report’s absence from the scene.

“It’s disappointing that several FIO report deadlines have come and gone. Secretary Geithner assured me several months ago that the reports were nearly ready, but we’re still waiting. If FIO is to become “the” insurance expert on which Members of Congress can depend, it must meet deadlines, especially those Congress establishes in law,” stated Rep. Judy Biggert, R-Il., in response to a press query last week.

Of course, much of its work is likely happening behind the scenes, or in arenas other than preparation for insurance industry data collection or review.

“…FIO’s number one priority should be to continue to partner with USTR and our state insurance regulators, engage in international forums, and strengthen our competitiveness abroad…we need a strong U.S. voice at the table during important regulatory negotiations – particularly those in Europe,” stated Biggert, who serves as chair of the U.S. House Financial Services Subcommittee on Insurance Housing and Community Opportunity, and who was involved in the insurance provisions of Dodd-Frank.