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.