:: State Regulators Set The Record Straight On The AIG Bailout

Some insurance lobbyists hope to politicize and mislead policymakers by suggesting AIG’s problems are a result of State insurance supervision, and could have been averted by Federal oversight. On the contrary, conservative State regulation ensured that while the federally regulated holding company was failing, the insurance businesses were appropriately capitalized and the interests of policyholders were placed ahead of shareholders. If the proposed optional Federal charter (OFC) for insurers had existed, and some or all of AIG’s insurance companies had chosen that Federal charter, the problems at the AIG holding company would still have fallen outside the jurisdiction of that Federal insurance regulator.

Sandy Praeger, Kansas Commissioner of Insurance, President, NAIC, in October 6, 2008 remarks (via letter) before the House Committee on Oversight and Government Reform

The risks associated with market disappointments include the opportunity presented to lobbyists to promote agendas as panaceas that actually creat more harm than good.  The AIG financial debacle has created just such an opportunity for advocates of increasing federal control over insurance regulation.   State regulators attempted to set the record straight in politically-charged hearings before the House Oversight and Government Reform Committee.

The problem, notes Sandy Praeger, NAIC President, did not arise in the AIG insurance companies under state regulatory supervision, but rather in the holding company. Praeger states that:

The OFC proposal would create a new Federal bureaucracy built on a hollow foundation of extreme deregulation. Supporters of the OFC (optional Federal charter) proposal routinely cite their desire to have a system akin to the banking system, which is the very model that has led to the problems taxpayers must now bail out.

New York State Insurance Superintendent Eric Dinallo appeared today before the U.S. House Committee also testified before the Committee and remarked that:

AIG’s problems came from its parent company and from its non-insurance operations, which are not regulated by New York or any other state.

Note: The causes of the AIG crisis are outlined by the NAIC in a concise overview which may be read here.  The push for diminishing state regulation has powerful supporters.  See my notes on the National Insurance Act of 2006.

A recent census of the coalition members supporting a restriction of state control may be read here, where a press release states that:

Members of the OFCC support the creation of a system that would give insurers and producers the option of obtaining a federal charter in lieu of the current state-by-state system of licensing and regulation. Today’s global insurance industry is governed by 56 separate regulatory regimes and is in desperate need of reform.  An optional federal charter would allow insurers, reinsurers, insurance agencies and insurance producers to  conduct business under one set of strong, national rules, which ultimately benefits consumers in ways that exceed the current structural abilities of the state regulatory system.

Recent events have not given cause for much confidence in strong national rules.  The NAIC has it right.