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Under the Dome by Joel Wood Phantasmagorical

The path of least resistance for Congress may prove hazardous for insurance companies: federal regulation without preemption of duplicative or conflicting state laws.

By  Joel Wood

I knew it would be a long week when the Monday morning news reported that Sen. Charles Grassley, R-Iowa, implied AIG executives should do the “honorable” thing and consider suicide. We were still two days off from the appearance of AIG CEO Ed Liddy before the House Financial Services Committee. Members of that committee had to figure out how to channel their outrage into a genuflection that would similarly make the nightly news—a challenge, no doubt, when the notion of disembowelment had already occurred.

But they rose to the occasion, particularly several junior members. One huffed that AIG stands for “Arrogance, Incompetence and Greed.” Another lectured Liddy, saying, “Offense is intended.” Another, hours after Chairman Barney Frank, D-Mass., had exhausted the question of releasing the names of individual executives, virtually screamed the same demand over and over again.

At least I was able to view the five-hour hearing from the comfort of my office via C-SPAN. My colleague, Joel Kopperud, landed a seat in the room next to a contingent of the “Pink Ladies,” who crash various functions on the Hill, all gaudied up with placards and chants. The entire experience of the hearing, with rounds and rounds of outrage and occasional, thoughtful give-and-take, was surreal.

“Phantasmagorical” accurately characterizes the new alignment in the White House and Capitol and its implications for the insurance regulatory agenda, which has been turned on its head amid the financial meltdown. No sane person can predict how things will turn out, given the way external factors influence the daily grind on the Hill. But we do have a lot more insight into the contours of the upcoming year of debate.

Sooner or later (within a couple months at best, by the end of the year at worst), Congress is going to pass a financial regulatory overhaul that will create a “systemic risk” regulator for holding companies, and insurance will not be excluded. Chairman Frank envisions a two-phased process, wherein a systemic risk regulator is created and broader regulatory parameters are realigned in subsequent legislation. He thinks the Federal Reserve is the logical systemic risk regulator.

Frank’s counterpart, Senate Banking chairman, Chris Dodd, D-Conn., prefers to tackle all of the regulatory issues in one major bill, fearing that the opportunity may be lost if Congress addresses only the systemic risk question and nothing else. And he doesn’t like the idea of the Fed getting extra powers, saying the Fed has failed to protect consumers. “Whether or not those vast powers will reside at the Fed remains an open question,” he said at a hearing, noting its ever-ballooning portfolio and balance sheet that could reach $3 trillion.

My colleagues and I all fear that insurance may be a stepchild in the systemic risk debate. For all of the drama associated with the financial collapse, the historic divide in the industry over the issue of federal-versus-state regulation remains deep. The path of least resistance to members of Congress may well be to create the legislative authorization for new holding company regulation, including insurance in the definition, and then leave the details to the new regulator.

For insurance, this would be hazardous, creating the potential for an add-on of federal oversight without preemptive authority over conflicting or duplicative state-by-state laws. Even the criteria for what constitutes systemic risk are highly problematic. Some have pointed out correctly that Geico could collapse tomorrow and that wouldn’t present a systemic risk. But a small financial guaranty insurer could.

So, what’s in it for insurance brokers? Obviously, we continue to search for oxygen for our surplus lines modernization legislation, which perhaps could be attached to a comprehensive regulatory bill. We’d also like to see NARAB II legislation pass, allowing producers to essentially get a federal “passport” for interstate licensure.

We’d also like to see the creation of an optional federal charter for insurers, but this is a tough sell based on opposition by smaller insurers and agencies and the fact that Treasury Secretary Tim Geithner and Obama economic advisor Larry Summers have both said they will oppose “regulatory arbitrage” wherein financial institutions could pick their regulator, setting up a “race to the bottom.”

There is, of course, an easy solution to the question of regulatory arbitrage. As Travelers CEO Jay Fishman said at The Council’s Legislative Summit in February, Congress could enact an optional federal insurance regulatory regime that by statute would require standards that are higher than exist in any state.

There are more compelling reasons today than ever before for Congress to address insurance regulatory reform, given the central issue of AIG in the international financial crisis. But in a crisis, competent lobbyists have to be first vigilant to stop the bad stuff from happening while trying to angle for the good opportunities. At another recent hearing on the Hill, I asked a colleague from a securities trade association about his strategy. “I just want to hold serve,” he said. “If I do that, and they haven’t gotten creamed within a year from now, I will have been successful.”

Wood is The Council’s senior vp of Government Affairs.
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