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Legal Ease by Scott Sinder The Void

Look out. We are now the target. Where Congress perceives a gap in regulation, it will fill that void.

By  Scott Sinder

Though you are reading this column in 2009, I wrote it in 2008. So I get confused—is this the end or the beginning? In all likelihood, the answer is yes.

Yes, we have seen the end of Congressional inactivity in our sector. For the past several years, all of our issues of interest have fallen to the bottom of the legislative priority stack as the focus has swiveled to the tragedy du jour. We are now the tragedy du jour, or at least a perceived component. The economic collapse—and AIG’s and other insurers’ place in that collapse—has now captured the attention of policymakers and the public alike. Determining what happened, and how it can be prevented from happening again, will be priority one with the 111th Congress and new president.

Yes, we are entering the first phase of what could be a very quick Congressional process in which we may see a fundamental reorientation of the financial services regulatory infrastructure in the United States. The regulatory vacuum revealed by AIG is the absence of any effective regulatory oversight of insurance holding companies—at the holding company level. There is a perceived lack of transparency regarding the non-insurance activities in which these holding companies are engaged, such as AIG’s London credit-default swap activities.

I will make one ironclad prediction here: Congress will fill that void. Lawmakers may do nothing else, but they will do that. I will bet on the Federal Reserve as the ultimate landlord for this holding company regulator. Why? That will marry regulation of insurance holding companies to the bank and financial services holding company oversight already conducted by the Fed. Such a marriage also will help to facilitate the creation of a true systemic oversight role for the Fed.

Where does that leave surplus lines reform, NARAB 2 licensure reform and/or an Optional Federal Charter (with an optional federal license for agents and brokers)? Hard to say. Those proposals are all fully consistent with the holding company regulator model and fold in very well underneath such an umbrella structure. The attention on the broader issues and the legislative proposals that will be sure to follow will provide opportunities to advance our key reform initiatives. They will not, however, be the focal point. Part of our mission must be to ensure that whatever is done can harmoniously accommodate the regulatory reforms we have long championed.

The end of the Bush Administration’s tax cuts, which expire in 2010, and the campaign focus on the reformation of our health care payment system also signal the beginning of serious legislative efforts as we ring in 2009. As chairman of the powerful Senate Finance Committee, Democratic Sen. Max Bachus, D-Mont., who) already has drawn some lines in the sand with respect to the health care debate. (Interestingly, his proposal includes potentially promising medical malpractice liability legal reforms.) The debates over taxes and health care may run along independent courses, but they also could be consolidated into a single mega-debate for two reasons. First, the Congressional committees that own both issues are the same—Senate Finance and House Ways & Means. Second, the health coverage debate is, at bottom, a tax debate and one that involves spending a lot of money. The health care debate is a natural fit with the review and reassessment of the broader tax issues given those revenue needs.

In 2009, financial services regulatory reform, health care insurance reform and tax reform are going to be three of the four or five primary issues of interest in Washington (with energy/global warming and, possibly, immigration as the other one or two). When energy issues are cast as global warming issues, all of the core primary issues could have enormous implications for your day-to-day work and for the insurance industry as a whole for years to come. It now appears clear that the confluence of a new president, a House and a Senate with strong Democratic party functioning majorities, and a recession that is focusing the public spotlight on perceived ills of the financial services and health insurance industries will combine to foster some of the change promised by our new President-elect. I hope we will be able to say yes to that.

Sinder, a partner at Steptoe & Johnson, is CIAB General Counsel.
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