Senate Financial Reform Bill Mostly a Relief for Insurers

In the wake of the financial crisis, insurance trade associations and other observers expressed concern that the insurance industry would be implicated along with the banking and securities industries, potentially resulting in new and onerous federal regulatory responsibilities. With the U.S. Senate’s passage of bill S. 3217, the Restoring American Stability Act of 2010, on Thursday, May 20, 2010, it is clear that the worst fears of the associations have not materialized, but some uncertainty remains about the effects of the bill once signed into law by President Barack Obama, following the expected passage of a House bill in December.

When S. 3217 was first introduced, the National Association of Mutual Insurance Companies (NAMIC) initially expressed what it terms significant concerns about the potential of the bill to result in duplicative regulation.

“Initially this bill contained a number of troubling provisions for the property/casualty insurance industry,” commented Jimi Grande, senior vice president of federal and political affairs, in a statement released by NAMIC. “However, in the almost 20 months since the financial crisis began, the Senate has seen the wisdom of respecting the state regulatory system of solvency and consumer protection. They correctly saw that there is no need for a new duplicative federal bureaucracy and instead crafted a small Office of National Insurance [ONI], not intended to be a regulatory authority, but to serve as a source of information and expertise.”

The Independent Insurance Agents & Brokers of America (IIABA) expressed gratitude that the Senate drew a clear distinction between the P&C industry and other financial services sectors as expressed in the final form of S. 3217. “Property/casualty insurers played no role in creating the crisis and pose no systemic risk to the overall economy,” commented Robert Rusbuldt, president of IIABA. “In fact, the state regulatory system, while in need of more uniformity and efficiency, has a proven track record of ensuring insurer solvency, industry competition and growth, and consumer protection, and we believe the House and Senate have both made the correct decision in recognizing the strength of the state regulatory system for insurance."

The American Council of Life Insurers (ACLI) expressed satisfaction mixed with unease about the potential form of the law once enacted. “We are encouraged that the legislation would creat an Office of National Insurance to provide advice and expertise on insurance issues to the administration and to Congress and play a key role in international agreements,” said Frank Keating, president and CEO, ACLI. “However, we remain very concerned about the impact the Volcker Rule [which limits banks’ proprietary trading of certain financial instruments not done on behalf of clients] and derivatives provisions would have on our industry.”

The Senate bill’s provisions touching on credit rating agencies is likely to affect insurers in their capacity as institutional investors, according to John Jay, a senior analyst with Boston-based Aite Group. “Insurance companies are big consumers of unsecured corporate debt and as well as structured products, such as mortgage-backed securities,” Jay notes.

Traditionally, the major rating organizations, such as Fitch, Moody’s and Standard & Poors — designated by the Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSROs) — enjoyed a protected market, according to Jay. NRSROs gained notoriety during the financial crisis by giving top ratings for risky securities. “For many years, when someone needed to issue debt, there would be requirements to have ratings from at least two of these organizations,” he says. “The Dodd bill is now making those agencies more accountable.”

NRSROs and credit rating agencies more broadly will be regarded as purely advisory and, in the interest of transparency, may be required to share methodology that they have considered to be intellectual property. No longer treated as an imprimatur on transactions, the big three NRSROs are likely to lose some of the 85 percent market share they currently enjoy. What this means for insurers is that they, will have to perform deeper credit analysis internally to gauge the real economics behind a particular credit risk,” Jay says. “More responsibility will reside on the investor side of the equation, so insurance companies may need to revisit their own credit analysis infrastructure.”

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio