RTTNews - Regulation of the insurance industry in the wake of the near collapse of American International Group, Inc. (AIG) was the focus of lawmakers Thursday. The debate centered on whether or not more regulation is needed, or rather if existing regulation needs to be better enforced.

The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises examined the industry in the wake of the AIG collapse.

Subcommittee Chair Paul Kanjorski, D-Penn, said that many insurance products that are of national importance are uniform in nature, and therefore the government must consider whether to regulate these instruments nationally.

At the very least, lawmakers must address insurance activities, Kanjorski said. Insurance is complex and it is time for the federal government to appreciate its importance.

However, ranking member Scott Garrett, R-NJ, suggested that additional regulation may not be the best move. He expressed his serious doubts that the resolution authority being proposed by Treasury Secretary Timothy Geithner would be successfully implemented and that one could apply to the insurance industry.

Such a systemic regulator would seem particularly inappropriate from the insurance industry, Garrett said, noting that there are already state guarantee funds to deal with insolvent insurance companies.

To supporters of these proposals I would say be very careful what you wish for, he warned, noting that the topic of federal versus state regulation fosters intense debate.

Rep. Jeb Hensarling, R-Texas, stressed smarter regulation over additional regulation.

We need to move to smarter regulation which is not necessarily more regulation, he said. We need to end the too-big-to-fail phenomena.

A panel of experts offered opposing viewpoints on the prospect of regulatory changes.

Patricia Guinn, Managing Director of Risk & Financial Services at Towers Perrin, stressed that AIG is the exception rather than the rule of how the insurance industry has weathered the current financial crisis. However, its near collapse does raise issues of systemic risk within the insurance industry, she added.

Any additional oversight should be crafted for the distinctive features of the insurance industry, Guinn stressed.

J. Robert Hunter, the Director of Insurance for the Consumer Federation of America testified that Congress should address the systemic risk in insurance by creating a federal systemic risk regulator.

In order to fully understand and control systemic risk, we believe that the federal government should take over solvency/prudential regulation of insurance, he said.

He called on Congress to consider the creation of a systemic risk regulator for insurance, of which the federal government would be in charge of regulating risk.

However, Hunter stressed that the regulator should not be allowed vague and open-ended powers regarding state consumer protection laws or rules in areas that Congress has chosen not to explicitly preempt.

Dr. Martin F. Grace, Professor of Risk Management & Associate Director of the Center for Risk Management and Insurance Research at Georgia State University, urged that the policy debate move beyond whether or not more regulation is needed to specifically how Congress plans to address systemic risk.

It is possible solvency and market regulation conduct arguably can be conducted at the federal level at lower cost to society than separate state regulation of these same activities, he said. Evidence suggests there are some economies of scale in these activities and the costs of regulation are spread beyond the borders of a single state.

Grace added that he is pessimistic about the role of states in the future of insurance regulation, stating that they have absolutely no ability or incentive to be proactive.

At best they are reactive and cannot reach anything like a consensus when one is needed, Grace said.

Thus, a uniform understanding and appreciation of systemic risk and how it should be treated in a holding company structure is not likely to be implemented on a relatively uniform base any time soon, he added.

However, Dr. Scott E. Harrington of University of Pennsylvania's Wharton School disagreed, warning that insurance is not banking and should not be regulated in a similar manner to banks. AIG's case was more a fluke than the rule, he said, stating that insurance markets face minimal systemic risk and often demonstrate strong market discipline.

Therefore, creating a systemic risk regulator for the insurance industry would likely undermine that strong market discipline and reduce competition, he said, without achieving its goal of reducing the likelihood of future systemic crises.

Legislative proposals for optional federal chartering of insurance companies should be designed to the extent possible not to undermine market discipline and should specifically seek to avoid expanding the scope of explicit or implicit government guarantees of insurers' obligations, he said.

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