State Insurance Commissioner Thomas Sullivan took to Capitol Hill last week, telling lawmakers on the powerful House Committee on Financial Services that state-based regulation of the insurance industry works, and needs to be incorporated into any new regulatory initiatives that Congress develops to watch over the financial system.
Sullivan, who was speaking on behalf of the National Association of Insurance Commissioners, was providing testimony in reaction to recent draft legislation unveiled by the Treasury and Congress that proposes, among other things, to establish a process for winding down large, troubled financial institutions that pose systemic risk to the U.S. economy.
The Financial Stability Improvement Act would also create a financial services oversight council that would identify companies and activities that pose a threat to financial stability and subject them to tougher oversight and regulations.
For his part, Sullivan welcomed federal efforts to reform financial regulation, but stressed that state regulation of insurance has protected insurance consumers and companies from the worst of the financial crisis, and therefore should be preserved in any reform efforts.
He said that effective insurance regulation must reflect the laws, values and unique risks of each individual state, which state-based regulators provide.
”Our rigorous oversight has resulted in high regulatory compliance, enabling our sector to avoid the level of insolvencies and market meltdowns that we have seen in other sectors of the financial community,” Sullivan said in his testimony. “Indeed, our national solvency system has protected the ability of companies to pay claims while remaining competitive and profitable.”
Sullivan said federal legislation should ensure effective coordination, collaboration and communication among all relevant state and federal financial regulators in the United States, rather than putting all of the power in the hands of a single regulatory body.
Doing so “would take away the crucial failsafe of allowing real and potential oversights by one regulator to be spotted and corrected by another,” Sullivan said.
“There is a great benefit of having multiple sets of eyes looking at an institution,” he added.
Sullivan said in his testimony that the insurance industry in general does not pose a systemic risk to the nation’s financial markets to the extent that the banking and securities sectors do. He said insurer’s only exposure to systemic risk typically flows from their investments in capital markets.
To deal with that, however, state regulators have placed appropriate restrictions on the investments held by insurers.
Additionally, in the wake of the financial crisis, Sullivan said the NAIC is currently reviewing and seeking improvements in its entire solvency system, including examining capital requirements, international accounting, insurance valuation, reinsurance, and group solvency.
NAIC is also assessing their reliance on financial rating agencies, to determine their impact on insurer liquidity and investments, Sullivan said.
Sullivan isn’t alone in trying to protect his regulatory turf.
Banking Commissioner Howard Pitkin recently spoke at the state banking department’s annual securities forum, telling audience members that he too would be concerned about the creation of a single federal regulator for the banking industry, an idea being considered on Capitol Hill.
He said oversight authority within one agency, in addition to giving that body the power to preempt state consumer protection laws, will work to the disadvantage of community and regional banks in Connecticut and across the country.
“Unavoidably, this proposed agency would have to spend most of its resources supervising the largest banks because most of the problems and risk is found with them,” Pitkin said.
Most importantly, Pitkin said Congress must solve the “too-big-to-fail” issue because it leads to disparate treatment of banks by the federal government. While big banks in financial trouble are getting bailed out because their collapse could pose systemic risk to the economy, smaller banks in financial turmoil are being left to fail.
He said having the Treasury decide which banks fail and which do not is disruptive to the functioning of normal markets.
“This policy is, without doubt, a playing out of the moral hazard related to bailouts, when those given taxpayer funds continue to grow become more dominant and pursue strategies that involve high risk,” Pitkin said. “The largest banks should be subject to the same market discipline that smaller institutions are held to.”
Greg Bordonaro is a Hartford Business Journal staff writer.
