NY Regulator: Federal Insurance Plan Gets It Right

State insurance regulators did a good job during the financial crisis, insists Eric Dinallo, New York's insurance chief, but he mostly approves of the Obama administration's call for a federal insurance regulator.

"I am positive about the proposal," Dinallo said in an interview Wednesday. "I think it gets at what we have been talking about for a long time: having the right capital standing behind commitments."

A draft proposal for expanded federal financial regulation released late Tuesday called for a new Office of National Insurance "to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector."

It is unclear what role will remain for the existing system of 50 state insurance departments, which the proposal says "led to a lack of uniformity and reduced competition across state and international boundaries, resulting in inefficiency, reduced product innovation, and higher costs to consumers."

A spokeswoman for the National Association of Insurance Commissioners did not immediately have a response to the proposal.

Dinallo said that he interprets the proposal as an "acknowledgement that insurance was on the right path concerning capital adequacy," he said. "We need to make sure we preserve what the states have done really well, which is to preserve adequate capital throughout this crisis."

Insurance supervision is fragmented, he said, with state regulators having authority only over their insurance businesses, but not holding companies or other non-insurance businesses.

The problems at AIG started in AIG Financial Products, the unit that lost billions through insurance-like derivatives called credit-default swaps, under the supervision of the Office of Thrift Supervision. The Obama administration Wednesday asked that the Office of Thrift Supervision be closed under its proposed revamp of federal regulations.

The draft proposal calls on the new federal insurance office to make recommendations on "any insurance companies that the Office believes should be supervised as Tier 1" financial holding companies. The government's draft white paper says Tier 1 FHCs are "firms whose failure could pose a threat to financial stability." The draft doesn't spell out whether it will co-exist with state regulation.

Dinallo and others said insurance companies generally have enough money set aside to pay potential claims, but he said the new proposal would improve "transparency." Even life insurers that applied for Treasury capital did so to boost ratings or for reasons other than paying claims, he said.

Insurers "probably view this as a partial success" in their effort to win the option of dealing with only one federal regulator instead of 50 state regulators, he said.

"The industry does have a good point about the inefficiencies of developing products through a 50-state process," he said. "But as inefficient and clunky as we do appear, the regulatory regime did perform well on this crisis of capital."

 
   -By Lavonne Kuykendall, Dow Jones Newswires; [phone]; [e-mail]