Treasury secretary calls for insurance law reform

WASHINGTON—Treasury Secretary Henry Paulson is using the near-bankruptcy of American International Group Inc. as a call for insurance regulatory reform.

Appearing on NBC's "Meet the Press" on Sunday morning, Mr. Paulson said to have allowed AIG the declare bankruptcy would have been "unthinkable," adding that the company was "a few hours" from doing so.

"What the government did was come in in a senior position, senior to the senior debt, well ahead of the shareholders, with…an $85 billion funding facility to allow the government to liquidate this company in a way" that avoided "a real catastrophe in our financial markets," said Mr. Paulson, according to a transcript posted on MSNBC's Web site.

"AIG was so interconnected: it touched money market funds, it touched individual savings," he said. "This is a classic example." He said the insurance operations were regulated by 50 different insurance regulators."Something like this, in my judgment, should never have happened. But again, we did this to protect the taxpayer…and it's something we're going to need to deal with in the future in terms of a regulatory system."

Mr. Paulson noted that he had issued a regulatory reform blueprint in March "because we have a patchwork regulatory system that is outdated." One section of the blueprint called for allowing insurers to choose an optional federal charter rather than continue to be regulated by states.

But Mr. Paulson added that regulatory reform couldn't be dealt with in a week, which is the administration’s timetable for gaining congressional approval of the bailout. "We need this legislation in a week because we have a problem in our capital markets that's urgent to deal with," he said. "And we can deal with it when we get the legislation from Congress."
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Organizations Opposed to U.S. Insurance Tax Bill Issue Statement

The Coalition for Competitive Insurance Rates, which groups a number of organizations that oppose to the latest attempt to amend U.S. tax laws on foreign insurers, has issued a bulletin outlining the reasons why they oppose recently introduced legislation.They claim that the legislation - HR 6969 - introduced September 18 by US Rep. Richard Neal - will, if enacted, reduce critical US insurance capacity and drive up prices for US consumers." The bulletin said the Bill would "affect all foreign insurers that have US subsidiaries and that also provide insurance and reinsurance coverage to the US."

Nancy McLernon, President and CEO of the Organization for International Investment (OFII), an association of U.S. subsidiaries of companies headquartered abroad, stated: "With the current US financial market turmoil -- including the US government takeover of the country's largest insurer -- this is a dangerous proposal that fundamentally limits capital available to US insurance companies and their consumers, and puts a straightjacket on continued foreign insurer assistance to the US market."This bill would affect workers employed at American operations of non US-based insurance companies - over 100,000 Americans work at these firms, which support an annual payroll of over $9 billion," she added.

"Without a competitive global reinsurance market, it would be even more difficult and expensive for South Carolina and other coastal state home and business owners to obtain insurance to protect them from hurricanes," explained South Carolina Insurance Director Scott Richardson. The bulletin also noted that "Richardson and several other insurance commissioners had written in opposition to similar proposals last fall."

The Coalition pointed out that it had sent a letter to Sen. Max Baucus, Chair of the Senate Finance Committee, last fall, which stated: "Twice before, US policyholder groups have urged opposition to such proposals because of their effect on the availability and affordability of insurance. We say it again now - these proposals are protectionist measures aimed at benefiting some competitors in the market at the expense of others. Ultimately, the US consumers will suffer if this proposal is approved."

The signers of that letter "included major US business and consumer organizations including the Risk and Insurance Management Society, the Florida Consumer Action Network, the National Risk Retention Association, the Organization for International Investment, the CEA -the European Insurance and Reinsurance Federation and the Association of Bermuda Insurers and Reinsurers," said the bulletin.

"This bill is an isolationist effort by a handful of very large, very profitable US insurance corporations who intend to create a new barrier for their competitors so that they will benefit from a protected market. This proposal could not come at a worse time for the US economy. Higher prices for consumers are the likely outcome," noted Bradley L. Kading, President of Association of Bermuda Insurers and Reinsurers (ABIR).

The Association has been in the forefront of efforts by Bermuda-based companies to explain their position to U.S. legislators, who have, as the bulletin notes, periodically tried to close what they contend is a "tax loophole," that allows offshore insurers to pay less tax than their U.S. counterparts (See IJ web site - http://www.insurancejournal.com/news/international/2008/09/15/93680.htm).

Their basic contention is that the "U S. insurance market is dependent on domestic and foreign participants which collectively have enough capital to meet the US insurance market's aggregate capacity needs. US consumers benefit from this global market which assures more affordable and available insurance coverage than otherwise would be the case."

Bermuda companies are heavily involved in reinsurance, professional liability coverage, as well as natural catastrophe coverage for hurricanes and other natural disasters. Kading noted: "Hurricane Ike last week has triggered a $1.5 billion reinsurance payout to the Texas Windstorm Insurance Association, $1 billion of that will be paid by Bermuda reinsurers - instead of by Texas taxpayers. Bermuda and European reinsurers write the overwhelming majority of reinsurance that protects US consumers from hurricanes and earthquakes."

He added: "In the last seven years, Bermuda's insurers and reinsurers have paid more than $25 billion to US consumers from catastrophic loss claims alone. That amount may reach $30 billion by the end of the US hurricane season. The proposed legislation will either discourage these reinsurers from committing capacity to the US market or increase prices for US consumers."

The bulletin concluded that "no tax legislation is needed as US subsidiary corporations are already subject to the US income tax and the IRS already has significant enforcement powers to review affiliated reinsurance transactions."

Source: Association of Bermuda Insurers- www.ABIR.bm and Reinsurers; Organization for International Investment - www.ofii.org

Insurance Producers Start to Move Business from AIG to Competitors

Despite assurance from state regulators that the insurance subsidiaries of American International Group (AIG) are financially sound, insurance producers are moving accounts from AIG.A survey by Insurance Journal of 1,000 insurance producers including 782 who say they have accounts with AIG found that 343 producers have had clients ask them to move their account out of AIG. That's 43.8 percent of producers with AIG accounts.

Slightly more than a quarter (202 producers or 25.8 percent) of AIG agents and brokers said they have in fact already moved or agreed to move accounts from AIG.

The survey was answered by 782 agents and brokers who said they have business placed with AIG. An additional 218 producers also answered the survey, which asked broader questions related to the AIG financial crisis.More than 62.3 percent said that going forward they expect to place less business with AIG insurance subsidiaries as a result of the parent companies' financial woes.

Not all producers are letting the AIG crisis change their practices. About 35 percent said the financial crisis is not likely to have any effect on their placement decisions.

Industry insiders contend the account movement is understandable even though state regulators are saying that the AIG insurance subsidiaries are in sound financial condition.

"Since the rating agencies apply the same financial rating to the subsidiaries as they assign to the parent, it really doesn't matter where the subsidiaries stand financially - they fall with the parent," said Chris Boggs, associated editor of MyNewMarkets.com. "Also, and not to deride any person or their opinion, some of this has to do with a misunderstanding of the complexity and size of AIG. To some agents, like to some clients, AIG is AIG, and if AIG is in trouble that's all they hear. Anything said in defiance of the agent's or client's opinion is just spin in the view of some."

The pullback reflects agents' desires to protect their clients as well as themselves.

"It's not really a surprise, especially if an agent has been through a few company meltdowns such Reliance, Royal and other such carriers," said MyNewMarket's Boggs. "When the boat springs a leak, it sinks a lot faster than you think or hope. Agents don't want to be accused of not being proactive. Better safe than sorry."

The emailed survey was conducted on Thursday, Sept. 18 and closed at 11 a.m. EDT on Monday Sept. 22, just days after the government loaned AIG $85 billion, seized 80 percent control of the company and installed a new chief executive officer.

Almost 80 percent of all 1,000 survey respondents said they expect AIG will lose market share, with 41.5 percent agreeing this is "very likely" to happen and another 37.5 percent terming it "likely" to happen.

Producers' comments in the Insurance Journal survey indicate that the scrambling for the AIG accounts has already begun.

"We have seen and heard from marketing of other insurers for our AIG business," an agent wrote.

"They are already campaigning for the business," another producer said of the carriers he represents.

"We have received emails and calls from Travelers, Zurich, C N A and Fireman's Fund," reported another.

One agent said one of his agency's personal auto carriers is already offering agencies a bonus for AIG accounts.

If AIG loses business, which of its competitors will gain?

AIG is so big and covers so many markets, the winners could be spread out among major international carriers, large commercial writers, surplus and specialty lines carriers, even regional carriers, according to producers.

Zurich, Travelers, Chubb, The Hartford and Liberty Mutual are among the carriers respondents to the Insurance Journal survey cited most often as potential winners, along with Lloyd's and various surplus lines and specialty companies. The large surplus lines carrier, Lexingon Insurance, is among AIG's companies.

"I think anybody with the ability to compete with AIG will now have an advantage over them," one producer wrote.

"The big names like Travelers or Hartford or even Lloyd's on the odd accounts will be able to use their financial strength to gain an advantage," said one survey respondent.

"I think agents and insureds will look for smaller, regional carriers, thinking this is safer," added another.

According to Boggs, if a client requests to be moved from AIG, the producer can be placed in a tough situation, not wanting to move the customer unnecessarily but also not wanting to risk a lawsuit.

A producer's response could depend on whether that producer is an agent of AIG or a broker on behalf of a client.

"If the producer is a broker, working only for the client with no agency agreement with the carrier, they work only for the client and act in the client's best interest," he said. " If the producer is an agent for AIG, they are contractually required to act in the best interest of AIG since agents work for the carriers with which they are contracted. However, if the client comes to an agent for AIG, and requests that coverage be moved, the agent has little choice but to move coverage or risk losing the client."

But before any decision is made, the producer does have an obligation to spell out the facts of the situation to the client.

"Agents must explain, to the best of their ability and knowledge what the facts of the situation are, in this case that the insurance subsidiaries are very strong and in no financial problem and that it's the non-insurance part of AIG that has caused the problem. Also, that there's a new CEO; the Fed has propped up the company; and all the rest that has happened," said Boggs

The final decision is still the client's.

"After the explanation of the facts, if the client still wants to move, the agent needs to move the coverage or risk an errors and omissions lawsuit if something goes bad," Boggs said.
www.insurancejournal.com