Insurance industry needs systemic-risk check

Congress should pass, as quickly as possible, a bill to establish an Office of Insurance Information.
MAY 31, 2009
Congress should pass, as quickly as possible, a bill to establish an Office of Insurance Information. Under the Insurance Information Act of 2009 — sponsored by Rep. Paul Kanjorski, D.-Pa., and co-sponsored by seven other members of the House Financial Services Committee — the office, under the Department of the Treasury, would gather vital information about the financial activities of insurance companies. By analyzing that information, it could serve as an early-warning system, detecting trouble in a vital sector of the U.S economy.

FILLING A VOID

Today, insurance oversight is balkanized. State insurance commissioners collect a great deal of information and track the health of insurance companies in their states. The Federal Reserve collects statistics about the flow of funds into and out of the insurance industry in its quarterly Flow of Funds Report. But there is no governmental entity that collects and analyzes all relevant data about the financial health of the insurance industry. This is the void that the bill seeks to fill. Despite possible protests from the insurance industry, Mr. Kanjorski — who is chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises — should make sure the information gathered by the Office of Insurance Information includes data about the activities of non-insurance subsidiaries. As shown by the disaster at New York-based American International Group Inc., the activities of such subsidiaries can be triggers of major systemic financial problems. The task of monitoring the insurance industry for systemic risk could be assigned to the Federal Reserve or the Treasury Department, but both have their hands full already and would need considerable time to learn the intricacies of the insurance business. The role of an early-warning insurance risk detector is better left to a specialized agency, since it deserves full-time attention. The financial well-being of millions of Americans — through life insurance policies, annuities and home and automobile policies — depends on the financial health of the insurance industry. Until last year, few would have given a thought to the notion that an economic downturn could jeopardize their protection. After all, most major insurance companies survived the Great Depression, largely because of the conservative nature of their investments. Unfortunately, in the age of derivatives and special-purpose entities, Americans no longer can assume the financial soundness of the institutions backing their insurance policies and annuities any more than they can assume that the banks holding their savings are secure.

FRAGILITY EXPOSED

The fragility of the financial system was made abundantly clear last year when the federal government had to step in to prevent the collapse of AIG, one of the world's largest — and presumably most stable — insurance companies. The problem at AIG lay not with its life insurance operations but with its subsidiary operations, especially its financial-products division, which sold billions of dollars' worth of credit default swaps. The collapse of Lehman Brothers Holdings Inc. of New York required AIG to pay out billions to holders of credit default swaps, greatly weakening the insurer and triggering the government's intervention. Establishing an Office of Insurance Information would go a long way toward avoiding AIG-like problems.

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