AIG’s fall revives calls to create U.S. insurance cop

The multibillion-dollar implosion of insurance giant American International Group Inc. has state and federal officials pointing fingers of blame at each other.

Who should have raised alarms that the company, which had to be rescued with an $85-billion federal bailout, was in trouble?

Whether it was state or federal regulators who failed, the fact that the AIG crisis happened has revived long-standing efforts to shift insurance regulation away from the 50 disparate state offices and into a centralized federal bureaucracy.

Proponents of the measure say a federal insurance regulator could take a broader view of an insurer’s health, spanning 50 states and across all business lines.

Under the proposal, an insurance company could seek a charter with the federal government, which would give it clearance to operate across the country if it passes muster with the federal regulator.

A federal regulator would be better positioned than its state counterparts to detect troubles such as those at AIG, proponents say.

“Clearly, some insurers have become too complex and too interconnected worldwide for the limited resources of state regulators to handle,” said Sens. John E. Sununu (R-New Hampshire) and Tim Johnson (D-South Dakota), and Reps. Melissa Bean (D-Illinois) and Ed Royce (R-Fullerton) in a Wall Street Journal opinion piece last week.

But the effort to create a federal insurance regulator is meeting with stiff resistance from the states. They contend that it was a federal failure, not a state failure, that allowed AIG to get into risky and ultimately disastrous kinds of investments.

The units of AIG overseen by state regulators -- the AIG insurance companies -- remain financially sound, they note.

The trouble at AIG, as they see it, lies with the units of AIG that dealt in the riskier credit default swaps, and those units were overseen by federal regulators within the Treasury Department.

“It was lax federal regulation that permitted this to happen,” said Sandy Praeger, Kansas insurance commissioner and president of the National Assn. of Insurance Commissioners, speaking of the AIG bailout and the broader Wall Street package being negotiated on Capitol Hill. “I’m not sure that a federal system of regulation is that efficient if now we have to have a $700-billion bailout.”

Eric Dinallo, superintendent of insurance in New York state, where AIG is headquartered, has contended that the insurance companies within AIG are all financially sound specifically because they were bound by state regulation.

So who should have had an eye on AIG’s parent company? That was the Office of Thrift Supervision within the Treasury.

“Our regulatory oversight of the [AIG] holding company identified the risks posed by the products in question [credit default swaps] and we promptly elevated those issues to the AIG board and senior management for action,” said a statement from the agency.

The Office of Thrift Supervision raised those issues with AIG in March, said spokesman William Ruberry.

But the idea of federal regulation of insurance has been around for years. Even before the AIG rescue, proponents of federal regulation have said that such a system would streamline the regulatory process for insurance companies, which currently must seek individual approval for rates and products from the states.

“There are a number of potential inefficiencies associated with the state-based insurance regulatory system,” according to a March report from the Treasury Department, which also endorsed federal regulation.

“While a state-based regulatory system for insurance may have been appropriate over some portion of U.S. history, changes in the insurance marketplace have increasingly put strains on the system.”

State insurance offices employ about 13,000 people, Praeger said. She estimated that a federal insurance bureaucracy would employ 8,000 to 10,000 people.

“The industry knows that a federal regulator wouldn’t be as vigilant,” she said. “They want to be federally regulated like the banks and other financial services, and we’ve seen what has happened with that.”