Insurance Experts Tongue-Tied on Ideas for Capital Adequacy, Too Big to Fail Rules

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The Capital Markets, Insurance, and Government Sponsored Enterprises subcommittee of the House Financial Services committee held hearings on how the Federal government should oversee insurance, a timely question since we’ve discovered the Federal government is backstopping a state regulated activity.

What is noteworthy about this session is that five experts were asked to opine on how to regulate capital adequacy and “too big to fail” and only one (Robert Hunter) made a serious, if sketchy, effort to answer the question. I can understand not having a simple answer to a complicated question (there are a lot of different products in insurance) but the flat-footedness is not encouraging.

The experts were:

Mr. Baird Webel, Specialist in Financial Economics, Congressional Research Service;
Ms. Patricia Guinn, Managing Director, Global Risk and Financial Services Business, Towers Perrin;
Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America;
Mr. Martin F. Grace, James S. Kemper Professor, Department of Risk Management and Insurance, Georgia State University; and
Mr. Scott Harrington, Alan B. Miller Professor, Wharton School, University of Pennsylvania.

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  1. Doc Holiday


    I thought you were on the night shift; this seems out of character for you to be adding a story at this time of day. Yah going somewhere … huh, huh?

    Re: “How the Federal government should oversee insurance”

    That is a tough question and I can understand why no one had a clue as how to respond, because none of them have had experience with understanding regulation, implementing policy or doing anything to control their pet projects.

    This is like doing a real-time live interview with a conductor of a runaway freight train and then everyone seems so frustrated about the questions and lack of responses.

    Also see:

    Runaway Train

  2. Leo Kolivakis

    What many of you do not know is that apart from selling credit default swaps (CDS), AIG was one of the biggest institutional investors in private equity, hedge funds and real estate (so-called alternative investments).

    When their quarterly reports showed trouble in those investments, I knew pension funds that invested in those assets were screwed and I wrote about it.

    The thought that one of these guys might become the next systemic risk regulator of insurance brings a chill down my spine.

    I say Harry Markopolos, the guy who uncovered the Madoff scam, should be the next systemic risk regulator.



  3. Doc Holiday


    I agree 100% with you on Markopolos or people that have character like Warren.

    This lack of regulation era, we live in, reminds me of a homeowner association, which elects people who all are eager to have power and to write new rules and to influence their control. I know my ownership association loves to spend money and change rules and then threaten people with new fines, but when it comes down to enforcing rules and apply equal implementation — they all fail, year after year and then seasonally, we seem to get new board members and new agendas and an attention deficit/circus atmosphere where nothing changes. Nothing will change in insurance or on wall street, because no one has a clue what they are doing, and this comes down to nepotism and situations reflective of Friends of Angelo and the corruption that seems to be embedded into organizational structures.

    These boobs from the insurance industry obviously are clueless and linked to a lack of regulation and they are also linked to a lack of IQ, a lack of honesty, a lack of serving the public good — they are frauds and they need removed from our society by noon Monday!

  4. attempter

    Markopolos is guilty of the sin of having been correct from the beginning and vocal about things. Therefore he or anyone like him can never be considered for positions of authority as long as the same system remains in place.

    (It’s the same case where people say they’d love to have seen someone like Roubini or Born in top economic positions in this administration. It was probably systematically foreclosed.)

    It’s like Krugman says about war opponents – to have credibility within the system you have to have made conformist mistakes to begin with, and only later have changed your mind.

    So what’s valued is not true intelligence but belated learning ability within conformism.

  5. B. Mull

    Re California,

    It was widely anticipated that the props wouldn’t pass. In the meantime California sold a lot of “too big to fail” bonds to cover part of the shortfall. They also cut state employees’ hours significantly–though I don’t notice any difference, so I assume they could cut even more. Finally, yes, the federal government is going to have to bail us out. But this is hardly unfair since we more than pull our weight when times are good.

    Another point the North article raises is why California pays it legislators so much more than other states. Got me on that one. It doesn’t seem like a full time job. And the seats never (literally never) change political parties, so why the party machine shouldn’t pay their man’s salary is unclear.

  6. Don

    It might help to know exactly what people mean by Systemic Risk. I see the current problem as Debt-Deflation. Consequently, I can propose various solutions to try and keep that from occurring again. For example, I like Narrow/Limited Banking. I can also see that as long as we have a Lender Of Last Resort, we cannot rule out Moral Hazard. No real government would tell people “Good luck” facing Debt-Deflation, especially if you have a LOLR. That’s basically what it means to have a LOLR.

    I guess I’m arguing that a Systemic Risk Regulator will be mainly window dressing, although it probably would do some good, assuming that people don’t rely on its blessing as the word of God. Good luck.

    Don the libertarian Democrat

  7. Analyst_for_Life

    Re: “How the Federal government should oversee insurance”

    It is ludicrous for a government that has such a hosed up accounting of its own affairs to presume to regulate other enterprises. Let the miscreants clean up their own act, then they can have some crediblity purporting to regulate banks or insurers.

  8. Richard Kline

    Yes, being a premature anti-capitalist _will_ be a hindrance for appointment to senior regulatory positions going forward. For all that, it is interesting how in this crisi, as in many, talent separates from mediocrity like alloy from dross when things start shaking. . . . It is even more telling that Bo Prez has brought NONE of this talent into positions of authority, which instead he busily packed with yesterday’s shills.

    Regarding CA: As a former resident there, I think the country should most assuredly NOT bail them out _until and unless_ they repeal that swinish property tax cap, their tax-blockage two-thirds majority legislative tax collar, and mandate a rainy day fund of sizeable proportions, all as part of their political framework for sound financial policy going forward. Then, yes, bail out their sorry assess. Down there in Sunshine Land they have lived the grasshoppers’ life for a generation, refusing to tax themselves at an appropriate level for the things of the good life. Their disaster is substantially self-made, just as they always tell the rest of us that as well was their success. They didn’t tax themselves during the recent bubble-boom, _but instead borrowed at stiff interest during the good times_. Now, their deficits and bod service are become so massive that they truly risk the collapse of state services. Tell them to do their part before they come to the rest of us sun-visor in hand.

  9. B. Mull

    If they asked me how the federal government should regulate insurance, I would say: By doing your damn job and regulating the securities and derivatives markets. How is a state insurance commissioner supposed to do that?

    RE California- You’re right there should have been better planning for a rainy day. That didn’t stop the banksters.

  10. JSD

    This hearing is steeped in many years of political posturing and manuvering. The real issue is Optional Federal Charter and whether the insurers should be granted a dual form of regulation similar to the banks.

    I would argue that the hearing participants are debating over how many angels may dance on the head of a pin, while the committee members seek out bits and pieces of testimony to forward preformed agendas.

    For more information:

    This will be an interesting test for the Obama administration. Will it take a pragmatic approach to financial services regulation or simply become a water carrier for big interests.

    OFC is the wrong answer searching for a problem however it is supported by large insurance companies such as Allstate, State Faarm and Hartford. Obama just appointed the former President of a property and casualty division of Hartford to the Treasury Department.

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