Financial Reform Watch

Developments surrounding the Treasury's Capital Purchase Program (CPP) in recent days are causing the Department to take a hard look at the justifications for federal investment in industries beyond those federally regulated. Appeals from the insurance and the auto industry are both being reviewed.

It appears the insurance industry proposals are getting the strongest consideration at present, but there are clearly some cross-currents at work that are complicating the decision about whether or not to include them in the CPP. Reflecting that duality, Treasury’s assistant secretary for financial institutions, David Nason, appeared on CNBC’s "Squawk Box" this morning and indicated that there is some difficulty for Treasury to assess the capital needs of an industry that does not fall under federal regulation. He noted that while for the banking industry Treasury is relying on federal regulatory agencies, there is no such federal role in the insurance industry. On the other hand, he noted that it may be important for the stability of the financial sector to expand the CPP to cover insurance. Treasury is evaluating that question as well.

While Treasury grapples with its policy on regulatory issues regarding the insurance industry, the industry itself seems to be divided on the issue of inclusion in the CPP. Life insurance companies are lining up more in favor while property and casualty insurance are expressing opposition.

On the life insurance side, the American Council of Life Insurers (ACLI), representing 353 members, sent an October 15 letter to Treasury Secretary Hank Paulson in which they appeared to recognize that a lack of federal nexus with their industry could be a barrier to assistance. The letter, signed by CEOs of 36 companies, asked the department to create a new "Office of Insurance Information" as "the best means of efficiently gathering publicly available information on our business as you and other policymakers evaluate the appropriate regulatory oversight of U.S. financial institutions." A spokesman for the ACLI told Bloomberg News today that life insurers are talking to Treasury about possible government investments.

On the property and casualty side, Evan Greenberg, the CEO of ACE Group and the chairman of the American Insurance Association (AIA), issued a statement this afternoon saying most of the association’s 350 members would not seek funds from the CPP. After surveying the board and a majority of AIA’s membership, Greenberg said,

"Those members believe that, as property-casualty insurance writers, they are well-capitalized and well-positioned to weather the current financial market crisis without the assistance of the CPP announced by Treasury. As a result, the property-casualty insurers who are members of AIA strongly prefer to compete in the private market and the substantial majority will elect not to participate in the CPP."

While Treasury is actively considering assisting the insurance industry—and it appears they are leaning towards doing so—the effort by the auto industry to gain assistance does not appear to be gaining as much traction. We anticipate that issue will most likely be addressed by a new administration in Washington.