Thursday, July 22, 2010

A Busy Week in Washington

The news highlight of the week was yesterday’s signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act by President Barack Obama.

But there is also other major news out this week. The Government Accountability Office, released its long awaited report on life settlements to the Special Committee on Aging in the Senate, which was commissioned at the behest of its chairman Sen. Herb Kohl, D-Wis.

The report finds “inconsistencies” in the market. In its opening statement, the GAO writes:

“Inconsistencies in the regulation of life settlements may pose challenges. Policy owners in some states may be afforded less protection than owners in other states and face greater challenges obtaining information to protect their interests. Twelve states and the District of Columbia do not have laws specifically governing life settlements, and disclosure requirements can differ among the other states.

“Policy owners also could complete a life settlement without knowing how much they paid brokers or whether they received a fair price, unless such information was provided voluntarily. Some investors may face challenges obtaining adequate information about life settlement investments. Because of conflicting court decisions and differences in state laws, individuals in different states with the same investments may be afforded different regulatory protections.

“Some life settlement brokers and providers may face challenges because of inconsistencies in laws across states. GAO developed a framework for assessing proposals for modernizing the financial regulatory system, two elements of which are consistent consumer and investor protection and consistent financial oversight for similar institutions and products. These two elements have not been fully achieved under the current regulatory structure of the life settlement market.”

The Securities and Exchange Commission also is expected to release its report today. The release follows a Congressional hearing last September following a New York Times article that said that the life settlement market could be the next mortgage crisis. The story caused great concern among federal lawmakers and members of the life settlement industry.

The Bellwether will have a fuller review later.

At the signing of the historic financial services reform, the President offered some remarks including the following:

“Now, while a number of factors led to such a severe recession, the primary cause was a breakdown in our financial system. It was a crisis born of a failure of responsibility from certain corners of Wall Street to the halls of power in Washington. For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy.

Unscrupulous lenders locked consumers into complex loans with hidden costs. Firms like AIG placed massive, risky bets with borrowed money. And while the rules left abuse and excess unchecked, they also left taxpayers on the hook if a big bank or financial institution ever failed.”

Insurance trade groups also weighed in. The American Council of Life Insurers, Washington, noted that the focus of financial reform now shifts to federal regulatory agencies and how they will implement H.R. 4173 in ways that do not hamper well-functioning markets. It also welcomed the creation of a Federal Insurance Office.

The American Insurance Association, Washington, issued a statement that it will be AIA’s goal to reinforce the differences between insurance and other financial services segments and to work with regulators to make sure that regulations adhere to legislative intent.

Rating agency, A.M. Best, Oldwick, N.J., writes that the “new law presents a host of new requirements and legal uncertainties that credit ratings agencies such as A.M. Best must now address.”

For instance, the rating agency says that “For example, the new law rescinds Rule 436(g), thus exposing credit rating agencies to “expert” liability if they consent to be named as such in registration statements and related prospectuses.

“A.M. Best will not consent to the use of its ratings in registration statements and related prospectuses. The Act also exposes credit rating agencies to a lower pleading requirement in government and private lawsuits and modifies the ability of credit rating agencies to receive certain information of a material, non-public nature from issuers.”

Standard & Poor’s Corp., New York, writes that it “does not expect that the legislation will have an immediate credit impact on its ratings on U.S. insurance and reinsurance companies. Indeed, we believe several aspects of the reform bill could help U.S. insurance/reinsurance companies maintain their competitive positions in the global marketplace.”

Among the positives cited are the establishment of a federal insurance office, new national underwriting standards for home mortgages and the marginal impact on securitizations and derivatives used to manage insurance companies’ risks.
On the negative side, S&P says that “diversified insurance groups with $50 billion in consolidated assets and nonbank financial companies or bank holding companies would become subject to an assessment on large financial firms.” S&P asserts that “In our view, no insurance company (excluding American International Group Inc.) poses a systemic risk to the financial system. As such, the insurance groups subject to this assessment will likely make disbursements that are not specifically related to the risks borne by the insurance/reinsurance industry and will generally decrease absolute capital levels.”

And, finally, according to S&P, “one of the tasks of the newly formed Federal Insurance Office will be to conduct a study and report to Congress on how to modernize and improve the system of insurance regulation in the U.S. It remains to be seen what recommendations are made and how they could affect the current regulatory system. Our ratings on insurance companies consider factors such as the national and global competitive position of insurers, the quality and absolute levels of capital relative to the company's risk profile, and the sustainability of earnings. Any changes that affect these rating factors could affect ratings.”

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