Proposed Restructuring Of Financial System Leaves Many Questions For Insurance Industry
Treasury Secretary Timothy Geithner’s proposed restructuring plan of the financial system leaves many unanswered questions for the insurance industry. Granted, sweeping changes have been expected for some time now considering the disastrous effect the seizing up of financial markets had on the general economy.
Large firms especially will face increased scrutiny and regulation due their impact on systemic risk for the economy. The example of AIG will be in the minds of many for a long time and will serve as a lesson on how the underestimation of risk in one part of a company can have crippling effects on the overall health of the company as a whole.
There is also the yet to be defined role of federal regulation in what has long been the domain of state regulators. While increased federal regulation in this case may actually increase efficiency in the industry, there are still concerns on how that will impact the level of consumer protection.
Obviously there are some glaring gaps in the regulatory structure of the financial system and it didn’t help that deregulation over the past three decades has helped blur the lines between insurance, commercial and investment banking. The most notable gap is in the derivatives markets and the primary reason for AIG’s near bankruptcy.
AIG basically sold insurance policies against credit defaults for which it did not have anywhere near enough capital to cover and they were not the only insurer to do this, although they had the largest exposure by far. While the government will be working frantically to close this regulatory loophole, it will not be an easy task since the derivatives market has grown so enormous in the short time that it has been around.
It will take some time for insurers to unwind their overly leveraged positions and in the mean time this still leaves them exposed to potentially large losses unless credit conditions improve sometime soon.
