DiMuccio: Lawmakers, Don’t Overregulate the Financial Industry
In Washington, populist anger is often a catalyst for legislative action. Sometimes that’s a good thing — as in the early 1970s, when citizen outrage over pollution in the nation’s lakes, streams and rivers led to passage of the Clean Water Act. But often, it can backfire — like in 1930, when Congress reacted to anger from farmers over low-cost agricultural imports by passing a sweeping protectionist measure that raised tariffs in all sectors of the economy, touching off a global trade war that only served to deepen the Great Depression.
[IMGCAP(1)]Now that Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) has introduced a bill to regulate the financial services industry and work begins to refine it, I hope lawmakers will recall these examples and regulate and legislate only in a way that’s fair, appropriate and sensible.
In considering how to achieve this goal, it’s important to keep in mind discussions on what may have caused the crisis of 2008 — and what didn’t.
America’s financial system came to the brink of collapse, it appears, after some of the nation’s largest financial services firms made bad bets on risky mortgage-backed securities. This, in turn, made necessary a massive financial bailout of this troubled industry. Voter anger was further stoked when word came that some of the biggest recipients of government largesse were going to pay out millions of dollars in performance bonuses — including payments to some of those who helped steer their companies into such perilous financial waters.
There’s no question that taxpayers and investors will be better protected and the risk of future economic crises will be diminished if the cause of this recent economic crisis is made clear.
However, as the Senate considers the best way to address America’s understandable rage at the near-collapse of its financial system, it will make a grievous mistake if it treats the stable and strong property casualty insurance companies in the same way as a very small group of large financial services firms.
That’s because Amica Mutual Insurance Co. and the more than 1,000 other companies that make up the Property Casualty Insurers Association of America have so little in common with the firms that contributed to the nation’s biggest financial crisis since the Great Depression.
We operate differently. We are effectively regulated at the state level and make only low-risk investments financed entirely with a firm’s own money. We’re required to keep large reservoirs of cash on hand to pay out claims — meaning our investments must be both extremely liquid and highly conservative.
This was evident in the Obama administration’s 2009 white paper on the financial collapse, which concluded that “the current crisis did not stem from widespread problems in the insurance industry.” Furthermore, a 2008 study by the investment firm MSCI Barra measured the degree to which some 35 different industry sectors were leveraged and ranked the insurance industry 27th, near the bottom, and even well below household products. By contrast, financial services firms like those that received federal bailouts ranked seventh.
And yet, in many respects, the Senate bill would treat Wall Street banks the same as the storefront insurance operations that can be found in nearly every town and city across America. This is a move that would subject all of PCI’s members to costly, duplicative and needless new regulatory requirements.
This approach might make sense if property casualty insurers weren’t already adequately regulated and a resolution mechanism was not in place. But in every state across the nation, property casualty insurers are required to pay into a guaranty fund that will provide coverage for homeowners for property damage and drivers for auto repairs in the unlikely event that their insurance carrier becomes insolvent. In 2008, there were no property casualty company insolvencies. Yet in the same year, the federally regulated banks saw an insolvency rate of 10.55 percent and thrift impairments reached 31.18 percent.
The members of PCI are committed to working with the White House and Congress to come up with a common-sense, effective regulatory reform plan for our nation’s financial sector.
PCI supports meaningful and reasonable regulatory reform of the nation’s financial services sector. But we’re concerned for our member companies. They are adequately capitalized; engage in low-risk, conservative investments; are already highly regulated; and are not structured like companies and firms that caused the crisis. However, we fear they will be unfairly burdened with costly and complex new regulations.
We ask only that lawmakers in Washington fix what’s broken and not derail an industry that employs hundreds of thousands of people, provides peace of mind to millions of homeowners and drivers and poses no threat to the well-being of our nation’s financial system.
Robert A. DiMuccio is chairman, president and CEO of Amica Insurance.