Multiple investigations of accounting practices and questionable deals at American International Group Inc. and New York state Attorney General Eliot L. Spitzer's ongoing investigation of insurance industry practices are rekindling a long-running debate about who should police insurance companies.
New York-based AIG is being investigated by the Securities and Exchange Commission, the Justice Department, the New York attorney general and state insurance officials. This week, the insurance giant disclosed it could be forced to cut its net worth by $1.7 billion because of a series of improper transactions and other accounting maneuvers that may have been used to burnish its financial statements.
New York state Attorney General Eliot L. Spitzer gained national prominence by exposing gaps in mutual-fund oversight.
(J. Scott Applewhite -- AP)
The question of who should serve as a watchdog for the insurance industry has been debated on Capitol Hill and around the country for decades, ever since Congress passed a 1945 law giving control to the states. Now, however, insurers and trade groups are wondering whether the AIG controversy and state probes of industry practices will build momentum for legislative proposals that could increase federal involvement in the process.
"I would assume that members of Congress read the same papers that we read," said Gary E. Hughes, general counsel at the American Council of Life Insurers. "The facts themselves suggest there will be heightened interest in the question of regulation and the federal role in that."
Spitzer became nationally prominent by exposing gaps in the federal oversight apparatus for mutual funds. But his current probe and the related investigation into how AIG and other companies use insurance policies to help inflate earnings and boost reserve accounts is raising questions about how closely state insurance regulators have monitored operations in the past, experts said.
"As far as consumer groups are concerned, we've said over and over again that we don't care who regulates the industry, so long as it's effective," said Bob Hunter, director of insurance at the Consumer Federation of America.
Rep. Michael G. Oxley (R-Ohio) and Rep. Richard H. Baker (R-La.) are drafting a plan that would rewrite rules on licensing and price controls and mostly rely on state regulators to enforce them. In essence, the plan would establish uniform rules across the states, deregulate insurance rates and streamline licensing procedures. In a speech last year, Oxley called for a move to a "more free-market system." He argues that would incite competition and ultimately benefit consumers.
The lawmakers have not yet formally introduced a bill, which remains a "work in progress," said Peggy Peterson, a spokeswoman for Oxley.
The fate of the plan is complicated by disagreements among industry players about how big a role the federal government should play. A spokesman for the Independent Insurance Agents & Brokers of America said his group supports the Oxley draft.
But two weeks ago, the National Association of Insurance Commissioners sent Oxley and Baker a letter expressing concerns about key aspects of their plan, including "mandatory federal rate de-regulation." Rather than concentrate on pricing issues, said Julie A. Rochman, a spokeswoman at the American Insurance Association, regulators instead should focus on illegal market conduct of the sort Spitzer and SEC investigators are exposing.
One alternative regulatory approach popular among some firms with national and international operations would allow companies to choose whether they are overseen by federal or state officials, a model currently in place for the banking industry.
William H. McCartney, senior vice president of government and industry regulation at the San Antonio insurer USAA Group, said that plan would help the company, which primarily serves military families, follow "a uniform system of regulation rather than working our way through myriad and sometimes conflicting state laws."
The Senate Banking Committee will hold hearings on insurance regulation this year.
Some observers say that the AIG case, more than anything, simply reinforces the longstanding federal role in policing financial statements of publicly traded companies.
"It's a good reminder about the necessity of Sarbanes-Oxley and the need to continue making progress toward compliance," said Peterson, the Oxley spokeswoman. "The SEC is addressing this as it would address accounting problems at any publicly traded company."