NU Online News Service, May 3, 3:35 p.m. EDT

U.S. Senate Republicans believe that failure to increase federal oversight of large insurance companies is a major deficiency of financial services reform legislation, questioning whether state guaranty funds are adequate enough to deal with large insurance failures.

In a report issued late Friday, Republicans said the need to provide funds to American International Group to keep it from becoming insolvent pointed out the necessity to study the "adequacy of state guaranty funds to handle the failure of large, interconnected, and international insurance companies."

The report noted that it was not only AIG that received federal funds during the 2008-2009 financial crisis but several other "prominent insurance companies," including Hartford Insurance Group and Lincoln Financial Services.

Debate on the legislation, S 3217, the "Restoring Financial Stability Act of 2010," began Monday on the Senate floor.

The Republican's report said the bill lacks a requirement that the Treasury Department study the adequacy of state guaranty funds to handle the failure of these large insurance companies.

"What notably is lacking" in provisions of the bill that deal with tightened financial regulation "is any provision to enhance regulatory oversight of large insurance companies," the Republican paper said, adding that the "collapse of AIG revealed serious shortcomings in the regulation of large, interconnected, and international insurance companies."

Specifically, the report said, "The failure of AIG was due, in large part, to the massive securities lending operation that several state-regulated AIG insurance companies ran collectively."

The Republican's report was released just two days after the Government Accountability Office issued a report indicating that because of federal help, AIG is now "stable."

However, the report said, the ability of the government to recover all the $182 billion it has loaned to AIG since 2008 depends on the ability of its underlying insurance companies to increase profitability.

The comments about the need to study the viability of the guaranty fund system in the "dissenting views" comments by Republicans is dealt with in discussing Republican concerns about Title V of the bill, which creates an Office of National Insurance.

This provision provides very limited powers to the ONI. Under the Senate bill, this agency would have the authority to collect and analyze insurance data and prepare a study for Congress recommending to Congress the best ways to modernize the insurance system.

But, the Republicans say in the dissenting views, "we believe that among the issues that the reported bill presently mandates the director of ONI to study, there should be a study of the adequacy of state guaranty funds to handle the failure of large, interconnected, and international insurance companies."

Moreover, the Republicans, in criticizing the bill, said "While insurance regulation is a complex matter and our state system largely has functioned well for nearly two hundred years, the size and international reach of many insurance companies has raised legitimate questions, including whether reforms are needed to reflect changes in the marketplace."

It added, "The failure of the reported bill to include provisions to ensure the proper oversight of large, interconnected, and international insurance companies like AIG is a glaring omission."

Their comments are likely to stir up strong opposition from supporters of state regulation.

In a recent letter to the Senate, for example, the National Conference of Insurance Legislators criticized the provision creating the Office of National Insurance. They said state legislators fear such an office "would preempt state law and eventually threaten successful state insurance oversight."

The letter added, "As has been evidenced and attested to over and over again, and despite the wishes of those who would seek to avoid the protections of state regulation, insurance regulation did not contribute to the crisis and does not need federal intervention."

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