Lloyd’s Expects U.S. To Adopt Federal Regulation of Insurance

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Pushed by the global economic crisis, the United States is expected to embrace federal regulation of the insurance industry as early as 2009, according to some financial and insurance executives.

Federal regulation — something that most other nations already have — in the U.S. is expected, at least initially, to function in tandem with the existing state regulatory framework rather then supplant it, Lloyd’s of London’s chairman Peter Levene told Reuters.

“This is a halfway house,” Levene said of a proposal by U.S. Treasury officials earlier this year that would create a federal office for insurance regulation.

“It is gaining quite a bit of traction, and if it happens in the next year, we would regard that as good progress,” Levene added.

The near failure of giant American International Group Inc. has propelled the likelihood of federal regulation. Insurers are now regulated by states.

The federal government had to step in to save AIG in September, after state regulators ran out of resources to help the company address a severe cash crunch.

AIG’s bailout — pulled together by the U.S. Treasury, Federal Reserve and New York State insurance regulator over a matter of days as the insurer neared bankruptcy — has swelled to $150 billion from an initial $85 billion.

Lack of federal regulation is proving thorny for some other insurers attempting to tap into a broader federal funding program, as they try to boost capital drained away by investment losses. Eligibility for the government’s $700 billion bailout of the financial services sector is limited to those that are federally regulated, leaving most insurers out in the cold.

Lloyd’s has long been in favor of the U.S. taking a federal regulatory approach. The prospect was shunted until recently because some in the industry, including state regulators, opposed it.

“Insurers would be better served” by a federal regulator, said Joseph Perella, managing partner of corporate advisory firm Perella Weinberg Partners, speaking at a forum hosted by Lloyd’s.

Regulatory change more broadly is long overdue, Perella added, noting that oversight generally has not kept pace with massive shifts in business markets over the past few decades.

In the U.S., “state and federal coordination must improve,” he added.

Perella — a veteran deal maker who founded his firm after a long career in banking — is an advisor to C.V. Starr, a firm run by former AIG CEO Maurice “Hank” Greenberg. C.V. Starr was AIG’s largest shareholder before the government took an 80 percent stake as part of its rescue plan.