By Arizona State Senator Pamela Gorman:

Last week, the U.S. House Committee on Oversight and Government Reform continued a hearing on the collapse of financial titans Bear Stearns, Lehman Brothers, and American International Group (AIG).

The latter company received an $85 billion loan from the federal government to avert bankruptcy and is often characterized as “the world’s largest insurance company.”  That caused some to speculate that AIG’s problems would soon bring down other insurance companies.  To prevent future crises, some suggested that insurance should be regulated by the federal government.  As chair of the Arizona Senate committee that oversees insurance regulation in our state, I am not so sure.

First, AIG is not a typical insurance company; it is a highly diversified multinational corporation (note that the “I” stands for “international” and not “insurance”).  It operates under a holding company structure that includes hundreds of subsidiary companies engaged in a wide variety of commercial activities, many of which have nothing to do with insurance.

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Second, financial analysts and government regulators have traced AIG’s troubles to a subsidiary that specialized in a financial product called “credit default swaps,” an exotic financial instrument that experts have likened to gambling. Warren Buffet famously called them “financial weapons of mass destruction.”

Third, since these credit default swaps aren’t insurance, state governments had no authority to regulate them or the non-insurance institutions that sell them.  That authority resides in the federal government – which decided not to regulate credit default swaps at all.

Finally, while the feds fiddled, failed, and ultimately allowed the risky practices to burn the AIG holding company, AIG’s insurance subsidiaries were being carefully regulated by the states and are healthy.

Our state’s insurance department imposes rigorous capital requirements on all insurers to make certain they’ll be able to fulfill their obligations to policyholders.  As a result, Arizonans who hold auto, home, life, and health insurance policies issued by AIG or any other insurer can be confident that their claims will be paid.  Even if AIG sells their insurance companies to pay back the federal loan, state insurance regulators have full authority to assure that policy-holders have continued payment of claims.

While I am well known as a “states’ rights” advocate, my position here is purely common sense.  The economic harm caused by arcane financial derivatives came directly from a lack of proper oversight at the federal level of non-insurance products.  For Congress to use this recent AIG non-insurance melt down to force more federal insurance regulation is misguided at best.

Sen. Pamela Gorman (LD 6) chairs the Senate Committee on Financial Institutions, Insurance, and Retirement.  Questions on this issue should be directed to pgorman@azleg.gov.