WASHINGTON Dec 12 The U.S. Treasury
Department's insurance office on Thursday called for federal
oversight of mortgage insurers, adding that state regulators
should improve oversight of the entire industry.
The Federal Insurance Office's report to Congress on ways to
revamp U.S. insurance regulation was required by the Dodd-Frank
Act of 2010 after taxpayers bailed out massive insurer American
International Group during the financial crisis.
"In the short term, the U.S. system of insurance regulation
can be modernized and improved by a combination of steps by the
states and certain actions by the federal government," the
Unlike banks, which can have several federal regulators,
U.S. insurance companies are mostly overseen at the state level.
The Treasury's insurance office, which was created by the
Dodd-Frank law, is a research group, not a regulator.
AIG's 2008 bailout brought heaps of criticism on the
decentralized system of insurance regulation, including calls to
establish a federal agency to oversee the industry.
State insurers have countered that AIG did have a federal
regulator, the now-defunct Office of Thrift Supervision, which
also failed to spot the problems that nearly destroyed the firm.
Regulators have since handed considerable oversight of AIG
and Prudential Financial, another large insurer, to the
U.S. Federal Reserve. They are considering doing the same with
The insurance office's report, which took years to compile
and had been eagerly awaited by the industry, said federal
regulators should not take over all oversight because so many
insurance products are tailored to specific locations.
But the current hodgepodge system can be inefficient and
overly complicated as insurers become more globally active,
creating a role for federal officials, the report said.
For instance, the private mortgage insurance sector is so
entwined with the rest of the housing finance system that it
should be overseen at the federal level, the office said.
Mortgage insurance is often required for loans with low down
payments to compensate lenders or investors if the borrower
defaults on the loan.
The report said the federal government also could be more
involved in efforts to monitor financial stability, work with
other agencies to develop auto insurance policies that would
apply across state lines for U.S. military personnel, and study
the way personal information is used for insurance pricing.
States, it said, should develop better coordination for
situations when one regulator plans to make decisions related to
an insurer's solvency.
The states should also come up with some new policies
related to resolving failed insurers, monitor the impact of
different rate-regulation practices and craft plans to reduce
losses from natural disasters, the report said.