INDIANAPOLIS (Jan. 23, 2009) – Credit default swaps are not insurance and should not be viewed as such by policymakers seeking answers to the current financial crisis. That’s the message the National Association of Mutual Insurance Companies (NAMIC) will deliver to state legislators meeting for a special hearing in New York City tomorrow.
Members of the National Conference of Insurance Legislators’ Steering and Financial Services Committees will hear from a panel of experts as they examine the issue of credit default swaps in order to provide guidance on the regulation of the derivatives to NCOIL members across the country. Former Illinois Insurance Director Nat Shapo will testify on behalf of NAMIC.
"Derivatives and CDS are certainly a form of risk management. But these products are not insurance – which is itself another, but not the only, method of managing risk," Shapo wrote in a recent analysis on the financial crisis for NAMIC. CDS are "more akin to securities markets – counterparties hedging risk through trades with each other – than to insurance risk pools –insurers underwriting and classifying their consumers by risk for placement in a common fund.” Shapo also noted that most CDS lack insurable interest.
During the 1990s, as "the derivatives process grew unabated ... insurance regulators developed and implemented a comprehensive system of financial oversight that includes capital and surplus requirements, risk-based capital standards, sophisticated review of reserves, and a national accreditation system that provides incentives for each state to thoroughly and rigorously supervise their domestic companies. The industry supervised by this system is well capitalized, stable, and reliable,” Shapo noted.
While he urges congressional oversight of CDS, Shapo says it’s important that lawmakers tailor solutions to proven needs. “While no system is perfect, the state insurance financial regulatory system has been effective and has provided a source of comparative stability during the recent financial crisis. NAMIC members urge policymakers to focus their responses to the financial crisis by identifying and remedying documented problems – but not fundamentally disturbing markets and regulatory systems that have served consumers well.”
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Posted: Friday, January 23, 2009 12:00:00 AM. Modified: Friday, January 23, 2009 4:15:43 PM.
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