A light touch: when insurance issues land on the Treasury Department's doorstep, Wayne Abernathy is there to pick them up. (Regulation: The Big Picture).

The U.S. Treasury Department's influence over the business of insurance has grown since Sept. 11, 2001, but Wayne Abernathy, assistant secretary of the Treasury for financial institutions, will tell you he is not regulating the industry.

"There is an interaction," Abernathy said. "Decisions were made many years ago that insurance was best regulated at the state level. I don't know of plans to change that, but people always talk about it. It's the nature of an evolving economic system. There's always a lot of talk, but no plans for having the federal government do it."

Abernathy and his staff are responsible for implementing the federal terrorism backstop program and the anti-money-laundering USA PATRIOT Act.

A lack of experience with the industry had Treasury thinking insurance didn't offer a likely avenue for laundering money, Abernathy said. "So our initial approach was we didn't need to apply the act to insurance as we did to banking." But consultations with state insurance regulators led Treasury to the conclusion that certain products might become avenues for money laundering.

Treasury always is reviewing what it's done so far with the PATRIOT Act regulations to see how it can relieve unnecessary burdens while covering the areas it needs to cover, he said. "We are encouraging people affected by the PATRIOT Act to let us know how we can do it better. The greatest single successful aspect has. been that we have kept it from being a confrontational relationship. Instead, it's a cooperative arrangement."

When it came to including insurers in the PATRIOT Act and developing regulations for the federal terrorism backstop, "our constant approach has been 'have the lightest touch,' and not take the central role from states; they have the experience," he said.

Insurance vs. Reinsurance 

Abernathy made clear that the backstop isn't a federal insurance program, but temporary federal reinsurance. "Primary insurance continues to be a state-monitored function. We don't want to get into that business and don't see the need to get in," he said.

As the federal government takes a reinsurance approach on some catastrophic terrorism event, the intent is for the private sector to progressively take over the federal role as the amount of federal reinsurance declines each year over the life of the three-year program.

For Abernathy and his staff, among the biggest challenges has been that the federal reinsurance program became law and took effect before it actually was set up and before detailed regulations were in place. Treasury has been developing them and expects to release them in a series.

"We had to monitor and manage all at the same time we had to get details. We're under the gun all the time. It's like someone who has never driven a car, getting in, driving and studying the manual at the same time."

In fact, he still is assembling a dedicated staff to oversee the terrorism program. The challenge has been persuading very qualified people who know the industry to pull up roots from wherever they are and come to Washington to take a job they know will end in three years, he said.

Congress even recognized some of the more difficult aspects of devising those program regulations, Abernathy said--for example, how to cover participants in the federal program who say they are self-insured: "Does this mean they have a genuine program, or that they just didn't want to bother with buying a policy?"

Some actually set money aside and enter formal arrangements, he noted, while others just carry the risk. "Where is the line between them? Congress just said 'figure it out,'" he said.

To what extent are foreign insurers covered? How much of a presence in the United States' must they have before they would be included in the program, and should inclusion be mandatory or opt-in? "Countries have various structures that don't look like ours, and the tough question for Treasury is whether there's enough of a difference that it would require different treatment, or should a foreign insurer have to follow the same rules," he said.

Optional Federal Charter

When people want to talk about an optional federal charter for insurance companies, they come to Treasury because the department "can be an honest broker. It doesn't carry on day-to-day regulation and doesn't have a dog in the fight," Abernathy said. "There are advocates in Congress to go for a federal charter, and I wouldn't be surprised to see a bill introduced."

Abernathy was sworn in as Treasury Assistant Secretary for Financial Institutions on Dec. 2, 2002. He had been nominated by President Bush on Aug. 1 and confirmed by the U.S. Senate on Nov. 14. In his position, he is the senior adviser to the Treasury secretary, the deputy secretary and the undersecretary for domestic finance on all matters relating to financial institutions, government-sponsored enterprises, financial education initiatives and ensuring the resiliency of the financial-services sector.

His more than 20 years of financial policy expertise includes his most recent position as Republican staff director of the Senate Committee on Banking, Housing, and Urban Affairs, where he also served as committee staff director to former Senator and committee chairman Phil Gramm, R-Texas, from 1999 to 2001.

Previous experience with the Senate Banking Committee includes serving as staff director of the Subcommittee on Securities from 1995 to 1998; Republican economist for the committee from 1989 to 1994; a senior legislative assistant for Gramm from 1987 to 1989, and as an economist for the Banking Committee's Subcommittee on International Finance and Monetary Policy, 1981-1986.

Even with his background, Abernathy gives much credit to working closely with the National Association of Insurance Commissioners.

"We wouldn't be where we are without the NAIC," he said. "State regulators are the ones to look at where the product meets the customers. They have to be involved, and we've had excellent cooperation with them."

Building a Strong Staff

Insurance industry lobbyists and others in the industry said the staff Abernathy has assembled thus far is pretty knowledgeable about the industry. One name that comes up often is Roy Woodall, who is a former Kentucky insurance commissioner. He also was a director for a life-insurance trade association, worked for a law firm and more recently worked for the Congressional Research Service as one of its insurance experts.

"If you were a congressional staffer and you want a research paper on mold, you call on the CRS," said Julie Gackenbach, assistant vice president of government relations with the National Association of Independent Insurers. "CRS is staffed with real experts."

As Congress looked ahead and knew it would be handling a number of insurance issues, it also knew it would need an insurance "go-to" person. That's why Woodall was asked to come on board at CRS, added Catherine Willis, NAII's director of government relations.

Scott Harrison, managing director of the national insurance regulatory practice for professional-services firm KPMG LLP, said he had a fair amount of contact with Woodall when Harrison was deputy superintendent in the New York State Insurance Department from 1995 to 1997.

At the time Woodall was with the American Council of Life Insurers. "I think Roy brings the type of experience and breadth of knowledge that an agency like Treasury needs," Harrison said.

Woodall headed state affairs for ACLI when he was there, said Gary Hughes, ACLI's general counsel and senior vice president. Woodall is expected to be involved in Treasury's more immediate priorities, which include looking at the question of whether group life insurance should be included in the terrorism backstop program, Hughes said.

"There is far too little expertise on insurance in this town, and Roy is in a very good position to bring that expertise to Treasury on a wide range of issues--on terrorism and the optional federal charter. He knows the industry from a business perspective and a regulatory perspective," Hughes said.

The PATRIOT Act, which affects life insurers, would seem to make sense as an issue for Woodall's input, but Hughes noted those discussions predate Woodall's arrival and it's a matter that's already pretty well set.

Putting the PATRIOT Act under Treasury's administration makes perfect sense, Harrison said. The precursor to the PATRIOT Act was the Bank Secrecy Act. Passed more than 20 years ago, the act is the principal anti-money-laundering statute and imposes a variety of requirements on federally regulated banks to detect money laundering.

Treasury was given regulatory and enforcement responsibility, so it already has that infrastructure in place. With the PATRIOT Act, Congress gave Treasury the new responsibility to oversee anti-money laundering in the insurance industry, Harrison said. "If not Treasury," he asked, "then where?"