Treasury urged to turn to insurers to help deal with illiquid assets


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The US Department of Treasury has been told that the insurance industry can play a big role in easing the global financial crisis.

This article appears courtesy of Reactions.

Testifying before the House Committee on Financial Services in Washington, DC, Cameron Findlay, executive vice-president and general counsel of broker Aon, said he believed that the creation of an insurance pool would help financial institutions deal with illiquid assets.

Findlay is keen to see the Treasury make greater use of section 102 of the Emergency Economic Stabilization Act – which refers to the insurance of troubled assets under the act – and establish a programme to insure the value of troubled assets.

The crux of Findlay's proposal was first outlined in a letter from Aon to Neel Kashkari, interim assistant secretary for financial stability with the US Treasury department, last month.

Participants in the asset stabilisation pool would have a portion of the principal and interest from specific, illiquid assets guaranteed. The Aon programme would insulate an asset holder from the decline in value resulting from the non-payment, or expected non-payment, of principal and interest.

The proposal, Findlay argues, would use a combination of risk retention, risk pooling and government backstop liquidity that would benefit taxpayers, financial institutions saddled with illiquid assets, and homeowners.

"The insurance of illiquid assets would protect financial institutions and the economy," said Findlay, who was speaking on behalf of the Council of Insurance Agents and Brokers.

"An insurance programme would provide asset holders the option to hold assets until maturity or until economic conditions permit the restoration of the assets' value, it would not flood the market with distressed assets, which could have the effect of further depressing assets.

"Insurance plays a fundamental role in the operation of the world's financial markets. Any coordinated effort to combat the turbulence roiling those markets should consider the potential for an insurance component.

"As long as the problems created by depressed valuation of these assets in the capital markets remain, no matter the volume of capital infusions, financial institutions will have a difficult time playing their critical role in the functioning of our economy."

When section 102 of the Emergency Economic Stabilisation Act was first included there was a degree of scepticism as to its merits. But Findlay believes the inclusion of the provision has proved to be a prudent move.

"An insurance programme would have significantly lesser short-term cash requirements than capital infusions, and because such an insurance plan would be largely funded by its direct beneficiaries, it would restore liquidity without requiring massive outlays of government funds to the benefit of taxpayers," he said.

"During the frenzied September effort to craft emergency legislation, some parties expressed scepticism regarding the idea of insuring troubled assets. However, the little hindsight afforded by the six weeks that have passed since the bill's enactment have already provided ample evidence that this committee exercised great foresight."