Senators introduce Optional Federal Charter legislation
Citing bipartisan support to revamp the insurance industry regulatory system, two U.S. senators unveiled legislation that would allow life and property/casualty insurers to choose federal rather than state regulation under an “optional federal charter” system. U.S. Sens. John Sununu (R-N.H.) and Tim John-son (D-S.D.) both members of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the “National Insu-rance Act of 2006” on Wednesday, April 5.
The bill has been referred to the Banking Committee where hearings are expected to begin later this spring.
“Unlike the modernization of banking and securities of the late 1990s under the Gramm-Leach-Bliley Act, the insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation, and growth,” Sununu said. “The existing governing system spreads across more than 50 jurisdictions and has proven burdensome and ex-pensive for all concerned. A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue and stands to substantially improve the environment for those who buy, sell and underwrite life and property and casualty insurance.”
An industry divided
The insurance industry has split over the advisability of creating a dual regulatory system with an optional federal charter. The life and financial services industry, some larger property casualty insurers and larger commercial insurance brokers generally favor the option while other property casualty insurers and independent agents oppose it.
The Independent Insurance Agents and Brokers of America said strongly opposes the National Insurance Act.
“There is no question in the insurance industry that the existing regulatory system needs comprehensive reform,” said Big “I” CEO Robert A. Rusbuldt. “Change is long overdue, and virtually every industry stakeholder agrees the existing system is a slow, inefficient patchwork of differing laws and regulations. The Big ‘I’ agrees strongly with the need to update the regulatory system, but a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer.”
The Big “I” argues that establishing a dual state/federal system would be very confusing to consumers who may have some insurance products regulated at the state level and others at the federal level.
However, The Council of Insurance Agents and Brokers, which represents large commercial property/casualty domestic and international commercial insurance brokers, supports the optional federal charter system.
“This approach is modeled after the dual charter system for banks, which has worked well and enhanced competitiveness in that part of the financial services sector,” said CIAB President Ken A. Crerar.
Crerar said if the United States hopes to be successful in pressing its case for open markets and free trade overseas, it must have uniformity and consistency in the regulatory environment of the 50 states. In addition, he said, an optional federal charter would significantly improve the ability of regulators to monitor the solvency and financial stability of insurers.
Regulators’ view
State insurance commissioners have stated their opposition to the Sununu-Johnson approach as well.
Alessandro Iuppa, president of the National Association of Insurance Commissioners says the National Insurance Act would “fundamentally dismantle the current system and allow insurance companies to opt out of state oversight and policyholder protections.” He added that state insurance officials are working to continuously retool and upgrade state supervision to provide multi-state platforms and uniform applications to leverage technology and enhance operational efficiency.
But their efforts to modernize the insurance regulatory system are not quick enough, Sununu said.
“State commissioners may have hoped to achieve uniformity and market-based reform within the state regulatory scheme, but those improvements have simply not occurred and are not expected in the near future,” Sununu said.
“The National Insurance Act of 2006 is about choice,” Sen. Johnson stated. “Consumers should have the benefit of the greatest array of product choice the industry can provide and insurance companies should have a choice between state and federal regulation.”
Insurers’ view
The American Insurance Association, a supporter of the National Insurance Act, says the legislation would allow consumers to reap the benefits of a modernized market-based insurance system by providing P/C insurers the option of being nationally regulated.
“The legislation is based on a model that has been proven successful for more than 100 years–the national/state banking regulatory system,” said Marc Racicot, AIA president.
But insurers opposing the federal charter approach say they are concerned about the establishment of a new federal bureaucracy. “Federal regulation has proven no better than state regulation at addressing market failures or protecting consumer interests and, unlike state regulatory failures, federal regulatory mistakes can have disastrous economy-wide consequences,” said NAMIC Federal Affairs Senior Vice President David A. Winston.
The Property Casualty Insurers Association of America also opposes federal charter legislation. Ernie Csiszar, president and CEO of PCI says “the positive elements of the OFC proposal can be incorporated into a much less intrusive concept–the SMART Act–that would preserve state regulatory authority but would establish federal standards for key areas of oversight.”