State Opposition, Other Issues Bury Federal Charter Efforts

Although three major proposals to revamp insurance regulation are before legislators in some form, it appears that the industry’s ultimate goal of optional federal charters is nowhere close to fruition.

Only the National Association of Insurance Commissioners’ interstate compact is likely to muster passage, while the other two proposals, currently floating in Congress, appear to be long shots. But the NAIC proposal doesn’t address federal charters.

The key issues for insurers are increasing speed to market, conduct exam reform, and uniform producer licensing requirements. The industry has long called for a streamlined process to reduce repetitive and costly bureaucratic compliance requirements in each state.

The NAIC interstate compact tries to deal with some of these issues while remaining rooted in the traditional state-based insurance regulatory system. In addition, it only affects life insurance, annuities, disability income insurance, and long-term care insurance in the states that sign on.

Once the compact is passed by at least 26 state legislatures or 40 percent of the market–10 states have given it the nod so far and another 19 are considering it–it would provide uniform standards for product approval, helping speed new product introduction, at least in the states that opt in.

But for many in the insurance business, that won’t be enough. The current, state-by-state approval process costs large carriers millions of dollars annually in regulatory compliance, according to Lisa Stimson, a senior manager in KPMG’s risk advisory services.

The time-consuming approval process also stifles product introduction: “What good does it do you if you see a need in the marketplace and it takes two years to get a product out there?” Stimson said.

The movement for insurance reform gained new life after the passage of the Gramm-Leach-Bliley Act in 1999. That financial services modernization bill allowed banks to merge with brokerage companies for the first time since the 1930s, and it opened the door for banks and brokerages to own insurance companies.

In the wake of GLB, carriers feared that they could not withstand the onslaught of banks and brokerages selling insurance, and argued for lighter regulation to help them compete. Insurers said that an optional federal charter would give them the same regulatory choice (state or federal) as banks.

“The optional federal charter is a very comprehensive approach,” says Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers. “Ideally, we would like to see a dual chartering system where you could pick the one that best suits your circumstances.”

The American Insurance Association, which represents property/casualty companies, also supports the optional federal charter idea. Julie Rochman, senior vice president of public affairs for AIA, said it would allow states to maintain many prerogatives, but also give insurers that market products nationally oversight at the federal level.

Insurance associations and others soft-pedal the fact that a federal charter would likely eviscerate the current state regulatory system, which has led to huge opposition from state insurance regulators. Regulators argue that an optional federal charter would pit the states against the federal government, and that oversight would decline as a result.
“The states are closer to the consumer and they can handle the day-to-day problems,” said Oregon Insurance Administrator Joel Ario. “The federal government does not have the wherewithal to handle half a million consumer complaints each year.”

But perhaps the biggest obstacle is that the dire threat to the insurance industry from banks and brokerages has yet to materialize. The European model of bancassurance–banks owning insurance companies–has not caught on in the United States.

In spite of the roadblocks, several of the national insurance trade organizations are looking for a senator to sponsor an optional federal charter bill. The effort has gone nowhere to date, with Terrorism Risk Insurance Act renewal taking much higher priority.

In addition, New York Attorney General Eliot Spitzer’s investigations have roiled the insurance world, making Congressional action on federal regulation extremely unlikely. “It’s not going to be an easy sell,” admitted the ACLI’s Hughes.

Meanwhile, in the House of Representatives, Michael Oxley (R-Ohio) and Richard Baker (R-La.), have been pushing the State Modernization and Regulatory Transparency Act. The so-called Smart Act would deregulate insurance rate structures and policy forms, while leaving enforcement and oversight with state regulators.

But neither insurers nor state regulators like the Smart Act. Carriers feel they’d be held to a mishmash of state and federal regulation, and state commissioners feel the legislation would usurp their power.

Birny Birnbaum, executive director of the Center for Economic Justice, a group that represents consumers, said that the Smart Act would make it difficult for state regulators to do their jobs.

“The premise is that the feds will set standards and the states will implement them,” he said. “But it’s really like a massive unfunded mandate that won’t let the states protect consumers.”

Insurance commissioners aren’t against all federal involvement in insurance. States want TRIA extended past this year, and they would also like more information sharing between the federal government and state insurance departments.

In particular, commissioners want access to the Federal Bureau of Investigations’ criminal data base, in order to screen agents who are applying for licenses. Providing health insurance is another area where the federal government could play a positive role, commissioners say.

But “the overall regulatory framework is best served at the state level,” said Alessandro Iuppa, Maine Superintendent of Insurance and president-elect of the NAIC. “I have yet to meet a person who would like to deal with an insurance problem by calling Washington.”

Article reprinted with permission from KPMG’s Insurance Insider, where Jacqueline Gold is managing editor. Copyright 2005 KPMG LLP.

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