House Bill Submitted To Create Federal Insurance Charters

National Underwriter News
April 3, 2009

Legislation to impose some federal regulation on insurers and create a federal insurance charter mechanism has been introduced by two House members who said the American International Group meltdown underscores the need for their measure.

In unveiling their National Insurance Consumer Protection Act, Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif. said numerous bipartisan reports have called for insurance regulatory reform.

Rep. Royce also noted that the federal government is already heavily invested in insurance—an industry it has no regulatory authority over.

Insurance trade groups were split on the measure some calling at boon to international trade and praising optional federal charter, while critics called it a convoluted and costly proposal.

According to a fact sheet distributed by Reps. Bean and Royce, the bill would establish a "parallel, national system of regulation and supervision for insurers, insurance agencies, and insurance producers, similar to the dual banking system."

Regulated entities would be able to choose national or state regulation, the fact sheet noted, unless the national commissioner and a newly-created systemic risk regulator determine an insurer is "systemically important," in which case they could require the insurer to be nationally regulated.

An Office of National Insurance (ONI), responsible for issuing charters for life, property-casualty, and reinsurance companies, as well as producers, would be created within the Treasury Department, with a commissioner appointed by the president for a five-year term, subject to Senate approval.

The commissioner would be charged with examining insurers, agents and brokers every two years and in response to a complaint or evidence of violation of a law or regulation. The commissioner would have enforcement powers patterned after those available to federal banking agencies.

Additionally, state and national commissioners would have to share information with a systemic risk regulator, who would be able to make "corrective action recommendations" to the national and state commissioners, "to take action to mitigate or avoid actions taken by an insurer or affiliate that would have serious adverse effects on economic conditions and financial stability."

The systemic risk regulator would have the authority in certain situations to circumvent an insurance regulator in "emergency circumstances."

The bill would also set up a Division of Consumer Affairs, which would in turn establish offices in each state to act upon questions and complaints.

Reaction among the insurance industry was varied, with some optional federal charter supporters praising the bill's intentions but raising concern about some of the particulars.

The Council of Insurance Agents & Brokers (CIAB), the American Bankers Association (ABA), the American Bankers Insurance Association (ABIA), and the Financial Services Roundtable expressed support for the bill. The associations all stated that an OFC will help simplify international regulatory cooperation for larger, national companies.

The ABA and ABIA noted recent statements by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner supporting an OFC.

Leigh Ann Pusey, president of the American Insurance Association (AIA), also supported the bill, noting that AIA has long supported an OFC.

However, the bill calls for a National Insurance Guaranty Corporation, while also requiring national insurers to participate in state guaranty associations, and Ms. Pusey said she believes consumers would be best protected under a single guaranty fund system.

The Property Casualty Insurers Association of America (PCI) said Congress should train its focus on systemic risk, rather than first trying to overhaul the entire financial regulatory system.

David A. Sampson, PCI's president and CEO said, "The reason that discussion of an optional federal charter should not be part of the systemic risk debate is that it falsely presumes that only large companies pose a systemic risk. In fact, smaller companies can pose significant systemic risk, and larger companies may pose little or none."

He added an OFC also concerns only one industry, while systemic risk reaches across all financial services industries.

Cliston Brown, PCI spokesman, issued a PCI response to the bill by e-mail stating, "PCI believes the states have not reformed the current regulatory system into a model that effectively facilitates commerce in the 21st century. To modernize, we support reforming the state-based system, but where the states continue to fail to make needed improvements, we may consider other approaches if proven necessary to the creation of a fair, effective and efficient business environment."

The National Association of Mutual Insurance Companies (NAMIC) opposed the bill. Jimi Grande, NAMIC vice president for federal and political affairs, said, "This convoluted legislation would create a huge new bureaucracy that would have broad, ambiguous powers. The ONI, as described in the legislation, would create multiple layers of regulation leading to confusion and higher costs for consumers."

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