Giving insurers the option to choose between the current system of state regulation and federal regulation has been a hotly-debated issue for many years. Now with regulatory reform high on US policymakers’ agendas, those favouring federal regulation appear to be gaining the upper hand. Charles Davis reports.
The on-again, off-again idea of an optional US federal insurance charter – complete with a single national insurance regulator – is back on again.
Eight major insurance industry trade groups supporting a federal charter told key members of Congress in a letter in late-May that any future financial services reform should include a dedicated national insurance industry regulator.
This approach contrasts with the view of other industry groups that are asking Congress to deal first with legislation creating a systemic regulator and provide a federal regulator with authority to deal with troubled financial firms regardless of product, then deal with more comprehensive reform later.
Enacting uniform federal regulation and supervision of insurers, producers and holding companies “would reduce costs and risks to consumers and the economy,” said the coalition, which included Agents for Change, the American Bankers Association, the American Bankers Insurance Association, the American Council of Life Insurers, the American Insurance Association, the Council of Insurance Agents and Brokers, the Financial Services Roundtable, and the Reinsurance Association of America.
“As Congress examines the creation of a financial stability regulator for all financial services institutions, it should give insurers and reinsurers the ability to be chartered and exclusively regulated at the federal level,” the groups said.
The coalition went on to argue that state insurance regulation should remain available for those who choose it, but the current environment, coupled with the structural limitations of the state system and the fact that insurance has become a global, integrated business, underscores the need for a dedicated federal insurance regulator.
The coalition argued that strong solvency regulation is central to consumer protection, and that a federal insurance regulator “must have the authority to examine and address all factors material to the solvency of national insurers and reinsurers, including analysing relevant financial data of non-insurance affiliates and insurance holding companies that may be germane to that financial regulatory authority.”
A federal insurance regulator’s authority should include the ability to “represent the US internationally on all relevant insurance issues” while preserving the rights of states to levy “nondiscriminatory premium taxes.”
It also said federal regulation must encourage insurance companies to develop new and enhanced insurance products, adding that insurance rates should be determined by competitive market forces, rather than government rate regulation.
A well-established idea
The concept of an optional federal charter and the federal insurance regulator has been bandied about for years, but the political will clearly has shifted, and its prospects now are quite real. In fact, the chairman of the House of Representatives committee that oversees the insurance industry, Paul Kanjorski, said recently that federal regulation is no longer a matter of if, but when.
Leading a hearing of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Kanjorski said the taxpayer bailout of AIG and other high-profile insurance scandals, combined with the requests by some life insurers for infusions of federal capital make such a move inevitable.
“We can no longer continue to ask the question about whether the federal government should oversee insurance. The answer here is clearly yes,” he said at the hearing.
In a statement, Property Casualty Insurers Association of America president and CEO David Sampson said the most important thing Congress should do is address the issue of systemic risk. The US Treasury and the Federal Reserve should continue to “pump life into the ailing capital and credit markets” while working with lawmakers to prevent new systemic risk failures, he said.
In May, Representatives Melissa Bean and Ed Royce introduced the National Insurance Consumer Protection Act (NICPA) that would create an optional federal charter for insurance companies.
The bill is an update of previously introduced legislation calling for a national regulatory system to charter and oversee insurers. Specifically, NICPA creates an Office of National Insurance (ONI) that would be headed by a National Insurance Commissioner. The Act authorises the commissioner to issue charters for life insurers, reinsurers, and general insurers, as well as to issue charters and licenses for insurance agencies and producers. It also provides for the conversion of state-regulated entities to a national charter and the conversion of federally regulated entities to a state charter.
New to the proposed law is the creation of a presidentially-appointed “systemic risk regulator” for insurers, and a Coordinating Council for Financial Regulation that would add stricter consumer protection and allow for establishment of self-regulatory organisations for nationally chartered and licensed insurers.
The ONI would be established as an independent bureau within the Treasury Department, much like the Office of the Comptroller of Currency and the Office of Thrift Supervision.
The bill has only two co-sponsors, and similar legislation introduced in 2006 and 2007 failed to pass the House or the Senate. Unlike past years, when the passage of optional federal charter legislation was stymied by stand-offs among large life insurance companies, this year the issue is more likely to be determined by how Congress and the Obama administration choose to deal with systemic risk and financial regulatory reform.
Thanks to the political wreckage of the government bailout of AIG, the Administration and Congress are likely to establish some level of federal supervision over the insurance industry as part of the overall financial services regulatory push, and an optional federal charter may quickly become a best-case scenario for the industry.
Financial regulatory reform is still in its nascent stages in Congress. The Senate Banking Committee has held one hearing on modernising insurance regulation, but a companion bill to the Act has not yet been introduced in the Senate. There is a long way to go, legislatively speaking, but the sense within the insurance industry is that some form of federal regulation is inevitable.