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July 8, 2009updated 13 Apr 2017 8:56am

State regulators survive reform tsunami

Proposals put forward by the US Treasury that would see state regulation of insurers remain and the creation of an Office of National Insurance have received a positive reception from insurance industry players Setting out President Obamas administrations proposals for sweeping reform of the US financial regulatory structure, an 85-page White Paper prepared by the Treasury Department has received a generally positive reception by insurance industry players

By LII editorial

Proposals put forward by the US Treasury that would see state regulation of insurers remain and the creation of an Office of National Insurance have received a positive reception from insurance industry players. However, a proposed Consumer Financial Protection Agency has emerged as a major area of contention.

 

Setting out President Obama’s administration’s proposals for sweeping reform of the US financial regulatory structure, an 85-page White Paper prepared by the Treasury Department has received a generally positive reception by insurance industry players.

However, it is clear the responses of regulatory and industry bodies rest heavily on their particular interpretation of the White Paper.

From the National Association of Insurance Commissioners (NAIC), a body representing regulators of the 50 states, the District of Columbia and five US territories, there was a clear signal of relief that its members’ almost 140-year jurisdiction over insurers was not about to come to an abrupt end.

NAIC CEO Therese Vaughan said in a statement: “While no one proposal is completely perfect, our initial read of the administration’s financial overhaul plan seems to reflect what is most important to us: preserving the consumer protections and financial solvency oversight of the historically strong and solid system of state-based insurance regulation.”

Vaughan continued: “State regulation’s strong solvency system and consumer protections have served consumers well, as evidenced by the relative stability in the insurance markets. The proposal appropriately focuses on the problems that need fixing, by addressing systemic risk and other regulatory gaps.”

ACLI sees things differently

In its response to the White Paper, the American Council of Life Insurers (ACLI) set out a different interpretation, heavily influenced by its call for introduction of an optional federal charter for the industry. An optional federal charter, the ACLI has long-argued, would increase the industry’s competitiveness by, for example, eliminating regulatory complexity faced by insurers operating in multiple states.

“The White Paper recognises the 135-year-old state regulatory system is riddled with inefficiencies, inconsistencies and unnecessary barriers to competitiveness that have not been alleviated despite sincere efforts by state regulators and the NAIC to advance uniformity,” stressed Frank Keating, president and CEO of the ACLI.

Keating continued it was also important the White Paper noted that insurance is global in nature, and the lack of a federal office with responsibility and expertise in insurance hampers the US insurance industry’s effectiveness in dealing with other nations.

“As the White Paper notes, the US is the only member of the International Association of Insurance Supervisors that does not have a federal office that can speak for our country with a single voice,” said Keating.

This shortcoming is one the White Paper addresses, proposing the establishment of an Office of National Insurance (ONI) within the Treasury. ONI would have no regulatory powers and, by and large, is paralleled in the establishment of an Office of Insurance Information currently being considered in the House of Representatives.

However, Keating believes the establishment of ONI suggests the Obama administration is moving more in the direction of an optional federal charter.

“We applaud Treasury’s proposal to create an Office of National Insurance as a first step towards eventual establishment of a federal functional insurance regulator,” said Keating.

Clearly not in agreement with Keating’s conclusion, California Insurance Commissioner Steve Poizner said the creation of ONI “avoids the trap of creating a federal insurance regulator”, something he has consistently opposed.

Poizner continued that the White Paper appropriately acknowledges the primary role the states play in regulating the insurance business to benefit consumers.

“State oversight of insurance companies, coordinated among all state regulators, is the reason that, among all the financial players in this country, it is the insurers who are and remain the most stable and the least in need of federal assistance,” Poizner said.

No done deal

Proposals contained in the White Paper are far from a done deal, with debate raging at the House of Representatives’ financial services committee (FSC) chaired by congressman Barney Frank.

One aspect of reform in the White Paper has prompted strong insurance industry opposition; the proposed Consumer Financial Protection Agency (CFPA), a federal body that would have wide regulatory powers.

Though the CFPA’s precise functions are vague, National Association of Insurance and Financial Advisers president Cliff Wilson said in testimony before the FSC on 24 June that it could usurp product regulation from state insurance regulators.

“We believe it is extremely dangerous to separate product regulation from solvency regulation,” Wilson warned.

Also testifying before the committee was ACLI executive vice-president and general counsel Gary E Hughes. He emphasised that, while the ACLI fully supported strong consumer protections, it was not happy with the proposed CFPA.

He stressed: “We do not believe the interests of life insurance consumers would be well served by subjecting life insurance products to the additional jurisdiction of the CFPA.”

Hughes put forward four reasons for the ACLI’s stance:

• Life insurance products are already one of the most heavily regulated financial products in the marketplace,

• There have been no evidence suggesting life insurance products contributed in any way to the present financial crisis,

• Unlike most financial products, the regulation of life insurance products has a direct and fundamental relationship to issuer solvency, and therefore cannot be separated from other aspects of insurance regulation that in the aggregate constitute solvency oversight, and

• Life insurance product regulation demands a comprehensive understanding of the fundamental mechanics of the life insurance business, and that understanding does not presently exist at the federal level and would not exist within the CFPA should it be established.

What the ultimate outcome of the Obama administration’s regulatory reform objectives will be remains to be seen but undoubtedly progress to finality will be characterised by heated debate.

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