Federal regulation closer to realisation

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.