BY ARTHUR D. POSTAL and DANIEL HAYS
WASHINGTON —The Bush administration rocked the insurance world this weekend by reportedly preparing to formally endorse optional federal charters for insurance companies and producers this Monday. Industry reaction was split along the usual fault lines, depending on whether a particular association’s membership supports or opposes the controversial concept.
Support for an OFC is expected to be announced March 31, when Treasury Secretary Henry Paulson unveils the agency’s proposal to overhaul the entire federal regulatory structure for financial services. A copy of Treasury’s draft proposal was published today by the Associated Press and The New York Times.
Treasury’s plan--calling for separate property-casualty and life-disability charters--also includes a proposal to create an interim federal insurance regulator within Treasury to coordinate with state regulatory officials on “pressing” insurance regulatory issues, an acknowledgment that the OFC debate in Congress is likely to be “difficult and ongoing,” the department noted.
Specifically, such “pressing” matters would include international regulatory issues, such as reinsurance collateral. The interim federal regulator would also “serve as an advisor to the Secretary of Treasury on major domestic and international policy issues,” the draft proposal said.
Officials of the National Association of Insurance Commissioners and the National Conference of Insurance Legislators immediately condemned the administration’s move to back an OFC in separate comments from the NAIC’s spring meeting in Orlando, Fla.
Rep. Brian Kennedy, D-R.I., president of NCOIL, said the only silver lining to the proposal is that a new administration will take office in 10 months. “We will have a new Treasury secretary and all of this will be forgotten,” he said.
Sandy Praeger, insurance commissioner of Kansas and president of the NAIC, told National Underwriter that “we will read [the Treasury proposal], review it and respond where it is called for.” Interviewed on Saturday, Ms. Praeger said that NAIC’s leadership had not yet read the report, but noted that “we will emphasize the importance of a state-based system, particularly to consumers.”
In other comments while speaking at various NAIC sessions at Saturday’s spring meeting in Orlando, she said that “just because we’re 55 [jurisdictions] doesn’t mean we can’t work together to effectively regulate.”
Ms. Preager asked why regulatory positions should be recreated on a federal basis, adding that it “would be a foolish duplication of effort.”
Regarding state regulation, she said, “there is no need to pull the plug on something that is clearly working with a dose of federal regulation.”
The Independent Insurance Agents and Brokers of America and the National Association of Mutual Insurance Companies also voiced opposition. Both said they supported regulatory reform for insurance, but not direct federal regulation.
NAMIC President and CEO Charles Chamness said the Treasury proposal “represents a shift in regulatory authority to the federal government. At this time, we urge Congress and Treasury to focus on effective market reforms rather than a consolidation of regulatory authority.”
In criticizing the Treasury blueprint for change, Robert Rusbuldt, president and CEO of the IIABA, said that, “while there may be some merit in the role envisioned for the Fed to identify and facilitate corrections of systemic problems in the financial services industry, the OFC section of the blueprint is clearly swimming upstream.”
He added that it is “hard to see Congress supporting a proposal “that calls for massive deregulation of the industry and a huge new federal bureaucracy.”
However, the American Insurance Association and the Council of Insurance Agents and Brokers—both longtime OFC backers--voiced support.
AIA President Marc Racicot, the former governor of Montana, called the Treasury proposal for an OFC, “a major milestone.”
“Providing insurers with the option of a single regulator for insurance will benefit consumers and will be more efficient, effective and rational given the increasing tension a state-based regulatory system creates,” he said.
Joel Wood, senior vice president for government affairs at the CIAB, said the fact that a conservative Republican administration would embrace the OFC structure “speaks volumes for the slow but steady progress that supporters of an OFC have made in moving toward a rationalized insurance regulatory scheme.”
Eli Lehrer, a senior fellow at the Competitive Enterprise Institute in Washington, who has studied and lectured on the insurance regulatory issue for several years, said his initial reaction is that “Treasury has taken the right approach. This really is a question of international competitiveness as much as anything else.”
He added that, relative to both the insurance systems in other countriesand other sectors of the U.S. economy, “our life and property-casualty insurance sectors are both unproductive and bereft of new ideas, and our burdensome, fragmented regulatory system deserves a lot of the blame for this.”
He said he was “intrigued” by the idea of creating an Office of InsuranceOversight as an interim step and thinks it deserves “serious consideration, but I think it's important that people who support real change realize that it would probably be little more than a half-way measure.”
He added that “as an enthusiastic supporter of OFC and other measures that would result in regulatory competition, I'll be the first to admit that thetype of change Treasury envisions is not going to be easy for every agent and every broker. But, like any other systematic economic modernization, it's likely to leave the great majority of people better off.”
The Treasury’s draft report published today said that “while a state-based regulatory system for insurance may have been appropriate over some portion of U.S. history, changes in the insurance marketplace have increasingly put strains on the system.”
“Much like other financial services, over time the business of providing insurance has moved to a more national focus even within the state-based regulatory structure,” the report says. “The inherent nature of a state-based regulatory system makes the process of developing national products cumbersome and more costly, directly impacting the competitiveness of U.S. insurers.”
Under the Treasury proposal, an OFC structure should provide for a system of federal chartering, licensing, regulation and supervision for insurers, reinsurers and insurance agents and brokers, the draft proposal says.
It adds that such a plan “would also provide that the current state-based regulation of insurance would continue for those not electing to be regulated at the national level.”
States would not have jurisdiction over those electing to be federally regulated, the plan proposes.
However, the Treasury plan would leave insurers holding an OFC still subject to continued compliance with certain state laws--such as on premium taxes as well as compulsory coverage for workers' compensation and individual auto insurance--as well as the requirements to participate in state-mandated residual risk mechanisms and guaranty funds.
An OFC would be issued to specify the lines of insurance that each national insurer would be permitted to sell, solicit, negotiate and underwrite. For example, the report said, an OFC for life insurance could also include annuities, disability income insurance and long-term care insurance.
On the other hand, “an OFC for property and casualty insurance could include liability insurance, surety bonds, automobile insurance, homeowners, and other specified lines of business.”
However, the report will say, “since the nature of the business of life insurers is very different from that of property and casualty insurers, no OFC would authorize an insurer to hold a license as both a life insurer and a property and casualty insurer.”
In his comments in Orlando, NCOIL’s president, Rep. Kennedy, said at a liaison meeting with state regulators that “now that we have seen this huge push for an OFC, we need to be a united front [in opposition] going forward.”
Rep. Kennedy said in an interview later with National Underwriter that “the Treasury’s conclusions were not unexpected” because, in doing its research on financial services oversight, Treasury had asked “leading questions in sending out questionnaires.”
He also said “state legislators and regulators should have a seat at congressional hearings” so that they could head off an OFC.
During her appearances at her group’s Orlando meeting on Saturday, NAIC President Preager recited a catalog of activities that states perform to help consumers and ensure the solvency of insurers. “Now is not the time to rest on our laurels,” she said at one meeting.
She pointed to various activities of the NAIC and noted how quickly--with New York taking the lead--the association had acted to approve a license for a new municipal bond insurer launched by Berkshire Hathaway.
“We took it on ourselves to move it through the process quickly,” she said.
“The NAIC should continue to push ahead with efforts to create reciprocity for the states for producer licensing and also to get more states to join the interstate insurance compact,” she added.