Two congressional leaders introduced legislation today that would create a federal regulator for insurance as an alternative to the current state-based regulatory structure currently in plan.
Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., introduced their bipartisan insurance regulation reform legislation called The National Insurance Consumer Protection Act (NICPA). The Act would create a robust federal regulator for insurance to act as an alternative to the antiquated, non-uniform system of state insurance regulators currently in operation, the legislators said in their announcement.
“The meltdown of insurance giant AIG and the broad crisis in the nation’s financial system serve as proof of the vital need for regulatory reform of the insurance sector. Numerous bipartisan reports on the nation’s capital markets have noted that insurance remains the only major segment of the capital markets not subject to federal regulation and reform is needed,” the statement said.
The industry remains divided on how to conquer reforming a decades old system of insurance regulation.
Insurers represented by the Property Casualty Insurers Association of America (PCI) say that while the NICPA raises important issues, the bill fails to address the critical regulatory vulnerabilities that caused the current global financial crisis.
PCI says it appreciates continued Congressional interest in addressing problems with the current state insurance oversight system, but thinks Congress should first focus on the more urgent issue of systemic risk oversight.
“Systemic risk is clearly an urgent issue that Congress should address now,” said David A. Sampson, PCI’s president and CEO. “Before attempting to overhaul the entire financial services regulatory system, it is important to determine which sectors of the marketplace actually create systemic risk and to fix the dangerous gaps in federal oversight. It is crucial to the future of our economy to establish a viable system for systemic risk regulation before refocusing on a decades-old debate over federal insurance regulation.”
The nation is currently struggling with a massive failure of federally regulated thrift holding companies, banks, and securities companies. The Treasury Department and Federal Reserve Board must pump life into the ailing capital and credit markets while working with Congress to prevent systemic risk failures from recurring, Sampson stated in a release.
“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,” Sampson said. “In fact, smaller companies can pose significant systemic risk, and larger companies may pose little or none. Systemic risk concerns the interconnectivity of all industries, whereas an optional federal charter concerns only one industry. That is why systemic risk must be the priority.”
Other insurers represented by the American Insurance Association have long supported federal regulation of insurers – but under a federal charter system rather than what the NICPA would do.
“We have long supported the availability of a market-based federal charter for insurers and believe it is the best model for modernizing our insurance regulatory structure,” said Leigh Ann Pusey, president of the AIA. “Any federal regulatory system should focus on true consumer protections like strong financial regulation and market conduct oversight, and we are encouraged to see those protections as the cornerstone of this legislation, Pusey added.
“However, we think that consumers would be best protected under a single guaranty fund system, and are concerned with the approach taken by the bill on this issue,” Pusey said in a statement. “That said, we look forward to working with the bill’s sponsors moving forward in a constructive manner.”
On the other hand, The Council of Insurance Agents & Brokers applauded Reps. Bean and Royce for their introduction of the National Consumer Protection Act.
“The events in financial markets over the past several months have caused legislators and regulators to rethink regulation of the financial services industry, including insurance,” said Ken A. Crerar, president of the CIAB. “The introduction of this legislation comes at a critical point in those discussions, as the AIG failure and other developments have made it clearer than ever that the insurance industry is a vital part of the nation’s economy.”
Crerar added the bill will provide “a more efficient and comprehensive regulatory system than state insurance regulators have been able to achieve.”
In addition, the CIAB, “believes that this legislation will bolster insurer solvency oversight, an issue that is very important to Council members and their clients, and will help to ensure that there is a path toward international harmonization of U.S. and EU regulatory requirements.”