Industry Lines Up ‘Pro and Con’ on Bush Plan for Federal Regulator

Insurance industry groups lined up quickly with responses to the Bush administration’s proposed overhaul of the way the government regulates the nation’s financial services industries, including insurance.

The sweeping regulatory reform proposal announced by Treasury Secretary Henry M. Paulson calls for insurance companies to be given the option of federal instead of state regulation, along with the creation of a powerful national insurance regulator and a system of national licensing of agents and brokers.

The proposed “Blueprint for a Modernized Financial Regulatory Structure” would give major new powers to the Federal Reserve to oversee financial services market stability, including powers to examine the books of any institution deemed to represent a potential threat to the proper functioning of the overall financial system.

“We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers,” said Paulson in remarks at the Treasury Department. “The challenge is to evolve to a more flexible, efficient and effective regulatory framework — and that is the purpose of this Blueprint.”

Dual Federal-State Regulation

According to the blueprint, legislation creating a federal insurance regulatory structure would “reestablish the federal government’s role in regulating the insurance industry by reclaiming a portion of its delegation of insurance regulation to the states, thereby creating a dual federal-state regulatory structure.”

The plan would introduce a system of optional federal chartering (OFC), licensing, regulation, and supervision for insurers, reinsurers, and insurance agents and brokers.

It would also provide that the current state-based regulation of insurance (authorized by the McCarran-Ferguson Act) would continue over insurers and producers not electing to be regulated at the national level.

States would not have jurisdiction over those electing to be federally regulated. However, insurers holding a federal charter could still be subject to some continued compliance with other state laws, such as state tax laws, compulsory coverage for workers’ compensation and individual auto insurance, as well as requirements to participate in state mandatory residual risk mechanisms and guarantee funds.

An OFC would specify the lines of insurance that each national insurer would be permitted to sell, solicit, negotiate, and underwrite. For example, an OFC for life insurance could also include annuities, disability income insurance, long-term care insurance, and funding agreements. 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.

Treasury recommends that the federal regulatory powers of the national insurance commissioner should be comparable in scope and force to those of “other world-class financial supervisors.”

Treasury also recommends that, as an intermediate step to a federal system, Congress should establish a federal Office of Insurance Oversight within Treasury to establish a federal presence in insurance for international and regulatory issues.

Regulators Balk

The blueprint explains the reasoning behind the shift to federal regulation of insurance and criticizes state regulators in the process: “Insurance is truly a global business with an international marketplace subject to international exchanges and negotiations. However, under the current U.S. state-based insurance system, no regulatory official at the federal level can speak for the interests of U.S. regulators of insurers and reinsurers. Assuming that role by default, the National Association of Insurance Commissioners (NAIC) has thus far failed in obtaining a satisfactory degree of state regulatory uniformity.”

NAIC President and Kansas Insurance Commissioner Sandy Praeger said the federal government has enough to do and should keep its hands off insurance.

“Clearly, the current climate of less regulation and less accountability has led to the turmoil affecting broad sectors of our nation’s economy. We agree that federal action to look at system risk is long overdue. We agree that the federal government needs to remodel their financial regulatory house, but they need to leave the insurance ‘room’ alone!” she said.

“While we certainly support better coordinating and modernizing of their oversight efforts, modern does not mean ‘federal,'” Praeger said.

From within the insurance industry, the Washington, D.C.-based American Insurance Association (AIA) and The Council of Insurance Agents & Brokers said they support the plan. But the National Association of Mutual Insurance Cos., Property Casualty Insurers Association of America and agent groups aren’t as supportive.

Robert Rusbuldt, president and CEO of the IIABA, said there are better ways to improve insurance regulation than moving toward a national system.

“While the Treasury’s recommendation does not come as a surprise since they would become the new federal insurance regulator, proposing a massive overhaul of insurance regulation when the insurance market is one of the few stable sectors in the financial services industry seems odd to many,” he said.

Political Viability

Rusbuldt questioned the political viability of the plan.

“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. It’s hard to see Congress supporting a proposal that calls for massive deregulation of the industry and a huge new federal bureaucracy. The Treasury Department has not recognized the fact that the current insurance regulatory system has functioned effectively to protect consumers and the safety and soundness of the industry,” Rusbuldt said.