Federal Oxley-Baker Bill Would Require Competitive Rating and Uniform Regulation by States

August 24, 2004

Sweeping legislation being drafted by federal lawmakers would end state approval of insurance rates and require all states to adopt competitive rating for most types of insurance.

States would have to stop requiring approval or prior review of rates and comply with this new system of nationwide competitive pricing within two years of enactment of the legislation.

While the legislation would require states to modify insurance laws, it stops short of creating a federal insurance regulator or a federal charter option as sought by some insurance companies.

The draft bill is the product of House Financial Services Committee Chairman Mike Oxley (R-Ohio), and Capital Markets Subcommittee Chairman Richard Baker (R-La).

The nationwide competitive rating system would be phased in using a flex band approach. The flex band would allow up to a 7 percent increase or decrease in rates for the first 12-month period and a 12 percent increase or decrease during the second 12-month period.

Credit insurance, title insurance, mortgage insurance, gap insurance and medical malpractice insurance would be exempt from the national rating system.

The draft legislation, nicknamed SMART after its full title, The State Modernization and Regulatory Transparency Act, says states may continue to regulate the use of all underwriting or rating factors or classifications including prohibiting the use of race, religion or other criteria.

The measure also aims to make states more uniform in their regulatory requirements and procedures in market exams, financial surveillance, licensing, product approvals and other areas. It establishes two and three-year deadlines for states to comply.

Among its major initiatives is the creation of a new regulatory oversight panel. This state-national partnership would “promote uniformity and efficiency in government policies that affect the insurance marketplace.” This partnership is to be balanced between state and national entities and will not have any direct regulatory power or supervisory authority. It would be responsible for identifying whether uniformity requirements have been met by the states, resolve conflicts and facilitate financial and international trade issues that affect insurance.

This board will have seven members, including an insurance commissioner from each of a small, medium and large state, as well as designees from the securities and Exchange commission, the Department of Treasury, and the Board of Governors of the Federal Reserve System, plus a seventh member nominated by the state insurance commissioners and appointed by the president to act as chair and break any tie votes, with equal balance as to political party membership and rotating meetings. This partnership will have no office and minimal staff to “ensure it remains only a coordinating entity.”

The proposal gives all states three years to implement coordinated insurance company market conduct exams and adopt standardized agent licensing and eligibility standards, including continuing education requirements. States would have two years to implement reciprocal licensing for agents and brokers.

For insurer licensing, states would be required to develop a single point-of-entry based on adequate standards and using uniform electronic filing systems.

Similarly, the measure requires states to come up with uniform electronic product filing systems for personal lines and commercial lines products within three years and eliminate each state’s so-called unpublished “desk drawer” rules that often contain exceptions and deviations.

The draft is being circulated among state insurance commissioners and trade groups for comment. Among the first to weigh in was the National Association of Mutual insurance Companies (NAMIC), which was cautious in describing SMART as a “basis for legislative activity in the next Congress that convenes in January 2005.”

“NAMIC has long contended that state regulation should be reformed and that these reforms can best be accomplished in the state capitols,” said David A. Winston, NAMIC federal affairs senior vice president.

“The long-awaited discussion draft is designed to move toward greater uniformity in state regulation, enhanced speed-to-market for insurance products, streamlined producer and company licensing and market-based rates for both personal and commercial lines. Notably, the draft eliminates price regulation within a two-year period,” Winston said.

“Most importantly, the bill would accomplish this without creating an optional federal charter, a federal regulator or any type of permanent federal insurance office,” he added.

Capital Markets Subcommittee Chairman Baker is expected to hold a hearing in September on the bill after it is introduced. “This legislation will certainly be the basis for legislative activity in the next Congress that convenes in January 2005,” Winston said.

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