Proposed Federal Regulation of Insurance Hotly Debated

Participants on a panel session debating the pros and cons of proposed federal regulation of the insurance industry at the Casualty Actuarial Society’s (CAS) annual meeting agreed there is a need for regulatory reform, but strongly disagreed on how and why such changes should be made.

Congress is currently considering the National Insurance Act of 2007, H.R. 3200/S.40 that would create an Optional Federal Charter (OFC) for a single national framework for insurance regulation. Insurers opting for a federal charter and federal regulation would lose the limited antitrust immunity granted to state-regulated insurers under the 62-year-old McCarran-Ferguson Act.

David Hartman, a past-president of the CAS and former chief actuary with the Chubb Group of Insurance Companies, moderated the debate and outlined the major reforms contained in the proposed federal legislation.

Hartman said the legislation would provide the option for all property/casualty and life insurers to obtain a federal charter to be federally regulated. Under the OFC proposals before Congress, those insurers that chose to become federally chartered could decide to switch back to state regulation, if they decided they no longer wanted to continue under the new federal system.

“To carry out federal regulation,” Hartman explained, “an Office of National Insurance in the U.S. Treasury Department would be established and it would be led by a Commissioner of National Insurance appointed by the President for a five-year term.” The new system would have six branch offices around the country and would be funded by those insurers that opted for federal regulation, he said.

Under federal regulation, property/casualty insurers would not be subject to rate or price regulation and that would mean the industry’s current limited anti-trust exemption would no longer apply, Hartman pointed out.

He said the proposed OFC legislation would cover many aspects of the business of insurance, including financial regulation, market conduct, unfair trade practices, receivership and liquidation, as well as insurance company mergers and acquisitions.

Hartman said national insurers also would continue to pay state premium taxes, participate in state guaranty funds, follow state compulsory coverage laws, and participate in state residual market mechanisms. But if an insurer elected to remain under state regulation, it would continue to operate within the current state regulatory system, he said.

Michael McRaith, director of the Illinois Department of Insurance and an opponent of the OFC proposals, said that while it is important to discuss improving the current state system of insurance regulation, “there is no pressing need for this change.”

“It’s important to acknowledge as state regulators that we are committed to moving forward in a way that makes sense and is consistent with our core mission at the National Association of Insurance Commissioners of protecting consumers,” he emphasized.

McRaith said insurance consumers don’t want to have to call a federal agency when they have a claim or complaint. He cautioned that passage of the OFC legislation “would be the largest expansion of federal regulation since the New Deal in the 1930s.” States have done a good job of regulating insurance and that needs to continue, he stressed.

Joining McRaith in speaking against proposed federal regulation, Deirdre Manna, vice president of Industry and Regulatory Affairs for the Property Casualty Insurance Association of America (PCI), pointed out that state regulators have done a great job of handling insurance company solvency issues and agreed with the need to work on improving the current system before considering an optional federal charter.

Neil Alldredge, vice president of State and Regulatory Affairs for the National Association of Mutual Insurance Companies (NAMIC), said that while some criticisms of the current system of state insurance regulation are justified, the potential problems of a national regulatory system would outweigh any short-term benefits.

He said proponents of this bill say the only way to reform the system is through the creation of a federal regulatory scheme, but other options do exist. “We need to go about fixing the current system in a methodical way that would result in a better one than an untested federal system could offer,” Alldredge said.

Alldredge also pointed out that the federal government has not done a very good job recently of handling the problems of pensions, savings and loans, and the home mortgage system.

Speaking strongly in favor of OFC, Kevin McKechnie, executive director of the American Bankers Insurance Association – the insurance affiliate of the American Bankers Association – argued that the problems associated with 51 different insurance regulators mean that regulation of the insurance industry is not being carried out in a logical way. He said the proposed OFC would allow for a more coherent and uniform system.

The ABA official listed instances of corruption that have occurred over the years under the current state regulatory system that he said further make the case for changing to an optional federal system.

McKechnie said a new federal regulator would be paid for by the people who want to use it and would have the power to negotiate and enter into treaties with other countries on insurance, something that is currently left out of all U.S. free trade negotiations. Other issues that are difficult to manage at the state level, including terrorism insurance coverage and a national catastrophe plan, also could be better accomplished under a federal system, the ABA official noted.

McKechnie, who chairs a coalition of insurance and financial services trade groups that is supporting the OFC legislation, concluded that the current state regulation system is not working in ways that benefit the financial services industry or consumers.

Source: Casualty Actuarial Society