House Panel Releases Bill Creating Federal Insurance Office

October 2, 2009

Congress got a look yesterday at a draft of legislation to create a federal insurance office that would work on international insurance issues as well as monitor the insurance industry and insurers for anything that might be a threat to the overall financial system.

Its powers would extend to all lines of insurance except health. It would fall under the Treasury department and its director would be appointed by the Treasury secretary.

The draft of the Federal Insurance Office Act was released by its chief sponsor, Rep. Paul E. Kanjorski , D- Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, who also released two others aimed at reforming the regulatory structure of the U.S. financial services industry. The two other draft bills he released are the Investor Protection Act and the Private Fund Investment Advisers Registration Act.

To accomplish its function, the federal insurance office would work with existing state regulators and collect information from them and the industry as needed. Smaller insurers could be exempt from any data collection mandates, according to the bill.

According to Kanjorski, the federal office is needed to “fill a gap in the federal government’s knowledge base on financial activities.” He said the credit crisis highlighted the lack of expertise within the federal government regarding the insurance industry, especially during the collapse of American International Group (AIG) and turmoil in the bond insurance markets.

“A Federal Insurance Office will provide national policymakers with access to the information and resources needed to respond to crises, mitigate systemic risks, and help ensure a well functioning financial system,” Kanjorski’s statement accompanying the draft proposal said.

The act says the office shall have the authority to “monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system.” It would refer any insurer or affiliates it found represented a systemic risk to the Federal Reserve System for action.

The office would be a coordinator of insurance policy but not a federal regulator, although the bill would authorize the Treasury secretary to preempt any state insurance regulations that violate international insurance agreements. Kanjorski’s bill does not include any provision for a federal charter for insurers or any provision for them to be regulated at the federal level.

The state regulators’ organization, the National Association of Insurance Commissioners (NAIC), has urged Congress to maintain their role in regulating insurance, arguing that state regulation is compatible with a sound approach to systemic risk regulation.

“Insurance companies are more often the conduits or receivers of risk rather than the creators since the assumption of risk, after all, is fundamental to the insurance business,” Illinois Insurance Director Michael McRaith told members of Kanjorski’s panel in June on behalf of NAIC. “With respect to systemic risk, insurers also do not originate risk, but most often receive risk — a fact that provides ample motivation to close regulatory gaps and encourage greater financial stability.”

McRaith noted that the insurance industry has fared better than its banking and securities counterparts in the current economic crisis and he cited the state guaranty fund system as a backstop to protect policyholders in the event an insurance company fails.

The latest draft of the federal office bill is a reworked version of bipartisan legislation Kanjorski introduced earlier this year. The idea was backed by the Obama Administration, which included it in its proposals for financial services regulatory reform. Rep. Judy Biggert, R-Ill., ranking member of the House Financial Services Subcommittee on Oversight and Investigations, was an original co-sponsor of the bill.

The federal office would also:

  • assist in administering the Terrorism Insurance Program within the Treasury.
  • coordinate federal policy on international insurance matters, including representing the U.S. in the International Association of Insurance Supervisors and assisting the Treasury secretary in negotiating international insurance agreements.
  • consult with states regarding insurance matters of national and international importance and advise the Treasury on major domestic and international insurance policy issues.

It would be the job of the office to inform states if any of their regulations or laws conflict with or are preempted by international agreements. Regarding state preemption, the new law would not allow preemption of any state insurance measure that governs any insurer’s rates, premiums, underwriting or sales practices, or state coverage requirements for insurance. It would also not apply to the application of the antitrust laws of any state to the business of insurance.

Before collecting any data or information, the office would be expected to coordinate with state insurance regulators to determine if the information is better obtained by them or another federal agency.

In stressing international insurance issues, Kanjorski’s draft maintains the lack of a national voice hurts all insurers. It reads:

“It is the sense of the Congress that the insurance marketplace increasingly operates globally with many significant foreign participants. There is increasing tension in the current regulatory systems as the result of an absence of clear and settled means for governments to enter into agreements on prudential measures with respect to the business of insurance or reinsurance. This impairs the ability of domestic and foreign-based companies to participate fully in each others’ markets.”

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