States, Industry Worried Federal Insurance Office Would Regulate

October 7, 2009

State insurance regulators, insurance carriers and independent insurance agents are concerned that redrafted legislation to create a federal insurance office makes the new agency too much like a regulator.

Testifying before the House Financial Services Committee on the proposal to create an Office of National Insurance (ONI), the National Association of Insurance Commissioners (NAIC) told Congress that a proposed federal insurance office should be a tool to connect the state regulatory system with the federal regulatory system, and not be an instrument to diminish state insurance regulation.

“A formal federal interface is appropriate, but the current ONI proposal strays too far from past legislation that included important safeguards against preemption of state laws and consumer protections,” said Therese M. Vaughan, Ph.D., NAIC Chief Executive Officer.

Vaughan cautioned that while the proposed reform would increase insurance knowledge and expertise at the federal level and enhance international cooperation on regulatory matters, it could also encroach upon state insurance regulatory authority, particularly in the area of federal preemption of state law due to international agreements.

“Any binding discussion at the international level should respect and reinforce the states’ authority to regulate insurer solvency and protect insurance consumers, and therefore should be limited to agreements of regulatory equivalence or mutual recognition,” Vaughan testified.

“It is critical that the federal government have access to insurance information in order to ensure that the United States is competitive with its foreign counterparts in global negotiations,” said Roger Sevigny, NAIC President and New Hampshire Insurance Commissioner. “At the same time, any state-federal regulatory cooperation agreement must leverage the successful state insurance regulatory system and not preempt state law except in extremely narrow circumstances.”

The National Association of Mutual Insurance Companies (NAMIC) expressed similar concerns.

“Any measure that could be used to set different standards for different companies runs the risk of distorting the market and ultimately harming consumers,” said Jimi Grande, senior vice president of federal affairs for NAMIC.

According to Grande, the office that would be created under the latest draft would have broader authority to reach agreements with foreign insurance companies that pre-empt state laws and regulations, potentially allowing those companies to operate under different standards than domestic insurance companies.

Grand said the original bill was better than the redraft at providing the federal government with the information it needs without affecting the market or establishing a de facto federal insurance regulator.

In addition to pre-emption, Grande also expressed concern regarding the broad authority the draft would create for data collection and the potential for a perceived mandate for the office to name an insurance company as major risk to the financial system.

“We applaud Rep. Kanjorski for stating his intent that the proposed office not be regulatory in nature,” Grande said. “But like one of the original bill’s sponsors, Rep. Judy Biggert, R-Ill., we’re concerned that this is moving away from a bipartisan approach to an over-reaching regulatory office disguised as an informational depository. The original legislation enjoyed broad support from lawmakers and the industry, while support for the new office draft seems confined to those who favor federal regulation of insurance.”

Spencer M. Houldin, an independent insurance agent from Connecticut, who is chairman of the Independent Insurance Agents and Brokers of America (IIABA), told Congress that any insurance information office should be “designed carefully and with the proper safeguards and not ‘set the stage’ for federal insurance regulation.”

Houldin said that IIABA would oppose any “overt or subtle efforts to make the insurance office look more like a regulatory body or to set it up to become a forerunner to federal regulation.”

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