A sweeping proposal for a new regulatory framework for the nation’s financial markets that includes establishment of an optional federal charter (OFC) for insurers is splitting the insurance along a familiar fault line. Proponents of an OFC are praising the report, while OFC opponents are united in opprobrium.
Unveiled Monday by Treasury Secretary Henry Paulson, the report, dubbed the Blueprint for Financial Regulatory Reform, seeks to streamline the existing, labyrinthine regulatory structure members of the financial services industry face. To do so, the plan would combine existing regulatory agencies and create new ones.
Most importantly for insurers, the report calls for the establishment of an optional federal charter for insurers and an Office of National Insurance (ONI) within Treasury to regulate the industry. The report says a commissioner of national insurance would head ONI and would have specified regulatory, supervisory, enforcement and rehabilitative powers to oversee the organization, incorporation, operation, regulation and supervision of national insurers and national agencies.
“While an OFC offers the best opportunity to develop a modern and comprehensive system of insurance regulation in the short term, Treasury acknowledges that the OFC debate in Congress is difficult and ongoing,” an executive summary of the full report reads. “At the same time, Treasury believes that some aspects of the insurance segment and its regulatory regime require immediate attention.”
Given the protracted tussling over creation of an OFC, immediate attention may not be too likely. OFC opponents were quick to register their displeasure with Paulson’s plan. Bob Rusbuldt, president & CEO of the Independent Insurance Agents & Brokers of America, said in a statement that an OFC was 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,” Rusbuldt says. “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.”
National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger was equally blunt in her appraisement of the proposal. “We agree that the federal government needs to remodel their financial regulatory house, but they need to leave the insurance “room” alone!”
Marc Racicot, president of the American Insurance Association and staunch backer of a federal charter, had a different view. Inclusion of OFC in the blueprint recognizes the important role that the insurance industry now plays in this new financial world of integrated and interconnected markets, he says.
"Providing insurers with the option of a single regulator for insurance will benefit consumers and will be more efficient, effective and rational given the "increasing tension" a state-based regulatory system creates,” Racicot says. "The blueprint provides a holistic and comprehensive framework that would ensure every type of insurance company the ability to do business under a modern regulatory regime, with the most advanced solvency and risk management tools available, ultimately delivering the highest-level of safety, soundness, and consumer protections.”
If the blueprint were enacted, the proposed ONI would not be the only new regulator insurers would need to get acquainted with. An Office of Insurance Oversight (OIO) would be created within Treasury.
The OIO should be established to accomplish two main purposes,” the report reads. “First, the OIO should exercise newly granted statutory authority to address international regulatory is ues, such as reinsurance collateral. The OIO would also have authority to ensure that the NAIC and state insurance regulators achieved the uniform implementation of the declared U.S. international insurance policy goals. Second, the OIO would serve as an advisor to the Secretary of Treasury on major domestic and international policy issues. Once Congress passes significant insurance regulatory reform, the OIO could be incorporated into the OFC framework.”
What’s more, insurers would come under the purview of a new business conduct regulator, the Conduct of Business Regulatory Agency (CBRA), which would be responsible for business conduct regulation, including consumer protection issues, across all types of firms.
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Sources: Treasury.gov, American Insurance Association, National Association of Insurance Commissioners, Independent Insurance Agents & Brokers of America
