Treasury Secretary Henry Paulson’s Blueprint for Financial Regulatory Reform landed in the insurance industry’s lap this week with all the subtly of a hand grenade. Indeed, Paulson’s plan brought to the fore an issue many thought would spend the year dormant, eclipsed by election-year politics. Though hardly a centerpiece of the document, the plan’s call for an establishment of an optional federal charter (OFC) for insurers quickly summoned partisans on both sides of the issue to the barricades.
“The proposal for change comes at a propitious time. Congress will soon examine the causes behind the recent market turbulence and restart its review of insurance regulation reform legislation,” says Frank Keating, president & CEO of the American Council of Life Insurers.
Opponents say the timing is anything but propitious. They accuse backers of using the mortgage crisis and recent meltdown of investment bank Bear Stearns as cover for their efforts to establish an OFC, noting other attempts have been beaten back over the last decade. National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger suggested the federal government limit their remodeling efforts to the banking side of the financial regulatory house, while leaving the insurance side alone.
Proponents of an OFC say, to the contrary, that the crises in other parts of the financial services industry make a sweeping overhaul all the more necessary. Joel Wood, SVP, government affairs, for the Council of Insurance Agents & Brokers, says the opposition to an OFC is rooted in the forces of state protectionism.
"We think this effort not unlike the battle that raged for more than 100 years over whether banks should be allowed to sell insurance products," he says. "In the end, banks were able to do so, and none of the horror stories of bank abuses turned out to be true. Literally thousands of regulatory barriers have been erected by in-state industry groups over the decades, and those protectionist competitive barriers are threatened by the OFC and the administration's position."
Furthermore, IFC advocates contend that the federalized insurance framework in the United States is a disadvantage in a global economy. “The current regulatory structures make serving insurance customers across the country complicated, costly and cumbersome,” says Ed Rust Jr., chairman and CEO of Bloomington, Ill.-based State Farm Mutual Automobile Insurance Co. “Increasingly, insurance challenges are also national and international in scope.”
Such notions of global regulatory harmony do little to mollify opponents of an OFC, who, in addition to insurance industry associations such as NAIC and the Independent Insurance Agents & Brokers of America, include consumer groups like the Consumer Federation of America (CFA). They charge that, if enacted, an OFC will precipitate a regulatory race to the bottom. “This is a prescription for regulatory arbitrage that can only undermine needed consumer protections,” the CFA said in a statement. “If the goal is to increase the ‘speed to market’ of insurance products and achieve other advantages that uniform federal regulation would provide, the appropriate approach is to create a federal regulator with strong consumer protections and not allow insurers to run back to the states when oversight is tougher than they would like.”
In addition to this array of industry and consumer opposition, OFC efforts face an uncertain legislative environment. While bills establishing an OFC have been introduced into both chambers, they have obstacles to overcome. One such hurdle is H.R. 5611, a bill that would na onalize insurance agent li ensing only. The act–officially the National Association of Registered Agents and Brokers Reform Act of 2008, but commonly referred to as NARAB II–has led critics to charge that the legislation’s true intent is to undercut support for existing efforts to establish an OFC.
Further complicating the picture is the complexity of the insurance industry itself. Published reports say that Senate banking Committee Chairman Sen. Christopher Dodd (D-Conn.) would back an OFC for life insurance, but not for property/casualty insurance.
Sources: Consumer Federation of America, Council of Insurance Agents & Brokers, National Association of Insurance Commissioners, State Farm Mutual Automobile Insurance Co., INN Archives
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