Chicago – With the extension of TRIA at the close of 2007, one legislative issue that had divided the insurance industry was put to rest. Yet, another equally divisive legislative issue remains unsettled and may well come to the fore this year. While the National Insurance Act of 2007 was, like its predecessor in 2006, unable to make it out of committee, the issue of an optional federal charter for insurers appears to be as alive as ever.
Evidence of these differing opinions was in ample supply in December at a panel session held during the annual meeting of the Casualty Actuarial Society (CAS).
David Hartman, a past-president of CAS and former chief actuary with the Chubb Group of Insurance Cos., moderated the debate and outlined the major reforms contained in the proposed federal legislation. 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.
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. He noted 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.
“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.
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.
Panel member 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.”
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.
Fellow panelist Neil Alldredge, VP 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 want us to believe 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,” he 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 Banker s Insurance 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 and 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, he noted.McKechnie, who chairs the Optional Federation Charter Coalition (OFCC), 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.
"We believe that there is an emerging consensus that an OFC, similar to the dual banking structure, is the best approach to improve competitiveness in the insurance industry,” noted Frank Keating, president and CEO of the American Council on Life Insurers (ACLI), another member of the OFCC, in a statement.
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