Regulatory Picture Still Amorphous

After a consistent series of setbacks in past legislative sessions, the long-running effort to establish a federal charter for insurers may soon be entering its endgame.

“The insurance industry has been having this OFC debate for decades and it never changed,” Howard Mills, chief advisor to the insurance practice at New York-based Deloitte Touche Tohmatsu, tells Insurance Networking News. “I think that this is the Congressional session that we’re going to see some significant changes that will impact this industry for decades to come.”

Yet, while the prospects of a bill redefining insurance regulation passing may be widely conceded, the precise nature of the legislation is still in the realm of conjecture. Feeding this are the contradictory statements emanating from legislators sponsoring reform bills. “It’s still too early to focus on any one proposal, because there is going to be a lot of them,” Mills says.

Melissa Bean (D-Ill.), co-sponsor of the forthcoming National Insurance Modernization Act (NIMA), recently roiled the debate by suggesting that a federal charter might be mandatory for insurers deemed systemically significant. Yet, Bean’s version of reform legislation may have to be reconciled with the wishes of House Financial Service Committee Chairman Barney Frank (D – Mass.) who last week told reporters that a federal charter would indeed be optional—and likely only include life insurers.

“I think that there are a lot of trial balloons being floated,” Mills says. “A couple of weeks ago I would have said that the “optional” in optional federal charter is dead. Now Chairman Frank is using it again.”

Congressional horse-trading aside, most agree the bill that emerges will put a premium on identifying and regulating insurers that pose a systemic risk. NIMA will stipulate that the proposed Office of National Insurance has the authority to access the financial records of all the affiliates within the holding company structure. The bill will also require federally registered insurance holding companies that have a predominant share of insurance business, as determined by the commissioner, to be regulated at the holding company level. The idea of segmenting very large insurers from the rest is gaining some traction, Mills says.

Yet, divining which companies pose a systemic risk will be a challenge. “I haven’t heard anybody really give the definitive definition of what a systemic risk is,” Mills allows. “Everybody knows what it is, but [legislators] have to codify what they mean. Within the insurance space there will no doubt be a lot of companies all too eager to say that they are not a systemic risk.”