Battle Lines Being Drawn Over Federal Chartering Bill

Washington

Both supporters and opponents of optional federal chartering areraising questions about legislation introduced by Rep. John J.LaFalce, D-N.Y., that would establish a national chartering optionwhile preserving the right of states to oversee insurancerates.

Joel Wood, senior vice president of government affairs for theWashington-based Council of Insurance Agents and Brokers, whichsupports optional federal chartering, said that while heappreciates efforts to advance the issue, Rep. LaFalces approach is“problematic” because the bill maintains state rate regulation.“One of the biggest reasons for our strategic support for dualchartering is our absolute opposition to command-and-control rateregulation in state laws.”

He said the bill also violates the basic concept that rateregulation should not be separated from solvency regulation.

Seconding those objections was Gary Karr, a representative ofthe Washington-based American Insurance Association. “As supportersof optional federal chartering, we are happy Rep. LaFalce wants toadvance the debate,” he said. “But we have concerns about whetherwhat he introduced would really work.”

Carl Parks, senior vice president of government relations withthe National Association of Independent Insurers in Des Plaines,Ill., which opposes dual chartering, said the LaFalce bill couldcreate a more burdensome regulatory environment than what existstoday.

As currently drafted, he said, the legislation would create afederal insurance director with broad discretionary powers similarto those held by state legislatures and regulators, but without anopen regulatory process. “The directors powers appear to beextremely arbitrary,” Mr. Parks said. “The bill itself is withoutspecifics and leaves broad discretion with the federalregulator.”

Ken Schloman, Washington counsel with the Downers Grove,Ill.-based Alliance of American Insurers, which opposes dualchartering, said that states should be given time to finish effortsto modernize the system before Congress considers adding newfederal layers of bureaucracy and regulation.

He said that in any case, Congress should complete work onterrorism insurance before taking up optional federal chartering,which he called an “unneeded distraction.”

Monte Ward, vice president of federal affairs for the NationalAssociation of Mutual Insurance Companies in Indianapolis, agreedthat the focus should remain on reforming state regulation. “NAMICmembers believe promoting a federal charter will undermine theefforts already taking place to reform the state-based system,” hesaid.

In a statement, Rep. LaFalce said that his legislation reflectsthe realities of the insurance market. “The current state-by-stateregulation of the insurance industry does not reflect either theeconomic centrality of the industry or the reality of todaysmarket,” he said.

“Many of the domestic insurance companies are heavily engaged ininterstate commerce, and sell insurance products to a global,national or, at the very least, a multistate market,” Rep. LaFalcesaid. “However, in the United States, we subject insurancecompanies to the burden and cost of being licensed in everyjurisdiction in which they choose to sell policies.”

Under the LaFalce bill, an Office of National Insurers would beestablished to set solvency and other standards for nationalinsurers and to oversee their activities. State form regulationwould be preempted, but not state rate regulation.

In addition, the legislation would establish minimum federalstandards for market conduct that would apply to state-chartered aswell as federally-chartered insurers.

Insurance companies would have to assemble and file data withthe ONI on the location of the risks they underwrite. Thisinformation could be used by community groups to documentallegations of redlining, Rep. LaFalce said.

In addition, insurers would have to establish and follow aspecific investment policy that takes into account communityinvestments. However, there would be no community investmentmandate.

Insurance agents would not be directly regulated by the ONIunder the LaFalce bill, although the ONI would be able toinvestigate allegations of unfair trade practices against agentswho sell policies for national companies.

Even though there is no direct regulation of producers, the billis opposed by two leading agent groups.

The Independent Insurance Agents of America “strongly believesthat Congress should build on, rather than dismantle, the currentstate-based system,” said Chief Executive Officer Robert A.Rusbuldt.

Last month, the Alexandria, Va.-based IIAAs national boardadopted a policy statement that calls for the use of “federaltools,” such as national standards, national reciprocity, a“carrot-and-stick approach” and preemption of certain state laws–tohelp reform the state regulatory system.

The National Association of Professional Insurance Agents, alsobased in Alexandria, believes “federally-chartered insuranceinstitutions reflect the wrong approach at this or any other time,”said Patricia Borowski, senior vice president of governmentaffairs. “We must strike a balance between the need for nationaluniformity in standards and the demands of our emerging multistatemarkets.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 25, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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