Terrorism Law Puts Treasury Dept. Into The InsuranceRegulation Business Washington

Despite what I think is a sincere desire to leave regulation ofinsurance to the states, it is hard not to notice that theterrorism insurance bill is forcing the Treasury Department to movecloser and closer to developing a type of federal oversight.

This emerged most noticeably in the most recent set of guidancethat Treasury issued regarding the Terrorism Risk InsuranceProgram. The guidance included a request for comments on severalissues, one of which really caught my attention.

It has to do with establishing financial standards for what arecalled “federally-approved insurers.” These are entities approvedby federal agencies to offer property-casualty insurance inconnection with maritime, energy or aviation activities, and arenot subject to state regulation.

The problem, according to the Treasury Department, is that whilesome federal programs impose minimum financial standards on theseinsurers, others do not. In any case, Treasury adds, there are nouniform requirements.

(I must confess something here. Ive been covering the insuranceindustry in Washington, D.C. since 1986, and I never even knewthese insurers existed until now.)

I think you can see the point. The Terrorism Risk Insurance Actrequires the Treasury Department to monitor the availability andaffordability of terrorism insurance. In other words, Treasury willhave to monitor rates.

Treasury also has to oversee various disclosure requirements,such as how insurance companies inform customers about theavailability of terrorism insurance and the fact that the programis reinsured by the federal government.

Now, Treasury will be getting into establishing financialstandards for insurance companies.

This looks an awful lot like the core functions of stateinsurance departments.

I can understand Treasurys dilemma. Here is a group of insurancecompanies that qualifies for federal terrorism insurance, butexists outside any recognized regulatory authority.

Somebody has to protect the public and make sure that thesecompanies are solvent. No one else is out there to do this but theTreasury Department.

Now, put this in the context of the upcoming debate overoptional federal chartering. One of the arguments made by opponentsof optional federal chartering is that the federal governmentcannot match the expertise of state insurance departments.

But by the time Congress gets around to seriously consideringoptional federal chartering, the Treasury Department might wellhave developed significant expertise on financial solvency, ratingand market conduct, albeit in the limited context of the terrorisminsurance program.

This certainly doesnt mean that optional federal chartering isimminent. Indeed, it is hard to imagine it happening in the 108thCongress.

Still, I cant help but get a sense that the federal role ininsurance regulation will increase incrementally. After theterrorism insurance program becomes settled, and other insuranceissues that are national in character arise, it is easy to imaginethat the Treasury Department will be the first place Congress willgo when seeking information.

As a consequence, it is also easy to see the responsibilities ofTreasurys insurance office expanding in response to emerginginsurance issues.

The phrase “camels nose under the tent” may have turned into areality.

But let me say that even for those who oppose optional federalchartering–or indeed, any federal role in insurance regulation–theestablishment of a federal government office with some expertise oninsurance might not necessarily be a bad thing.

A federal government office could prove to be the best advocatethe industry has when it comes to explaining the economic realitiesof the business of insurance to members of Congress.

Ive seen time and time again–particularly in the past debateover bank insurance powers–the deference accorded by Congress tofederal government officials as opposed to state governmentofficials.

And no matter what Republicans in Congress like to say abouttheir commitment to states rights, and their supposed belief thatall wisdom does not reside “inside the Beltway,” Im not convincedthat they really mean it.

Despite the expertise and experience of state government inregulating the business of insurance, Ive yet to see the time whena state insurance commissioner–including the president of theNational Association of Insurance Commissioners–was treated withthe same degree of respect as a deputy assistant secretary in acabinet office.

On a lot of issues that might come before Congress in the nextfew years, including possibly some type of federal role incatastrophe insurance or broader civil justice reform, the presenceof an insurance office at the Treasury Department could beinvaluable. (This, of course, presumes that Treasury ends upagreeing with the industrys representations on these issues. Itmight not.)

But whatever the case, I think an increased federal role in theregulation of insurance beyond terrorism insurance is almost acertainty.

I think the key for the industry is to try to manage this changeto assure that Treasurys role complements that of the states, so itdoes not turn into a secondary (or dual) regulator.

Steven Brostoff is NU's Washington editor. He may be reachedat [email protected].

Reproduced from National Underwriter Edition, March 31, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.