The Bush administration may have rocked the insurance world lastweek by including optional federal charters for insurancecompanies, agents and brokers in its proposed overhaul of financialservices regulation, but getting its sweeping reform packagethrough Congress will be "difficult," the blueprint's architectsays.

Indeed, the Treasury Department report detailing theadministration's call for an historic regulatory reorganizationconceded that a "difficult and ongoing" debate lies ahead to securecongressional approval.

Insurance industry reaction was split along the usual faultlines, depending on whether a particular association's membershipsupports or opposes optional federal charters.

But the Treasury's position could not be more clear anddefinitive. "While a state-based regulatory system for insurancemay have been appropriate over some portion of U.S. history,changes in the insurance marketplace have increasingly put strainson the system," the report said.

"Much like other financial services, over time the business ofproviding insurance has moved to a more national focus even withinthe state-based regulatory structure," Treasury added. "Theinherent nature of a state-based regulatory system makes theprocess of developing national products cumbersome and more costly,directly impacting the competitiveness of U.S. insurers."

Under the solution proposed by the Treasury, an OFC structureshould provide for a system of federal chartering, licensing,regulation and supervision for insurers, reinsurers, and insuranceagents and brokers. Such a plan "would also provide that thecurrent state-based regulation of insurance would continue forthose not electing to be regulated at the national level."

States would not have jurisdiction over those electing to befederally regulated, the Treasury noted.

However, the Treasury plan would leave insurers holding an OFCstill subject to ongoing compliance with certain state laws--suchas on premium taxes as well as compulsory coverage for workers'compensation and individual auto insurance--as well as requirementsto participate in state-mandated residual market mechanisms andguaranty funds.

The Treasury plan calls for separate property-casualty andlife-disability charters, and also includes a proposal to create aninterim federal insurance regulator within Treasury to coordinatewith state officials on "pressing" insurance matters, includinginternational regulatory issues such as reinsurance collateral.

The interim federal regulator would also "serve as an adviser tothe Secretary of Treasury on major domestic and internationalpolicy issues," Treasury said.

Officials of the National Association of Insurance Commissionersand the National Conference of Insurance Legislators immediatelycondemned the administration's move to back an OFC in separatecomments from the NAIC's spring meeting in Orlando, Fla.

Rep. Brian Kennedy, D-R.I., president of NCOIL, said the onlysilver lining to the proposal is that a new administration willtake office in 10 months. "We will have a new Treasury secretaryand all of this will be forgotten," he said.

"Now that we have seen this huge push for an OFC, we need to bea united front [in opposition] going forward...State legislatorsand regulators should have a seat at congressional hearings" sothey can head off an OFC, he added.

In a prepared statement issued after the report was officiallyreleased on March 31, NAIC President Sandy Praeger said that whilestate regulators "certainly support better coordinating andmodernizing of their oversight efforts, 'modern' does not mean'federal.'" Ms. Praeger, who is Kansas insurance commissioner, saidthe blueprint would "marginalize" state regulators "and frankly,for our sector it looks more like a solution in search of aproblem."

She added that "state regulators challenge the proponents of afederal solution to trace the origins of the current problems inthe housing and bond insurance markets...and they will find thatthe true failures lie with a lack of coordinated federaloversight."

J. Robert Hunter, director of insurance for the ConsumerFederation of America, said the proposal would have the effect of"gutting consumer protections." He said the Treasury proposals "foran OFC/deregulation regime as part of a 'solution' to the illscaused in mortgage lending lack of oversight is laughable."

"More deregulation as a solution to too much deregulation isclassic Bush administration logic, akin to more tax cuts to solvethe crisis in our national debt caused by excessive tax-cutting,"Mr. Hunter added.

The Independent Insurance Agents and Brokers of America and theNational Association of Mutual Insurance Companies also voicedopposition. Both said they supported regulatory reform forinsurance, but not direct federal regulation.

NAMIC President and CEO Charles Chamness said the Treasuryproposal "represents a shift in regulatory authority to the federalgovernment. At this time, we urge Congress and Treasury to focus oneffective market reforms rather than a consolidation of regulatoryauthority."

In criticizing the Treasury blueprint for change, RobertRusbuldt, president and CEO of IIABA, said "while there may be somemerit in the role envisioned for the fed to identify and facilitatecorrections of systemic problems in the financial servicesindustry, the OFC section of the blueprint is clearly swimmingupstream."

He added that it is "hard to see Congress supporting a proposalthat calls for massive deregulation of the industry and a huge newfederal bureaucracy."

David A. Sampson, president and CEO of the Property CasualtyInsurers Association of America, said that while his membership"acknowledges improvements are necessary to streamline andmodernize the existing regulatory system," PCI "would support asolution...that would accomplish needed reforms within theframework of the existing system."

The National Association of Professional Surplus Lines Officessaid Congress should first complete work this year on theNonadmitted and Reinsurance Reform Act of 2007--which would setfederal regulatory standards for states to follow on reinsuranceand excess and surplus lines--"before it discusses other changes inthe current regulatory structure."

The act's passage would be "a major step in creating a frameworkto eliminate duplication and inefficiency in the surplus lines andreinsurance segments of the insurance industry," said NAPSLO'sexecutive director, Richard Bouhan.

However, the American Insurance Association and the Council ofInsurance Agents and Brokers--both longtime OFC backers--voicedsupport.

AIA President Marc Racicot, the former governor of Montana,called the Treasury proposal for an OFC "a major milestone."

"Providing insurers with the option of a single regulator forinsurance will benefit consumers and will be more efficient,effective and rational, given the increasing tension a state-basedregulatory system creates," he said.

Joel Wood, senior vice president for government affairs at theCIAB, said the fact that a conservative Republican administrationwould embrace the OFC structure "speaks volumes for the slow butsteady progress that supporters of an OFC have made in movingtoward a rationalized insurance regulatory scheme."

Meanwhile, on the corporate buyers side, the Risk and InsuranceManagement Society said it "wholeheartedly endorses" Treasury'scall for on OFC.

Terry Fleming, a RIMS board member and director of riskmanagement for Montgomery County, Md., said in a statement that therisk management community has long supported the OFC concept and"believe that a regulatory system structured in the method proposedwill provide an effective and much more efficient process to manageinsurance transactions for policyholder operations."

Fran Semaya, a lawyer who heads the insurance corporate andregulatory practice at Cozen O'Connor in New York, as well as theAmerican Bar Association's Task Force on Federal InvolvementInsurance Regulation Modernization, said she believes an OFC "willwork very well in certain lines of business very quickly," citinglife insurance and reinsurance.

"We need a one-stop shop for professional reinsurance, eitherthrough a single state regulator or a federal insurance regulator,"she said. "To function properly in a global environment, thereneeds to be a single regulator."

Some of her concerns about an OFC stem from cases where there isa holding company structure and some subsidiaries might opt for anOFC, while others do not. "I'm not sure that it has been thoughtout even in the national insurance proposals that are out thereabout how that is going to work," she said.

Another concern she cited comes in the insolvency area, wherethe blueprint calls for a federally regulated insurer to use thestate guaranty fund system. "I have questions about how that willfunction," she said. "Will a federally chartered insurer beassessed by the state system so that, if there is an insolvency,they have already paid into the system?"

She explained it is "very important that if you have aninsolvency, that the state regulator works with the state guarantyfund so that they are prepared and ready. Will that happen with afederally chartered insurer?"

Eli Lehrer, a senior fellow at the Competitive EnterpriseInstitute in Washington, who has studied and lectured on insuranceregulation for years, said his initial reaction is that "Treasuryhas taken the right approach. This really is a question ofinternational competitiveness as much as anything else."

He added that relative to both the insurance systems in othercountriesand other sectors of the U.S. economy, "our life andproperty-casualty insurance sectors are both unproductive andbereft of new ideas, and our burdensome, fragmented regulatorysystem deserves a lot of the blame for this."

He said he was "intrigued" by the idea of creating an Office ofInsuranceOversight as an interim step and thinks it deserves"serious consideration, but I think it's important that people whosupport real change realize that it would probably be little morethan a half-way measure."

He added that "as an enthusiastic supporter of OFC and othermeasures that would result in regulatory competition, I'll be thefirst to admit that thetype of change Treasury envisions is notgoing to be easy for every agent and every broker. But, like anyother systematic economic modernization, it's likely to leave thegreat majority of people better off."