Ill. insurance director predicts no federal oversight

On the same day a House committee exempted insurance companies and products from oversight by a proposed U.S. Consumer Financial Protection Agency, Illinois Director of Insurance Michael McRaith predicted that insurance is unlikely to be subject to federal oversight.

"State insurance regulation is under attack, but an optional federal charter won't happen," McRaith said in a keynote address to attendees at the National African-American Insurance Assoc. (NAAIA)'s national conference this week Chicago.

Although admitting that "we (state regulators) could do it better" when it comes to the often burdensome and duplicative process of interstate licensing, McRaith defended the state regulatory system as making the most sense for a product that is designed and sold to address a local need. The director has testified on behalf of the NAIC before the U.S. Senate Committee on the Judiciary and the President's Antitrust Modernization Commission in support of state-based insurance regulation.

Optional federal chartering, which would allow insurers to select between state or federal regulation, would not work because of the inevitable conflicts that would arise when multiple regulators examine insurance products using multiple standards, he said.

Comparing the push by many large insurers for optional federal chartering to the credit card companies' efforts to pass the Bankruptcy Reform Act of 2005, McRaith noted that insurance is too unique and personal to be lumped in with other financial products--a fact recognized as far back as the Roosevelt administration.

In 1932, 40 percent of all banks closed, ushering in the election of President Franklin Roosevelt, the New Deal, and an unprecedented number of financial oversight initiatives. But even the regulation-minded Roosevelt administration "never touched insurance," recognizing it as a local product, sold as an interstate transaction, and not traded on any public exchange, McRaith said. The 1945 passage of the McCarran-Ferguson Act, permitting state regulation of insurance and granting insurance an antitrust exemption, further solidified insurance as a product best regulated at the state level, he said.

Other current efforts to involve the federal government in insurance operations could have larger, more serious implications for economic recovery. Especially troublesome is the proposed "resolution authority" legislation that would enable the federal government to supersede all other authorities in the takeover of a failing business. "This is a concern because if you're an investor, you don't want to put capital into a company that could go to the government so you'd potentially lose access to that capital," McRaith said.

On the subject of the federal limitation of executive compensation, he agreed that although this made sense for executives at companies that took TARP money, "executive compensation is a matter of corporate governance," and should be determined by the "commercial democracy" of a company's shareholders and board of directors.

He also assailed abuses in the life insurance settlement marketplace, which has evolved into a practice that is "dangerous" for consumers. Growing from a $2 billion industry 7 or 8 years ago, life settlements today are a $40 billion industry that could exceed $100 billion in the next several years as the U.S. population continues aging, McRaith said. In March he testified before Congress about how vulnerable older Americans are being duped by investors who are aggressively buying up life insurance policies, bundling them and selling them as securities.

In August, Illinois enacted a law prohibiting "stranger-originated life insurance transactions" (STOLIs), and mandating that only licensed insurance producers can sell life insurance (http://www.lifeandhealthinsurancenews.com/News/2009/8/Pages/Illinois-Bans-STOLI.aspx)

McRaith, who chairs the NAIC's property-casualty insurance committee, also discussed credit-based insurance scoring, a contentious issue among many minority groups who believe they are disproportionately affected by poor scores. McRaith said that if insurers are going to continue the practice, there needs to be more transparency around the data they use to determine the scores, rather than the "rhetoric" which too often marks both sides of the discussion.
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