Filed Under:Markets, Personal Lines

Optional Federal Charter Won't Happen, Illinois Top Regulator Predicts

NU Online News Service, Oct. 23, 11:12 a.m. EDT

CHICAGO--Insurance regulation is likely to remain a state rather than federal function, according to Illinois Insurance Director Michael McRaith.

"State insurance regulation is under attack, but an optional federal charter won't happen," Mr. McRaith said yesterday in a keynote address here at the National African-American Insurance Association's national conference.

His remarks came on the same day that a House committee voted on an amendment to exempt insurance companies and products from federal oversight in legislation to create a U.S. Consumer Financial Protection Agency. (See

Mr. McRaith admitted that when it comes to handling interstate licensing, a frequently burdensome and duplicative process, that state regulators "could do it better," but, he 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 in the past in support of state-based insurance regulation for the National Association of Insurance Commissioners in appearances before the U.S. Senate Judiciary Committee and the President's Antitrust Modernization Commission.

He said proposed legislation in Congress to allow optional federal chartering, allowing 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 compared the push by many large insurers for optional federal chartering to the credit card companies' efforts to pass the Bankruptcy Reform Act of 2005, Mr. 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.

He noted that 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, Mr. 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, Mr. McRaith suggested.

Especially troublesome, he said, 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 advised.

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.

The commissioner 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 seven- or eight-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, Mr. 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.(See

Mr. McRaith, who chairs the NAIC's property-casualty insurance committee, also discussed credit-based insurance scoring, a process that has been criticized giving disproportionately negative scores to minorities and low income groups.

Mr. 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.

Ms. Toops is the editor of American Agent & Broker, part of Summit Business Media's Property & Casualty Magazine Group, which includes National Underwriter.

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