The National Association of Insurance Commissioners has wonsignificant changes to legislation creating a Federal InsuranceOffice, giving state regulators more say in its operations.

The new language is contained in a manager's amendment to thebill agreed to last week. It would require the new agency toclosely coordinate with state regulators, and would give Congressand the courts the authority to further limit the agency'sauthority in insurance matters.

The changes in the Federal Insurance Office Act of 2009 wereagreed to by the leadership of the House Financial ServicesCommittee.

The bill was scheduled to be marked up late last week by thecommittee, but insurance industry sources said that after someparties objected, committee officials agreed to delay draftingactivity until after the Thanksgiving holiday.

The proposed NAIC alterations to the legislation apparentlyupset supporters of a stronger federal role in regulation ofinsurance. These include the American Insurance Association, theReinsurance Association of America, the American Council of LifeInsurers and the Financial Services Roundtable.

The changes the NAIC negotiated in the bill would:

o Mandate closer cooperation between the states and the FIO onnarrow international agreements.

o Ensure that international agreements don't preempt stateprudential regulation of U.S. insurers.

o Limit the scope of agreements to recognizing a level ofsupervision consistent with state protections.

o Add congressional involvement and consultation.

o Add judicial review on preemptive determinations made by theproposed agency.

o Reassert state authority to regulate the "business ofinsurance."

"The recent amendments strike an appropriate balance among theneeds of consumers, state regulators and federal negotiators, bypreserving important state and market regulation while allowing foragreements with equivalent regulatory systems," said NAIC PresidentRoger Sevigny.

"While the NAIC continues to oppose a federal functionalregulator for insurance or misguided attempts to further empowerthe FIO, the bill as currently drafted is an appropriately narrowand targeted improvement to our system of supervision," added Mr.Sevigny, who is New Hampshire's insurance commissioner.

SYSTEMIC RISK

In other federal regulatory news, property and casualty as wellas life insurers have written lawmakers objecting to language inlegislation giving Washington oversight of insurance holdingcompanies they believe pose a systemic risk to the financialsystem. The letters were sent to all members of the House FinancialServices Committee, which is currently marking up the bill–theFinancial Stability Improvement Act of 2009.

Each member of the committee was written to by groupsrepresenting five p&c insurance trade groups, representing bothunderwriters and agents, as well as the American Council of LifeInsurers.

P&C organizations that wrote are the American InsuranceAssociation, the Independent Insurance Agents and Brokers ofAmerica, the National Association of Mutual Insurance Companies,the Property Casualty Insurers Association of America and theReinsurance Association of America.

The industry groups asked that large insurers not be subject toany oversight by bank regulators unfamiliar with the insuranceindustry regulatory scheme.

They also requested that bank regulators not have the authorityto determine whether insurers should be responsible forcontributing into a fund that would be used to pay for resolvingtroubled financial institutions.

They voiced particular concern over an amendment to the proposedlegislation that would require institutions that are designatedsystemically important to pay in advance into a fund that would beused to resolve insolvent financial institutions.

Such an amendment was expected from Rep. Luis Guitierrez,D-Ill., during the markup of the legislation by the committee.

"We strongly oppose the idea of prefunding because it runscounter to our own resolution system, amounts to a tax …," the fivep&c insurance trade groups said in their letter. "We see nobenefit to our industry and its customers that would flow fromadopting an amendment to prefund the enhanced resolutionauthority."

The bill would give the Federal Reserve, the Federal DepositInsurance Corp. and a council of federal regulators broad authorityto deal with so-called "too big to fail" financial institutions,including insurers.

But it would not give the proposed Financial Services OversightCouncil the authority to oversee the operating subsidiaries ofinsurance companies.

According to the ACLI letter, the bill would change the BankHolding Company Act to effectively treat operating insurancecompanies as if they were national banks merely because they are ina holding company system that also owns an ancillary non-bankdepository institution.

"Many insurance companies' insurance holding company systemscontain small thrifts that are used to enhance the servicesprovided to policyholders," the ACLI letter said. Many p&cinsurance companies also include subsidiaries that operatethrifts.

"Although policy makers may see a need to restructure theregulation of thrifts, that should be done in a way that does notdamage the other corporate entities within the holding company,"the letter said.

In its letter, the p&c groups said its industry "did notpose systemic risk to the U.S. financial system or to the economy"during the economic crisis that is prompting the legislation. "Webelieve that any federal proposal to subject financial companies toheightened prudential supervision should start from the premisethat property and casualty companies engaged in insuranceactivities should not be subject to such supervision."