Terrorism Law Puts Treasury Dept. Into The Insurance Regulation Business Washington

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

This emerged most noticeably in the most recent set of guidance that Treasury issued regarding the Terrorism Risk Insurance Program. The guidance included a request for comments on several issues, one of which really caught my attention.

It has to do with establishing financial standards for what are called “federally-approved insurers.” These are entities approved by federal agencies to offer property-casualty insurance in connection with maritime, energy or aviation activities, and are not subject to state regulation.

The problem, according to the Treasury Department, is that while some federal programs impose minimum financial standards on these insurers, others do not. In any case, Treasury adds, there are no uniform requirements.

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

I think you can see the point. The Terrorism Risk Insurance Act requires the Treasury Department to monitor the availability and affordability of terrorism insurance. In other words, Treasury will have to monitor rates.

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

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

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

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

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

Now, put this in the context of the upcoming debate over optional federal chartering. One of the arguments made by opponents of optional federal chartering is that the federal government cannot match the expertise of state insurance departments.

But by the time Congress gets around to seriously considering optional federal chartering, the Treasury Department might well have developed significant expertise on financial solvency, rating and market conduct, albeit in the limited context of the terrorism insurance program.

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

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

As a consequence, it is also easy to see the responsibilities of Treasurys insurance office expanding in response to emerging insurance issues.

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

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

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

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

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

Despite the expertise and experience of state government in regulating the business of insurance, Ive yet to see the time when a state insurance commissioner–including the president of the National Association of Insurance Commissioners–was treated with the same degree of respect as a deputy assistant secretary in a cabinet office.

On a lot of issues that might come before Congress in the next few years, including possibly some type of federal role in catastrophe insurance or broader civil justice reform, the presence of an insurance office at the Treasury Department could be invaluable. (This, of course, presumes that Treasury ends up agreeing with the industrys representations on these issues. It might not.)

But whatever the case, I think an increased federal role in the regulation of insurance beyond terrorism insurance is almost a certainty.

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

Steven Brostoff is NU's Washington editor. He may be reached at sbrostoff@nuco.com.

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

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Terrorism Law Puts Treasury Dept. Into The Insurance Regulation Business

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