Optional Federal Chartering Debated Washington

While agreeing on the dire need for insurance regulatory reform, the industry remains sharply divided on whether optional federal chartering is the right means to achieve the desired result.

At a debate on OFC sponsored by the Washington Legal Foundation, industry representatives, along with Arkansas Insurance Commissioner Mike Pickens, presented strikingly different views on the likely outcome of the effort to create a federal regulatory option.

Craig A. Berrington, senior vice president with the Washington-based American Insurance Association, said AIA supports OFC because the current regulatory system allows for public policy decisions that are wrong from the standpoint of modern economics, business and consumer needs. “We have a system for property-casualty insurance that is archaic, dysfunctional and prone to corruption,” he said.

He emphasized that in using the word “corruption,” he is not talking about individuals. Rather, Mr. Berrington said, the problem is systemic in that insurance companies must go to regulators to beg for a price to sell their products.

The pricing of insurance too often is a political act, he said, thus corrupting the regulatory system.

The system proposed by AIA and supported by the American Council of Life Insurers, would focus on financial integrity, not rate and form regulation, he said.

But Wayne F. White, president of Conway, Ark.-based Home Mutual Fire Insurance Company, said the advocates of OFC always discuss the issue as if they are presenting a fully cooked meat loaf to the dining room table.

But in reality, he said, they will be taking their plans to one house of Congress where there are 435 chefs, and another where there are 100 chefs. Each one of those chefs, Mr. White said, will want to add something to the recipe.

By the time they get done, Mr. White said, the result will be something much different than meat loaf.

From his own perspective as president of a small farm mutual, he believes companies like Home Mutual benefit from the ability to establish a close relationship with the local regulator. Consumers also benefit by the added competition.

But companies like his would be pushed off an unlevel playing field created by a federal regulator, he said.

Bradford W. Rich, executive vice president of San Antonio-based USAA, emphasized that the system backed by proponents of OFC is optional. There is no requirement that any company be regulated by the federal government, he said. Something must be done, he said, to address the patchwork system of today that creates unnecessary costs and inexplicable delays.

The system is broken, he said, and it cries out for the logic of a single, strong federal regulator.

Mr. Rich added that consumers are harmed by the present system. For example, he said, revolutions in information technology that could reduce costs and increase choices for consumers are not as prevalent as they should be in the insurance industry because of the inflexibility of state regulation.

He noted that dual chartering already exists in the banking industry, and the ability of banks to choose their regulator has made both the state and federal systems more efficient. Indeed, Mr. Rich said, some 55 percent of assets are in federally regulated banks, while 45 percent are in state regulated banks.

But Mr. Pickens, who is current president of the Kansas City, Mo.-based National Association of Insurance Commissioners, insisted that NAIC has made a great deal of progress on regulatory reform since the enactment of the Gramm-Leach-Bliley Act.

He added that many of the proponents of OFC seem to spend most of their time and money in Washington rather than in state capitals helping NAIC advance its reform agenda.

The push for OFC, Mr. Pickens said, is being led by a few large companies and banks, perhaps believing that a single federal regulator would facilitate their business operations. But much of the insurance industry, he said, remains opposed to OFC. Moreover, Mr. Pickens said, he does not believe that many consumers want to call Washington when they have a complaint.

As an example of the problems caused by federal regulation, Mr. Pickens cited health insurance, which he said is a broken system due to increased federal government interference.

Right now, he said, p-c insurers can leave a market if there is a bad regulatory decision. However, Mr. Pickens said, if there is a single federal regulator who issues a bad decision, where will insurance companies go?

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 2, 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.

Special Reports /

Optional Federal Chartering Debated

Related Stories

Recommended For You