More Noise About Federal RegulationIs federal regulation of insurance justaround the corner? There is little question that Congress isgrowing more and more interested in establishing some type ofdirection to a system that has been the exclusive domain of thestates for more than a century.

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It was Congress that forced states to begin harmonizing theiragent and broker licensing standards as part of theGramm-Leach-Bliley Act.

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It was Congress that created a federal insurance office at theTreasury Department, albeit limited to the Terrorism Risk InsuranceProgram.

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And now, Congress is threatening to enact legislation on marketconduct and rate and form oversight that would force states todevelop uniform laws.

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Indeed, in a statement earlier this year outlining itspriorities for the 108th Congress, the House Financial ServicesCommittee devoted several pages to insurance, reflecting anactivist agenda on insurance reform.

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“Congress is very clearly looking at the industry, more from anoversight standpoint at this juncture,” said Julie Gackenbach,assistant vice president of federal affairs with the Des Plaines,Ill.-based National Association of Independent Insurers, whichopposes federal regulation.

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“We will likely see some consideration of national standards,”she added, “but I dont see federal regulation.”

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But Gary Karr, a representative of the Washington-based AmericanInsurance Association, which supports optional federal chartering,said that it is not off the table.

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“It is clear that regulatory reform is on the mind of theCommittee,” he said. “It is a high priority. It might take time forOFC (optional federal chartering) to sift up, but the Committee islooking at it.”

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All this activity comes at a time when state governmentadvocates of state regulation say they agree that insuranceregulation needs reform and they are committed to bringing itabout.

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Timothy L. Tucker, director of state and federal affairs for theNational Conference of Insurance Legislators, said it is no longergood enough for states to say they are working on reforminitiatives.

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Reforms, he said, have to be developed and implemented in atimely manner. NCOIL, Mr. Tucker said, is working toward that endas reflected by a recent report of market conduct reform that NCOILleaders say could become a model act. (See May 12, page 6, and page24, this edition, for more on market conduct reform.)

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He said he does not believe the Committee wants to move towardfederal regulation.

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“I think there is still hope that the states can act quickly,”Mr. Tucker said.

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Arkansas Commissioner Mike Pickens, who is the current presidentof the Kansas City, Mo.-based National Association of InsuranceCommissioners, agreed.

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“Based on our Congressional visits, I think the action will notbe on a dual federal chartering bill,” Mr. Pickens said.

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Instead, he said, he expects to see Congress consider a federalstandards proposal that is being developed by the Alexandria,Va.-based Independent Insurance Agents and Brokers of America.

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The Committee, Mr. Pickens said, is buildinga case that state regulation has made positive steps. For example,he said, the NAICs solvency accreditation program has been one ofstate regulations biggest success stories.

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However, he said, there is also a case that more work needs tobe done. Congress, he said, will likely keep pressure on the statesto continue reform.

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Mr. Pickens noted that there has been a change in the industryin recent years in that the industry itself is expressing more andmore concerns about state regulation. AIA, along with theWashington-based American Council of Life Insurers, is talkingabout optional federal chartering.

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However, he said, most of the industry does not support optionalfederal chartering. Any action, Mr. Pickens said, will be on afederal tools proposal.

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But Robert Rusbuldt, chief executive officer with IIABA, notedthat the IIABA proposal, which is still being developed, may bynecessity include some type of federal government role.

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The problem, he noted, involves constitutional questions of whowould enforce federal standards.

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While the NAIC might seem the logical choice, he said, there isalways a constitutional question involving NAIC, which is a privatetrade association and is not directly responsible to any federalagency.

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(The constitutional question involves whether Congress candelegate authority to enforce a federal law to an organization likeNAIC.)

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Currently, Mr. Rusbuldt said, IIABA is looking at a role forNAIC in promulgating some of the standards. But in addition, hesaid, there might have to be some type of federal entity that wouldhave veto power over what the NAIC does in order to meet anyconstitutional issues.

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However, Mr. Rusbuldt emphasized, this federal entity would haveveto power, but not regulatory power.

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IIABA is still considering the issue, he said, as well as theissue of where in the federal government the veto power wouldreside.

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While there is a growing body of expertise at the TreasuryDepartment on insurance due to the terrorism insurance program, Mr.Rusbuldt said, very few Republicans want to expand the power of theTreasury versus the states.

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“Most members simply want uniformity and efficiency,” hesaid.

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Moreover, Mr. Rusbuldt said, if federal standards are to beeffective in achieving uniformity and efficiency, they must be asclear as possible. “We want to leave as few gray areas aspossible,” he said.

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There is also a question, Mr. Rusbuldt said, regardingenforcement. “What is the hammer forcing states to comply?” heasked.

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IIABA, he said, is looking at various ideas and the issue isstill under discussion. However, Mr. Rusbuldt added, he believesthe states will want to voluntarily comply with the standards,since uniform and efficient regulation is clearly good forconsumers.

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As for federal regulation, he added that currently some 11,000people in the states are involved in insurance regulation. If thereis a federal system, Mr. Rusbuldt said, there will be thousandsmore in Washington.

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“I dont see that happening anytime in the near future,” hesaid.

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Indeed, while Treasury is developing a lot of insuranceexpertise in the context of the terrorism insurance program, Mr.Pickens said he does not believe that Treasury wants to get intothe business of regulating insurance.

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He said that, having dealt personally with Treasury officials,the interest at Treasury is to focus on its role as a reinsurer forterrorism losses. Treasury and NAIC, Mr. Pickens added, havedeveloped an excellent working relationship.

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However, Treasury did cause some concern among opponents offederal regulation when it recently asked for comments on whetherit should promulgate financial standards for so-called “federallyapproved insurers,” which it described as insurance companiesapproved to write insurance under various federal programs butwhich do not come under a consistent set of financialstandards.

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NAII filed comments with Treasury challenging its authorityunder the terrorism insurance legislation to promulgate suchstandards.

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Ms. Gackenbach said that as of this writing, NAII has notreceived any feedback from Treasury on its comments.

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(National Underwriter contacted Treasury regarding aninterview on how it sees its role with the industry and stateregulators. A department representative promised an interview,which was not forthcoming at this writing.)

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However, Ms. Gackenbach added, while Treasury is learning a lotabout how the industry works, it is relying heavily on NAICthroughout the process.

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She added that the terrorism insurance program is limited andlikely will expire in less than three years. “Treasury,” Ms.Gackenbach said, “will be looking to wind down.”

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But one supporter of optional federal chartering, who asked notto be identified, said he is not so sure. While there is a lot ofinterest in the IIABAs federal standards proposal, he believes theFinancial Services Committee is starting to realize that it couldbe so complicated that it might be hard to implement.

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All the optional chartering proposals, this source noted,identify Treasury as the insurance regulator. Even if the terrorisminsurance program expires, he said, Congress may want to maintainsome insurance expertise at Treasury should it conclude optionalfederal chartering is the only answer.

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Currently, the prevailing view is that Congress will look atsomething short of federal regulation in its effort to reforminsurance regulation.

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But there is a broad consensus that insurance regulation must bereformed.

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“The clock is ticking,” Mr. Tucker warned.


Reproduced from National Underwriter Edition, June 23, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.


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