USAA Plugs For Optional Fed Charter

By Arthur D. Postal, Washington Bureau Chief

NU Online News Service, Sept. 22, 4:27 p.m. EDT, Washington?An official of USAA Group told a Senate Banking Committee hearing today that the current system of state-based insurance regulation is broken and the company "believes that a market-based optional federal charter would be the best route to true regulatory reform."[@@]

At the same time, a representative of the Council of Insurance Agents and Brokers told members of the committee during testimony on state insurance regulation that it was urgent that Congress extend the Terrorism Risk Insurance Act, an area everyone agrees is within the federal purview, as soon as possible.

Representatives of the CIAB and the Independent Insurance Agents and Brokers of America told the panel that while the current state system needs updating, they were more moderate in their views of how state regulation could be improved.

The Independent Agents said they supported the federal standards approach as contained in the State Modernization and Regulatory Transparency (SMART) legislation expected to be introduced shortly in the House by Reps. Mike Oxley, R-Ohio, chairman of the House Financial Services Committee, and Richard Baker, R-La., who heads its main subcommittee, the Capital Markets Subcommittee.

But the CIAB said that while it supports the SMART Act proposal as an interim step, it believes that in the long run, an optional federal charter is needed.

J. Robert Hunter, director of insurance for the Consumer Federation of America, said that while there are many problems with state oversight with insurance, consumers would oppose the optional federal charter approach in the strongest possible way.

The strongest criticism of state regulation from any speaker at the hearing came in the comments by William H. McCartney, senior vice president, Government and Industry Relations, at the USAA Group.

Mr. McCartney, speaking on behalf of USAA and the 450 members of the American Insurance Association, said, "Whether the problems are inherent in 50-state oversight or are part of the post-McCarran-Ferguson [Act] approach to insurance regulation, the current system is undeniably broken and all stakeholders are suffering as a result."

He added, "As price and product obstacles increase, insurers find it more difficult to compete and make a reasonable profit in the marketplace. This leads to more competitors withdrawing from the market, taking capital and jobs from that market and leaving fewer choices for consumers."

It is no surprise, he said, "that property-casualty insurance consistently has the lowest return on equity of all the financial services industries. The net result is a parochial regulatory environment that encourages inefficiency and repels investors."

One of Mr. McCartney's heaviest criticisms was about rate controls, the source of much contention between industry, which is united in seeking rate deregulation of both commercial and personal lines, and the National Association of Insurance Commissioners, which believes that total rate deregulation will hinder the ability of state regulators to maintain solvency.

Mr. McCartney told the panel, "The current ?heavy-handed' regulatory system in many states does not protect consumers; it actually disenfranchises them."

He argued that, "because of the emphasis on price and product controls in these jurisdictions, USAA is forced to devote enormous resources responding to these "pre-market" obstacles rather than developing innovative new products for our members. The system, in fact, discourages innovation because the timeline for approving new products offered nationally can be longer than the shelf-life of the innovation."

Moreover, Mr. McCartney said, an optional federal charter is just that, an option. "Equally important, the optional federal charter is just that ? a choice," he told the panel. "Insurance companies that are comfortable with the current state regulatory system are not forced into the new system, while insurers like USAA that prize uniformity and market freedom may elect to be subject to federal oversight.

"Similarly," Mr. McCartney said, "consumers who are comfortable doing business with state-regulated insurers are free to continue to do so. This is not a new regulatory paradigm but one that is based on the chartering system for U.S. banks."

But Tom Ahart, representing the IIABA, rejected McCartney's proposal for a solution. Mr. Ahart is a former president of the IIABA and president of Ahart, Frinzi & Smith Insurance Agency, an independent agency based in Phillipsburg, N.J.

Mr. Ahart said, "State regulators and legislators, many consumer groups, independent insurance agents and brokers, some life insurance companies, and most property-casualty companies are strongly opposed to an optional federal charter."

In fact, Mr. Ahart said, "the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies, which represent property-casualty insurers of all sizes, oppose an optional federal charter."

Mr. Ahart said, "The state system has proven that it best protects consumers and can be modernized to work effectively and efficiently for the entire insurance marketplace with the right pressure from Congress.

"Targeted, federal legislation to improve the state-based system presents members of Congress with a middle-ground solution that is achievable ? something we can all work on together." This pragmatic approach, Mr. Ahart said, "would build on the success of the National Association of Registered Agents and Brokers' provisions in the 1999 Gramm-Leach-Bliley Act."

Mr. Ahart said that the IIABA believes the best alternative for addressing the current deficiencies in the state-based regulatory system "is a pragmatic, middle-ground approach that utilizes federal legislative tools to foster a more uniform system and to streamline the regulatory oversight process at the state level." In fact, Mr. Ahart added, "to take one example, the so-called industry ?consensus' federal charter proposal would force the state guaranty funds to accept and backstop federal chartered insurers ? there is nothing "optional" about that.

"This would be an unprecedented intrusion on state solvency regulation," Mr. Ahart said. "In the end, the state system would be responsible for insolvent insurers but could not regulate them to keep them from going insolvent."

Representing the CIAB, Albert R. Counselman, CPCU, president and chief executive officer of Riggs, Counselman, Michaels & Downes, Inc., based in Baltimore, and past chairman of the CIAB, testified that "the need for federal action in the area of terrorism coverage is a clear example of the limits of state regulation."

He noted congressional work in this area, and added, "Now, as we look forward to the third and final year of TRIA's current life, the evidence is mounting that TRIA is effective and that purchase of terrorism coverage is increasing.

"It has also become evident, however, that the private marketplace will not be prepared to take on the full risk posed by potentially catastrophic terrorism losses by the time the law expires on Dec. 31, 2005," Mr. Counselman added. "Thus, it is imperative that TRIA be extended."

Regarding state insurance regulation, Mr. Counselman said, "we believe the ultimate solution ? at least for the property and casualty industry ? is enactment of legislation creating an optional federal insurance charter.

"An optional federal charter would give insurers and producers the choice between a single federal regulator and multiple state regulators,"

Mr. Hunter, director of insurance for the Consumer Federation of America, said, "Consumer organizations strongly oppose an optional federal charter, where the regulated, at its sole discretion, gets to pick its regulator," Mr. Hunter told the panel. "This is a prescription for regulatory arbitrage that can only undermine needed consumer protections," he said.

"Indeed the drafters of such proposals have stated openly that this is their goal with the optional charter approach," Mr. Hunter said. "If elements of the insurance industry truly want to obtain "speed to market" and other advantages through a federal regulator, let them propose a federal approach that does not allow insurers to run back to the states when regulation gets tougher."

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USAA Plugs For Optional Fed Charter

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