The National Conference of Insurance Legislators, which said there is "no room" for an optional federal charter, will propose a resolution opposing OFC legislation in Congress during its spring meeting this week in Washington.

Indeed, state lawmakers and regulators are joining together and ratcheting up their opposition to federal legislation--the National Insurance Act--that would create an optional federal charter for insurers.

NCOIL's president--State Rep. Brian Kennedy, a Democrat from Rhode Island--said that through their national organizations, state officials have "collectively agreed" to oppose OFC legislation.

NCOIL is being joined by the National Association of Insurance Commissioners, the National Governors Association and the National Conference of State Legislatures, Rep. Kennedy said. The groups have agreed to accept the NCOIL draft resolution as a model template for states "to reiterate to their congressional delegations the harmful effects of OFC legislation currently active in both chambers of Congress," he added.

The proposed resolution says that an OFC "would eventually draw from the states the almost $14 billion of critical premium tax revenue they receive, bifurcate insurance regulation, result in a quagmire of federal and state directives, erode key consumer protections, and compromise guaranty fund coverage, among other things," he noted.

Separately, NAIC President Sandy Praeger released a letter sent to the president of the American Insurance Association reiterating her opposition to an OFC.

The letter exchange began when the Washington-based AIA wrote to Ms. Praeger, the Kansas insurance commissioner, to criticize her article, "Federal Bill Unnecessary," published Feb. 7 on her insurance department's Web site.

In the letter to Ms. Praeger, AIA President Marc Racicot noted that AIA has worked with the NAIC and individual commissioners to reform insurance regulation, but that progress has been "uneven and has come about slowly."

Mr. Racicot, a former Montana governor, went on to write that insurers need a "modern and efficient regulatory structure," adding that this can only be achieved through a federal charter option.

States, he said, will continue to receive premium tax revenue, noting that an OFC would be optional and consumers could decide whether to buy coverage from a state- or federally-regulated insurer, much the way that they do business with state- or federally-chartered banks.

Mr. Racicot added that states would retain authority over state-regulated insurers. He said an OFC would not create a federal bureaucracy because a regulator would be appointed within the Department of Treasury, while start-up costs for an Office of National Insurance would be provided through assessments on insurers.

In her response, Ms. Praeger said property-casualty insurance is "a local product with local issues that require a responsive, local regulator to help resolve consumers' complaints and address their concerns."

She added that "it takes quite an imagination to assume the Treasury Department could assume even a partial role in regulating insurance without creating a huge bureaucracy."

In addition, Ms. Praeger said that an OFC would allow insurance companies to "opt out" of comprehensive consumer protections and state oversight.

"Current proposals would gut consumer protection while outsourcing most critical regulatory functions to an industry-run self-regulatory organization," she said.

Allowing insurers to pick their regulator would create a "race to the bottom," she added. "The push for an OFC is, in reality, nothing more than a call for little or no regulation," according to Ms. Praeger.

She noted that in 2006, states collected more than $16.7 billion in revenues from insurance sources--of which $1.2 billion, or approximately 7.2 percent, went to regulate insurance, while the remaining $15.5 billion went to the states' general funds for other purposes.

"How would any new federal bureaucracy be funded, if not by state premium tax dollars?" she asked. "Surely you are not proposing that the AIA's member companies would be willing to pay an assessment to the federal government, in addition to the premium tax they would continue to pay to their domiciliary state. That would undoubtedly result in higher premiums for American consumers."

She cited the Federal Crop Insurance Program as one initiative that was funded by premium taxes for awhile, and then reversed course and took revenue from states.

Ms. Praeger wrote that bank regulators focus on safety and soundness, devoting 90 percent of their resources toward that end, with the remaining 10 percent used "for their very weak version of consumer protection." Insurance regulators, she said, split resources more on a 50-50 basis.

She added that Treasury would have to create an infrastructure to handle insurance regulation.

In her letter, Ms. Praeger cited instances in which federal regulations had lapses:

o "Lax federal oversight caused the current disruption in the bond market. The Office of the Comptroller of the Currency allowed banks to offer unaffordable subprime loans to homeowners over the objection of state regulators, who sought to protect consumers from these unsafe products."

o "The Federal Reserve allowed banks to hold risky derivative investments based on these subprime loans, which resulted in billions of dollars in write-downs."

o "The Securities and Exchange Commission not only authorized these derivatives, it failed to supervise how credit agencies rated them. Everyone on the federal level who contributed the kindling, logs and matches that caused this fire should not now take away authority from state regulators who have been keeping the flames in check."

On the flip side of the OFC issue, Rep. Paul Kanjorski, D-Pa., who chairs the House Capital Markets Subcommittee, in an article published earlier in the week in a Capitol Hill newspaper, said the problems faced by bond insurers pointed up the "real need" for better regulation of bond insurers--a need that might be best served by an optional federal charter, he suggested.

However, at a hearing this month held by Rep. Kanjorski's panel, New York Gov. Eliot Spitzer urged Congress not to rush to create a federal insurance regulator. Mr. Spitzer said "the fact that the states need to improve does not lead to the conclusion that federal regulation of insurance is the answer, especially given the performance of other federal regulators on this issue."

But Rep. Ed Royce, R-Calif., sponsor of a bill creating an OFC in the House, remarked that "because these bond insurers, like all insurers, are overseen solely at the state level, we do not have the same level of expertise at the federal level" that exists for other areas.

AIA's Mr. Racicot said the bond insurers' current situation "underscores the need for strong solvency regulation that anticipates, rather than responds to, rapid societal developments that can result in major losses."

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State Regulators, Legislators Join Forces Against OFC Bill

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