The Bush administration may have rocked the insurance world last week by including optional federal charters for insurance companies, agents and brokers in its proposed overhaul of financial services regulation, but getting its sweeping reform package through Congress will be "difficult," the blueprint's architect says.

Indeed, the Treasury Department report detailing the administration's call for an historic regulatory reorganization conceded that a "difficult and ongoing" debate lies ahead to secure congressional approval.

Insurance industry reaction was split along the usual fault lines, depending on whether a particular association's membership supports or opposes optional federal charters.

But the Treasury's position could not be more clear and definitive. "While a state-based regulatory system for insurance may have been appropriate over some portion of U.S. history, changes in the insurance marketplace have increasingly put strains on the system," the report said.

"Much like other financial services, over time the business of providing insurance has moved to a more national focus even within the state-based regulatory structure," Treasury added. "The inherent nature of a state-based regulatory system makes the process of developing national products cumbersome and more costly, directly impacting the competitiveness of U.S. insurers."

Under the solution proposed by the Treasury, an OFC structure should provide for a system of federal chartering, licensing, regulation and supervision for insurers, reinsurers, and insurance agents and brokers. Such a plan "would also provide that the current state-based regulation of insurance would continue for those not electing to be regulated at the national level."

States would not have jurisdiction over those electing to be federally regulated, the Treasury noted.

However, the Treasury plan would leave insurers holding an OFC still subject to ongoing compliance with certain state laws--such as on premium taxes as well as compulsory coverage for workers' compensation and individual auto insurance--as well as requirements to participate in state-mandated residual market mechanisms and guaranty funds.

The Treasury plan calls for separate property-casualty and life-disability charters, and also includes a proposal to create an interim federal insurance regulator within Treasury to coordinate with state officials on "pressing" insurance matters, including international regulatory issues such as reinsurance collateral.

The interim federal regulator would also "serve as an adviser to the Secretary of Treasury on major domestic and international policy issues," Treasury said.

Officials of the National Association of Insurance Commissioners and the National Conference of Insurance Legislators immediately condemned the administration's move to back an OFC in separate comments from the NAIC's spring meeting in Orlando, Fla.

Rep. Brian Kennedy, D-R.I., president of NCOIL, said the only silver lining to the proposal is that a new administration will take office in 10 months. "We will have a new Treasury secretary and all of this will be forgotten," he said.

"Now that we have seen this huge push for an OFC, we need to be a united front [in opposition] going forward...State legislators and regulators should have a seat at congressional hearings" so they can head off an OFC, he added.

In a prepared statement issued after the report was officially released on March 31, NAIC President Sandy Praeger said that while state regulators "certainly support better coordinating and modernizing of their oversight efforts, 'modern' does not mean 'federal.'" Ms. Praeger, who is Kansas insurance commissioner, said the blueprint would "marginalize" state regulators "and frankly, for our sector it looks more like a solution in search of a problem."

She added that "state regulators challenge the proponents of a federal solution to trace the origins of the current problems in the housing and bond insurance markets...and they will find that the true failures lie with a lack of coordinated federal oversight."

J. Robert Hunter, director of insurance for the Consumer Federation of America, said the proposal would have the effect of "gutting consumer protections." He said the Treasury proposals "for an OFC/deregulation regime as part of a 'solution' to the ills caused in mortgage lending lack of oversight is laughable."

"More deregulation as a solution to too much deregulation is classic Bush administration logic, akin to more tax cuts to solve the crisis in our national debt caused by excessive tax-cutting," Mr. Hunter added.

The Independent Insurance Agents and Brokers of America and the National Association of Mutual Insurance Companies also voiced opposition. Both said they supported regulatory reform for insurance, but not direct federal regulation.

NAMIC President and CEO Charles Chamness said the Treasury proposal "represents a shift in regulatory authority to the federal government. At this time, we urge Congress and Treasury to focus on effective market reforms rather than a consolidation of regulatory authority."

In criticizing the Treasury blueprint for change, Robert Rusbuldt, president and CEO of IIABA, said "while there may be some merit in the role envisioned for the fed to identify and facilitate corrections of systemic problems in the financial services industry, the OFC section of the blueprint is clearly swimming upstream."

He added that it is "hard to see Congress supporting a proposal that calls for massive deregulation of the industry and a huge new federal bureaucracy."

David A. Sampson, president and CEO of the Property Casualty Insurers Association of America, said that while his membership "acknowledges improvements are necessary to streamline and modernize the existing regulatory system," PCI "would support a solution...that would accomplish needed reforms within the framework of the existing system."

The National Association of Professional Surplus Lines Offices said Congress should first complete work this year on the Nonadmitted and Reinsurance Reform Act of 2007--which would set federal regulatory standards for states to follow on reinsurance and excess and surplus lines--"before it discusses other changes in the current regulatory structure."

The act's passage would be "a major step in creating a framework to eliminate duplication and inefficiency in the surplus lines and reinsurance segments of the insurance industry," said NAPSLO's executive director, Richard Bouhan.

However, the American Insurance Association and the Council of Insurance Agents and Brokers--both longtime OFC backers--voiced support.

AIA President Marc Racicot, the former governor of Montana, called the Treasury proposal for an OFC "a major milestone."

"Providing insurers with the option of a single regulator for insurance will benefit consumers and will be more efficient, effective and rational, given the increasing tension a state-based regulatory system creates," he said.

Joel Wood, senior vice president for government affairs at the CIAB, said the fact that a conservative Republican administration would embrace the OFC structure "speaks volumes for the slow but steady progress that supporters of an OFC have made in moving toward a rationalized insurance regulatory scheme."

Meanwhile, on the corporate buyers side, the Risk and Insurance Management Society said it "wholeheartedly endorses" Treasury's call for on OFC.

Terry Fleming, a RIMS board member and director of risk management for Montgomery County, Md., said in a statement that the risk management community has long supported the OFC concept and "believe that a regulatory system structured in the method proposed will provide an effective and much more efficient process to manage insurance transactions for policyholder operations."

Fran Semaya, a lawyer who heads the insurance corporate and regulatory practice at Cozen O'Connor in New York, as well as the American Bar Association's Task Force on Federal Involvement Insurance Regulation Modernization, said she believes an OFC "will work very well in certain lines of business very quickly," citing life insurance and reinsurance.

"We need a one-stop shop for professional reinsurance, either through a single state regulator or a federal insurance regulator," she said. "To function properly in a global environment, there needs to be a single regulator."

Some of her concerns about an OFC stem from cases where there is a holding company structure and some subsidiaries might opt for an OFC, while others do not. "I'm not sure that it has been thought out even in the national insurance proposals that are out there about how that is going to work," she said.

Another concern she cited comes in the insolvency area, where the blueprint calls for a federally regulated insurer to use the state guaranty fund system. "I have questions about how that will function," she said. "Will a federally chartered insurer be assessed by the state system so that, if there is an insolvency, they have already paid into the system?"

She explained it is "very important that if you have an insolvency, that the state regulator works with the state guaranty fund so that they are prepared and ready. Will that happen with a federally chartered insurer?"

Eli Lehrer, a senior fellow at the Competitive Enterprise Institute in Washington, who has studied and lectured on insurance regulation for years, said his initial reaction is that "Treasury has taken the right approach. This really is a question of international competitiveness as much as anything else."

He added that relative to both the insurance systems in other countriesand other sectors of the U.S. economy, "our life and property-casualty insurance sectors are both unproductive and bereft of new ideas, and our burdensome, fragmented regulatory system deserves a lot of the blame for this."

He said he was "intrigued" by the idea of creating an Office of InsuranceOversight as an interim step and thinks it deserves "serious consideration, but I think it's important that people who support real change realize that it would probably be little more than a half-way measure."

He added that "as an enthusiastic supporter of OFC and other measures that would result in regulatory competition, I'll be the first to admit that thetype of change Treasury envisions is not going to be easy for every agent and every broker. But, like any other systematic economic modernization, it's likely to leave the great majority of people better off."

Special Reports /

Treasury Dept. Backs Federal Charters, But Expects 'Difficult' Debate Ahead

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