President Barack Obama has stated he intends to present a proposal to Congress for a major overhaul of the regulatory apparatus governing financial services by April. The president has not taken a public position on the issue of optional federal charters, and he has not indicated whether there will be an insurance component to his reform proposals. But he did say during a pre-Inaugural interview:
"We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible. And there's systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits. So we've got to update the whole system to meet the needs of the 21st century."
Will insurance regulation be included in the upcoming regulatory overhaul? Probably not. A reading of a few tea leaves presents a clearer picture why.
Looking Ahead
First, the Government Accountability Office (GAO) said in a recent report that Congress could "consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity."
But that is a neutral statement that does not make a recommendation. In fact, press reports say the inclusion of a reference to insurance didn't appear in the draft of the report that the GAO circulated until the American Council of Life Insurers (ACLI) lobbied for it. Still, the GAO reference was neutral and oblique, not supportive of ACLI's position in favor of an optional federal charter.
Another tea leaf is a report by the Group of 30, an academic group headed by Obama adviser Paul Volker, former chairman of the Federal Reserve Board. The report contains one broad reference to national regulation of "large, international, active insurance companies" that pose a systemic risk.
Then there is the perspective offered by FDIC Chairman Sheila Bair. In November, Bair told directors of the American Insurance Assn. (AIA) in an off-the-record briefing that Congressional approval of federal regulation of insurance appears unlikely in 2009, and that an optional federal charter may never be created.
We know this because an enterprising reporter for the National Underwriter obtained a summary of Bair's remarks at the private AIA briefing, confirmed them through other sources and published them.
Bair said plans to create an optional federal charter may fall by the wayside, as the Obama administration seeks to consolidate regulatory agencies, not create new ones. She also noted that federal oversight in general, and a federal charter in particular, face a difficult uphill climb because insurance "is not in any financial trouble, and it is state-regulated, so it is not in the sights of those will be involved in federal financial services regulatory reform."
PIA opposes a federal takeover of insurance supervision. Other groups are also taking that message to the new Congress.
The National Conference of Insurance Legislators has announced plans to hold a summit of state officials opposed to federal regulation of the insurance industry. The National Assn. of Mutual Insurance Cos. has launched a nationwide grassroots action campaign to protect the interests of Main Street insurance companies in the upcoming overhaul of financial services regulation. And the Council of State Governments reiterated its opposition to federal insurance chartering by adopting a resolution during its meeting in Omaha, Neb.
PIA continues to support and work for regulation of the business of insurance that is modernized, coordinated, seamless–and state-based. It also is important to assure that where and when necessary, federal issues and authorities coordinate, complement and work with our state authorities.
Perception versus reality
During a recent hearing of the Senate Banking Committee, ranking member Richard Shelby (R-Ala.) suggested that the financial problems of AIG should prompt the federal government to consider federal regulation of insurance.
There's just one problem: AIG's insurance companies did not experience a financial meltdown. It was its holding company and financial products unit–which was regulated by the U.S. Office of Thrift Supervision (OTS, not the New York State Department of Insurance–that got into trouble.
AIG is a thrift holding company regulated by the federal OTS, but because the media identifies it as an "insurance company," the public–and apparently some members of Congress–concluded that the insurance operations of AIG were in trouble, when they were, and are, not.
As a result, state insurance regulators get tagged with the blame and federal regulation is advanced as the solution when the reality is exactly the opposite: Federal regulators failed and state regulators succeeded.
Fix only what failed
The financial meltdown was caused in large measure by imprudent behavior and lax regulation of banking, securities and capital markets–all of which are regulated by the federal government. The state-regulated insurance industry has remained stable.
"Congress will soon consider sweeping regulatory reforms," noted PIA national executive vice president and CEO Len Brevik. "State and federal lawmakers need to realize that in this current financial markets crisis, state insurance regulation has proven to be a resounding success while federal regulation in the banking, securities, and private capital market sectors was an abysmal failure."
The primary focus of Congress should be correcting the gross deficiencies in federal supervision of the banking, securities and private capital market sectors–all of which precipitated the financial meltdown that led to the current economic downturn. Indeed, lawmakers would do well to look at the successful state insurance regulatory system as a template for reforming the federal regulatory system.
Congress needs to preserve what worked as it fixes what failed. Ted Besesparis is senior vice president of communications for the National Assn. of Professional Insurance Agents, based in Alexandria, Va. Prior to joining PIA National in 1995, he was a reporter and radio talk show host in Palm Beach, Florida and Washington, D.C.

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