Last week, the chairs of key Senate and House committees promised President Obama they will work together to have legislation on his desk by year's end creating a "new, more robust regulatory framework" for financial services firms.

Within days of delivering the promise in a letter signed by Senate Banking Committee Chair Chris Dodd, D-Conn., and House Financial Services Committee Chair Barney Frank, D-Mass., two members of the House of Representatives introduced a bill that would create an Optional Federal Charter (OFC).

The March 30 letter and the April 2 House action followed March 26 testimony by Treasury Secretary Timothy Geithner before the House Financial Services Committee during which he asked Congress for authority to create a federal regulator to administer large insurance companies. (See NU, March 30, page 6 for details.)

During his testimony, Mr. Geithner commented that there is "a good case" to be made for introducing an optional federal charter for insurance companies.

In their letter to the president, Sen. Dodd and Rep. Frank said they endorsed the core principles for modernizing the financial regulatory system articulated by Mr. Geithner, identifying these as systemic risk regulation, strengthening consumer and investor protection, streamlining prudential supervision, and addressing gaps in regulation.

Addressing a reference by Mr. Geithner to the need for international cooperation, the two lawmakers wrote, "We also recognize that the mobility of capital means that, while the ultimate decision as to what rules to adopt is a sovereign decision of each individual nation, success in this effort requires us to consult closely with other major financial centers with the goal of achieving appropriate coordination and minimizing any opportunities for regulatory arbitrage."

On Thursday of last week, pointing to the "meltdown of insurance giant" American International Group, in addition to the broader financial crisis, Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., introduced the National Insurance Consumer Protection Act.

The two lawmakers said numerous bipartisan reports have called for insurance regulatory reform. Rep. Royce also noted that the federal government is already heavily invested in an industry it has no regulatory authority over.

According to a fact sheet distributed by Reps. Bean and Royce, the bill would establish a "parallel, national system of regulation and supervision for insurers, insurance agencies and insurance producers, similar to the dual banking system."

Regulated entities would be able to choose national or state regulation, the fact sheet noted, unless the national commissioner and a newly-created systemic risk regulator determine an insurer is "systemically important," in which case they could require the insurer to be nationally regulated.

An Office of National Insurance (ONI), responsible for issuing charters for life, property-casualty and reinsurance companies, as well as producers, would be created within the Treasury Department, with a commissioner appointed by the president for a five-year term, subject to Senate approval.

The commissioner would subject insurers to examinations every two years, and producers to examinations in response to a complaint or evidence of violation of a law or regulation. The commissioner would have enforcement powers patterned after those available to federal banking agencies.

Additionally, state and national commissioners would have to share information with a systemic risk regulator, who would be able to make "corrective action recommendations" to the national and state commissioners "to take action to mitigate or avoid actions taken by an insurer or affiliate that would have serious adverse effects on economic conditions and financial stability."

The systemic risk regulator would have the authority in certain situations to circumvent an insurance regulator in "emergency circumstances."

The bill would also set up a Division of Consumer Affairs, which would in turn establish offices in each state to act upon questions and complaints.

Reaction among the insurance industry was varied, with some OFC supporters praising the bill's intentions but raising concern about some of the particulars.

The Council of Insurance Agents & Brokers, the American Bankers Association, the American Bankers Insurance Association, and the Financial Services Roundtable expressed support for the bill. The associations all stated that an OFC will help simplify international regulatory cooperation for larger, national companies.

Leigh Ann Pusey, president of the American Insurance Association, said her group also supported the bill, noting that AIA has long supported an OFC.

However, the bill calls for a National Insurance Guaranty Corporation, while also requiring national insurers to participate in state guaranty associations, and Ms. Pusey said she believes consumers would be best protected under a single guaranty fund system.

The Property Casualty Insurers Association of America said Congress should train its focus on systemic risk, rather than first trying to overhaul the entire financial regulatory system.

David A. Sampson, PCI's president and chief executive officer, said, "The reason that discussion of an optional federal charter should not be part of the systemic risk debate is that it falsely presumes that only large companies pose a systemic risk. In fact, smaller companies can pose significant systemic risk, and larger companies may pose little or none."

He added that an OFC concerns only one industry, while systemic risk reaches across all financial services industries.

Cliston Brown, PCI spokesperson, issued an additional response to the bill via e-mail, stating, "PCI believes the states have not reformed the current regulatory system into a model that effectively facilitates commerce in the 21st century. To modernize, we support reforming the state-based system, but where the states continue to fail to make needed improvements, we may consider other approaches if proven necessary to the creation of a fair, effective and efficient business environment."

Jimi Grande, NAMIC vice president for federal and political affairs, said, "This convoluted legislation would create a huge new bureaucracy that would have broad, ambiguous powers. The ONI, as described in the legislation, would create multiple layers of regulation leading to confusion and higher costs for consumers."

Likewise, the Independent Insurance Agents & Brokers of America gave the Royce-Bean idea the thumbs down.

IIABA President and CEO Robert Rusbuldt said: "While it has an appealing title, this latest incarnation of OFC legislation would damage the stable and healthy insurance marketplace to the detriment of consumers.

"While the bill reintroduced today has a few changes, it is basically the same concept–optional federal chartering and deregulation of strong state consumer protections, which has rightfully been rejected and ignored by previous Congresses. There is no doubt the current regulatory system needs more uniformity and efficiency, but there are more prudent ways to accomplish this via targeted federal legislation," he said.

The group "believes that there is no regulatory crisis in the property-casualty insurance market as a whole that necessitates a risky massive overhaul of its current regulatory structure," he added.

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