Legislation sent to Congress last week by the TreasuryDepartment, which details an Office of National Insurance thatwould have strong authority over solvency and international issues,is already dividing the property and casualty industry.

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The legislation gives the proposed agency authority to designateinsurers as systemically risky and subpoena power to collectinformation from insurers.

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It is considered stronger thanlegislation recently introduced in the House creating an Office ofInsurance Information, because the Treasury proposal specificallygives the ONI the power to designate insurers as "Tier 1 financialholding companies," which would trigger "systemic risk" regulatoryoversight by the Federal Reserve.

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In addition, according to several lawyers who commented on thecondition of anonymity, there are state insurance law preemptionprovisions in the Treasury legislation that are regarded as tighterthan the Office of Insurance Information legislation introduced inApril by Rep. Paul Kanjorski, D-Pa., who chairs the Capital MarketsSubcommittee of the House Financial Services Committee.

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According to the proposed legislation, the ONI would establishfederal policy on prudential aspects of international insurancematters, including representing the United States in theInternational Association of Insurance Supervisors and assistingthe Treasury Secretary in negotiating international insuranceagreements. In addition, the ONI would have authority "todetermine…whether state insurance measures are preempted byinternational insurance agreements on prudential measures."

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One lawyer noted there is no provision in the Treasurylegislation that would allow the Secretary of the Treasury to staythe preemption. The Treasury proposal also does not provideCongress with the power to nullify a preemption determination.

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It deals with potential conflict with state regulators bymandating a notice-and-comment procedure outlining "potentialinconsistencies." This would permit interested parties to comment,after which the ONI will make a determination of inconsistency, andthe preemption would become effective following a "reasonableperiod of time" to be determined by the proposed agency.

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At the same time, the new bill prohibits the new agency frompreempting state laws with respect to rates, premiums,underwriting, coverage requirements, or application of stateantitrust laws.

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Because of strong preemption authority, however, industryreaction was split.

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Leigh Ann Pusey, president of the American InsuranceAssociation, said "we all agree" that the government must put inplace the necessary regulations and consumer protections tosafeguard and prevent future economic crises and to fillsignificant regulatory gaps in its architecture.

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The Treasury legislation, she added, "addresses some of thosekey concerns, particularly as they relate to building a strongfederal knowledge base on the insurance industry and allowing theUnited States to engage authoritatively with the global communityon international insurance matters."

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Joel Wood, senior vice president, government affairs for theCouncil of Insurance Agents and Brokers, said, "It's pretty hard toargue the point that there shouldn't be a seat at the internationaltable for American insurers and that state laws that interfere withinternational obligations should be preempted.

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"While we'd like to see the legislation go further onpreemption, we think that this is thoughtful, measured, consistentwith the ideology of House and Senate congressional leaders onfinancial services issues, and we hope that it will be a part ofbroader regulatory reform efforts this year."

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But Jimi Grande, vice president of federal and political affairsfor the National Association of Mutual Insurance Companies, andCharles Symington, senior vice president of government affairs forthe Independent Insurance Agents & Brokers of America, voicedconcerns.

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Mr. Grande said NAMIC has "long supported" legislation proposedlast year by Rep. Kanjorski creating the OII. He called this "atargeted approach to improving insurance regulation withoutupending the current state-based system that has protectedconsumers and companies throughout the financial crisis."

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He added that NAMIC is "pleased" the administration's proposalfor an ONI did not include regulatory authority or supplant thecurrent state-based model, "but we have some concerns with theinformation-gathering provisions," he said.

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The proposed legislation states that ONI may require an insureror affiliate to submit data or information that it might reasonablyrequire to carrying out its functions (with the exception of smallinsurers falling under size threshold to be determined). The ONIwould have power to require the production of requested data bysubpoena.

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Mr. Grande said, "We hope the administration will considerendorsing the OII, which would meet the stated goals of theadministration to create an agency that would gather information,develop expertise, negotiate international agreements andcoordinate policy in the insurance sector." Additionally, ChairmanKanjorski's OII proposal "has already won support from keystakeholders and the majority of the industry," he said.

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IIABA's Mr. Symington said, "We think the bill is a thoughtfulproposal, but it does differ from last year's OII legislation thatthe IIABA supported. We will continue to analyze those changes andtheir impact on our membership and look forward to working with theHouse, Senate and the administration as the bill moves throughCongress," he added.

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The new agency would also have authority to oversee theTerrorism Risk Insurance Program.

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The legislation creating the ONI is Title V of detailedlegislation dealing with preventing systemic risk in thefuture.

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It creates a Financial Services Oversight Council consisting ofall federal regulators, and subjects all Tier 1 financial servicesholding companies to consolidated supervision and regulation by theFederal Reserve "regardless of whether they own insured depositoryinstitutions." According to the Treasury Department, they will besubject to the nonfinancial activities restrictions of the BankHolding Company Act whether or not they are banks.

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These will be subject to stricter and more conservativeprudential standards than those that apply to other bank holdingcompanies–including higher standards on capital, liquidity and riskmanagement.

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"These standards will be set with a focus on the risks thatthese firms could pose to the financial system as a whole, not justthe risks to each institution," the Treasury statement said.

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Tier 1 FHCs will be subject to a prompt corrective action regimethat would require the firm and its supervisory agency to takecorrective actions as the firm's regulatory capital levels decline."This regime will mirror the prompt corrective action regime forinsured depository institutions established under the FederalDeposit Insurance Corporation Improvements Act," Treasury said.

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This will include a requirement that all Tier 1 FHC prepare andmaintain a credible plan for the rapid resolution of the firm inthe event of severe financial distress.

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