Rep. Ed Royce (R-Calif.) fired the first salvo in a renewed war on state regulation of insurance. Royce launched a broadside against the National Association of Insurance Commissioners (NAIC), and said he will request a hearing to investigate the NAIC and its role in the insurance marketplace.

NAIC's role, he said, has gone far beyond what it has the legal authority to do.

A top Republican on the House Financial Services Committee, Royce said the NAIC has acted beyond its self-described role as a standard-setting organization and taken on a regulatory role, both in the U.S. and on the international stage. An NAIC spokesperson said the association has no immediate comment.

Royce, one of the most outspoken supporters of federal insurance regulation in Congress, was a proponent of creating the Federal Insurance Office (FIO) and tasking it with studying the “benefits”—but not the disadvantages—of federal insurance regulation. He also authored the ill-fated so-called “optional” federal charter for insurers and producers. Prominent among Royce's campaign contributors have been those at the forefront of the decades-long campaign to engineer a federal insurance takeover.

The timing of this may not be a coincidence. Very shortly, the much-delayed FIO study of insurance regulation could be released. It may recommend some measure of federalization—unlike the recent Government Accountability Office (GAO) study, which praised our state-based insurance regulatory system for protecting markets, the insurance industry and policyholders during the financial crisis. PIA was instrumental in bringing about the GAO report.

Holding a congressional hearing to attack the NAIC could simply be part of a new campaign timed to coincide with the release of a critical FIO report and recommendation.

What's really happening?

During the course of many years, periodic efforts to shift the supervision and regulation of insurance away from the states toward the federal government have occurred.

The insurance business is highly profitable. Well-run companies can make a lot of money. Success breeds competition. The entire industry is a tempting target for both inside and outside competitors.

Our national system of state-based insurance regulation organizes the insurance sector of our economy so that it is “walled off” from the federal regulatory system that governs banks and securities firms. This is one reason that when the financial services sector experienced the worst of its crisis in 2007-2008, insurance was insulated from the damage.

In the crisis—as in the Great Depression of the 1930s—insurance policyholders were protected by the states' prudent supervision and regulation. Policyholders also were protected by the insurance industry's inherent nature: While banks and securities firms seek risk to make profits, insurance firms profit by insuring against risk. Banks and insurance companies are completely different, as are their products.

Over the years, the supervision of banks and securities firms by the federal government became increasingly lax. Regulations were weakened or eliminated and supervision was reduced. At its worst, federal authorities embraced the concept of “self-regulation,” which in practice meant letting everybody do anything they wanted.

This did not happen with insurance. Insurance regulation remained with the states; it escaped the wholesale deregulation granted to banks at the federal level under the Gramm-Leach-Bliley Act of 1999.

The result: when the 2008-09 financial crisis hit, rigorous safeguards remained intact for the insurance industry. Prudent state regulation worked, while lax regulation by the federal government of banks and securities firms led to the crisis.

Here we go again

One would think that this would have settled the argument about state versus federal regulation of insurance. But it hasn't. Just as some financial services firms are back to their old tricks of over-leveraging and betting their depositors' money on risky investments, the push to take over the insurance sector is back.

In the depths of the financial crisis in early 2008, then-Treasury Secretary Henry Paulsen issued his “Blueprint for a Modernized Financial Regulatory Structure.” The section of that report dealing with insurance envisioned our industry being made part of a unified, global financial services sector governed by one regulator, the same one that governs banks.

Royce's remarks came just days after three former NAIC commissioners also criticized NAIC. One said the NAIC “…is at risk of becoming irrelevant and it's going to be fighting for its life.” Another said the NAIC is “fighting a losing battle to stay relevant.” One also said that Europeans think the NAIC is “odd.”

Of course, the Main Event is the release of the FIO report and FIO's recommendations on how to “modernize” regulation of the insurance industry. This report is almost 2 years overdue. Why the delay?

Royce said he sees the release of the FIO report “as a watershed moment for future regulation” of the insurance industry. Has he seen the report already?

Other signs

Another big push may be afoot to advance federal insurance regulation. Every time this happens, “experts” proclaim the impending death of the independent insurance agent. This has started again.

What are billed as “studies” get issued with great fanfare. Often, these come from firms that would stand to profit handsomely by doing business with mega-firms that would thrive in a constricted insurance marketplace. But these are not really research studies at all, they are merely opinion articles. No original research to support their conclusions has been conducted. Often, they are a just rehash of the opinions of others.

Then there is the specter of other nations taking it upon themselves to tell the U.S. that it doesn't know what it is doing and should be more like Europe.

Connecticut Insurance Commissioner Thomas B. Leonardi, chair of the NAIC's International Insurance Relations Committee, has dismissed a peer review of the U.S. insurance regulatory system by the G-20's Financial Stability Board (FSB). In September 2013, FSB called on the U.S. to move toward a federal regulatory system for insurance.

“Should we throw out that system that works in regulating the largest, most vibrant insurance system in the world, and adopt the bank model that failed miserably during the financial crisis?” Leonardi said. “I think that's ludicrous.”

Why is this so important to Main Street agents?

Make no mistake: This debate is very important to Main Street insurance agents.

The “uniformity” that federal advocates tout could ultimately result in far fewer insurance companies, offering fewer choices to consumers, through fewer independent insurance agents. In addition, every state's insurance premium tax could be at risk of being usurped by the federal government.

This battle has been fought many times before, and the state system of insurance regulation has always prevailed. It will prevail again.

Related: Read “ SERFF Board Blues“

Special Reports /

Kindling on an Ember: State vs. Federal Regulation

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