Treasury Secretary Jacob Lew. (AP Photo/Manuel Balce Ceneta)

The National Governors Association expressed concern in a letter to Treasury Secretary Jacob Lew about December’s Federal Insurance Office regulatory modernization report and its role in the larger state vs. federal regulation debate.

The NGA, a bipartisan organization of the nation’s governors, says in the letter, “Governors are concerned by the FIO report’s suggestion of a greater federal role that could invite a dual regulatory system. It is our position that federal laws and regulations must not preempt or undermine the strong state-based insurance-regulatory system that for more than 140 years has protected consumers and safeguarded the capital adequacy and solvency of insurers.”

The FIO report, released in December after long delays, attempted to reframe the state vs. federal debate, calling for a hybrid system in which both state and federal regulators assume roles based on their respective strengths. It did call for federal intervention in mortgage insurance, reinsurance collateral and the monitoring of National Association of Registered Agents and Brokers Reform Act.

Industry officials and experts offered a range of views on the FIO report when it was released. Most conceded the current system is in need of improvement, but stressed caution when it came to addressing shortfalls through federal involvement in regulation.

The NGA letter offered a strong defense of state-based regulation, calling it a “world-class” system, and touting the “deep regulatory expertise “ states have developed.

“We recognize the possibility for federal intervention should states fail to act collectively on issues of legitimate concern, but preemption of state regulatory authority must be the exception rather than the rule,” the letter states. “Governors stand ready to protect state-based insurance regulation.”

The letter accuses some of arguing “that state regulation of financial services, and insurance in particular, chills competition, creates a drag on this sector, and hampers the overall economy.” But the letter says, “The insurance sector, including its regulation, is a significant generator of high-skilled, well-paying jobs in the states.” It also says the business of insurance has remained profitable and competitive despite recent years of economic headwinds.

The letter, signed by Governors Robert Bentley (R-Ala.) and Earl RayTomblin (D-W.Va.), does not cite any specific area of the FIO report with which the governors took issue. An NGA spokesperson said the letter restates a longstanding policy view held by the governors. The spokesperson said NGA letters represent a consensus view of the nation’s governors.

A Treasury spokesperson declined to comment.

In a statement about the NGA letter, National Association of Insurance Commissioners President and North Dakota Insurance Commissioner Adam Hamm said, “Governors understand the importance of creating local solutions tailored to a state’s individual needs, and their letter affirms what we have known for sometime: our state-based system of oversight is the strongest approach for creating stable marketplaces and protecting consumers in our states.” 

When the FIO report was released, the NAIC did not question the report’s views on the state-based regulatory system, with then-NAIC President and Louisiana Insurance Commissioner Jim Donelon saying, “Like the recent GAO report…we note that [the FIO report] acknowledges the effectiveness of state-based insurance regulation and the improvements states have made.”

Some industry members, such as representatives from PIA and the Property Casualty Insurers Association of America, said after the FIO report’s release that it attacked the state-based system and did not do enough to highlight the states’ successes.

Howard Mills, chief advisor with Deloitte LLP’s insurance industry group, and a former insurance regulator in New York, said at the time that while the report could have gone further in pointing out the strengths of state regulation, that was not really its aim. The report, he said, was intended to point out weak points and inconsistencies in the current regulatory model.