Industry Split Could Spell Doom For Optional Federal Chartering Bill

Right off the bat, I think the supporters of OFC face a dilemma. Republicans are more supportive philosophically of the market-based approach to regulation favored by the industry. But at the same time, they tend to oppose creation of new federal bureaucracies.

Democrats, on the other hand, are more comfortable with federal regulation, but will probably want to attach a variety of market restraints to it. For an example, look at the legislation introduced by Rep. John Lafalce, D-N.Y., the ranking Democrat on the House Financial Services Committee, which maintains state rate regulation even for federally-charted insurers.

Other bills, probably more to the liking of the industry, certainly will be introduced. But my educated guess is that the first really serious bill, one that has a genuine chance for movement, will be an incremental approach developed by the Financial Services Committee leaders that will establish goals and timetables for reform of state regulation. OFC would come into being only if the states fail to make the required reforms.

It will be very interesting to see whether the industry supporters of OFC can accept this incremental approach. If they do, they risk undermining the very concept of OFC, since a reformed state system would negate the need for OFC.

On the other hand, if the industry supporters of OFC take an all-or-nothing approach, they not only risk alienating Republican leaders–the resulting legislation might be drafted by those who are not friends of the industry. The bill might become so burdensome that the supporters of OFC have to disown it.

What will the supporters of OFC do to expand their base?

A lot of powerful groups support OFC, including certain property-casualty insurance companies, life insurers, brokers and banks. But there is still major opposition to the concept among other p-c insurers as well as agents, so the industry is split on the issue.

While there has been a significant movement towards support of OFC compared with the past, there still is nothing remotely resembling a consensus within the insurance industry.

Members of Congress are understandably reluctant to take sides in an intra-industry battle, especially when it is not entirely clear how taking a side would benefit either their constituents–or, more importantly, themselves.

Generally, after going through all the motions of hearings, meetings with lobbyists and fundraising, members tell a squabbling industry to get its own act together and develop a consensus bill.

Some critical mass of support within the industry will be necessary to get an OFC bill moving. And the supporters of OFC are not there yet. Something will have to happen to bring more insurers, particularly small insurers, on board.

At what point do the life insurers and banks abandon the p-c insurers?

Even though the debate has only just started, you can see this one looming on the horizon. I can think of a variety of issues that might force the supporters of OFC to ultimately oppose an OFC bill.

Many of these issues, such as community reinvestment requirements and privacy, cut across traditional industry lines.

But there is a big one that only affects p-c insurers, and one which will not be easily resolved, and that is rate regulation. While the p-c, life insurance and banking supporters of OFC are on the same page now, insisting on market-based rating, I have to wonder just how committed the life insurance and banking industries will be, when the chips are down, to something that does not affect their interests.

Ive said for a long time that p-c insurance is fundamentally different from life insurance and banking, in that the former is risk management and the latter is asset management. I sometimes think the only thing life insurance underwriters and p-c underwriters have in common is that they both use the word "insurance."

The most noteworthy reflection of this is the decision by Citigroup to sell off its p-c business. Underwriting p-c insurance is apparently not a good fit with what Citigroup wants to do (unlike selling p-c insurance, which is an excellent fit).

Rate regulation of p-c insurance, particularly personal lines, is a controversy that can easily bring down OFC legislation. And if it looks as if that is about to happen, what will be the reaction of life insurers and banks?

My strong suspicion is that life insurers and banks will dump their p-c coalition partners and try to get a life insurance-only federal chartering option. While this might seem like a betrayal, it really isnt. It just reflects the nature of coalition politics.

Coalition partners stay together for as long as it is practical. But at the end of the day, their first responsibility is to themselves and their own industries.

OFC is certainly not just around the corner. It will take a long, long time to enact something this sweeping. But whatever happens over the next several Congresses, it will be fascinating to observe the political battle.

NU Washington Editor Steven Brostoff can be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 3, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.