Brokers' Leader: Have States Enforce Fed Rules

Moreover, he said in an interview with National Underwriter, the recent history of insurance legislation suggests that any federal regulatory system that emerges from Congress will look much different from what the advocates of federal regulation desire.

By contrast, Mr. Rusbuldt said, a federal standards approach that simply mandates national uniformity based on a National Association of Insurance Commissioners model is far less likely to have potentially negative consequences for the industry.

Mr. Rusbuldt responded to a letter sent by the Washington-based American Council of Life Insurers to Rep. Richard Baker, R-La., who chairs the House Financial Services Subcommittee with jurisdiction over insurance, that criticized federal standards as more cumbersome and more of an affront to states' rights than dual chartering.

ACLI supports dual chartering while IIABA supports federal standards.

During a recent hearing, Rep. Baker raised the question of whether basing federal standards on an NAIC model law might be a viable approach to insurance regulatory reform.

In a letter, ACLI Senior Vice President Gary Hughes raised several objections. One of the major concerns Mr. Hughes raised was enforcement.

"It is unrealistic to believe that we could put in place a series of key federal standards and expect the states to enforce them," Mr. Hughes wrote.

"Moreover," he said, "if Congress merely enacts standards with no accompanying federal enforcement mechanism, it is all but inevitable that day-to-day interpretations and other ongoing regulatory matters would, by default, be brought back to the Financial Services Committee."

"The only practical means of enforcing these standards would be to assign that task to a new federal insurance regulatory agency, at which point we would be better served by simply creating a federal regulator to administer a federal charter option," Mr. Hughes said.

Mr. Rusbuldt responded that the enforcement issue is a valid concern, but he believes that a federal standards approach can be structured in a way to assure that states implement them both in letter and spirit.

Stressing that these issues still need to be fleshed out and discussed, Mr. Rusbuldt said, for example, that Congress could include a "hammer" in the federal standards legislation that would deprive states of premium tax revenue if they fail to implement the federal standards.

As for the possibility of state-by-state variations in interpretations, he said, mechanisms could be created that would assure uniformity. For example, he said, the Treasury Department could be granted authority to veto interpretations that deviate from an NAIC model.

Treasury would not have the authority to issue regulations, but merely to veto inconsistent state interpretations, Mr. Rusbuldt said. Thus, he said, a major new federal bureaucracy would not be necessary.

It is important, he noted, to keep in mind the political realities. Currently, he said, some 11,000 individuals work in insurance regulation under the present system.

Even assuming that the federal government would regulate insurance with about half that number, it would still mean bringing some 6,000 new regulators to Washington.

"I don't know of any Republicans who would support that," he said.

Moreover, Mr. Rusbuldt continued, it is very likely that any legislation passed by Congress would look much different than what the supporters of dual chartering want.

He cited the Terrorism Risk Insurance Act and the ongoing debate over asbestos litigation reform as recent examples of issues where the insurance industry asked Congress to help solve a problem and Congress responded with legislation that was much different from what the industry requested.

Mr. Rusbuldt noted that during a recent Senate hearing on insurance regulation, three Democrats said they would not support elimination of rate and form regulation but would support transferring rate and form regulation from the states to the federal government.

He said that given the geographically sensitive nature of the insurance industry, federal rate and form regulation would be a "disaster."

Since it would not create a new federal bureaucracy, a federal standards approach is less likely to have such potentially negative consequences, Mr. Rusbuldt said.

Mr. Rusbuldt urged the industry to consider an approach to insurance regulatory reform that is politically doable.

With strong industry support, he said, he believes federal standards could be enacted within three-to-five years.