Industry Still At Odds Over Federal Charters

However, the Independent Insurance Agents & Brokers of America said that instead of a federal charter, they supported the federal standards "partnership" approach as contained in the State Modernization and Regulatory Transparency (SMART) legislation expected to be introduced in the House by Reps. Mike Oxley, R-Ohio, chairman of the House Financial Services Committee, and Richard Baker, R-La., who chairs the Capital Markets Subcommittee.

Meanwhile, the Council of Insurance Agents and Brokers said that while it supports the proposed SMART Act as an interim step, it believes that in the long run an optional federal charter is needed.

The strongest criticism of state regulation by any speaker at last week's hearing came from William H. McCartney, senior vice president of government and industry relations at the San Antonio, Texas-based USAA Group.

"Whether the problems are inherent in 50-state oversight or are part of the post-McCarran-Ferguson approach to insurance regulation, the current system is undeniably broken and all stakeholders are suffering as a result," said Mr. McCartney, testifying on behalf of USAA as well as the 450 members of the American Insurance Association.

"As price and product obstacles increase, insurers find it more difficult to compete and make a reasonable profit in the marketplace," he added. "This leads to more competitors withdrawing from the market, taking capital and jobs from that market and leaving fewer choices for consumers."

It is no surprise, he said, "that property-casualty insurance consistently has the lowest return on equity of all the financial services industries. The net result is a parochial regulatory environment that encourages inefficiency and repels investors."

One of his heaviest criticisms focused on rate controls, the source of much contention between the industry (which is united in seeking rate deregulation of both commercial and personal lines) and the National Association of Insurance Commissioners (which believes that total rate deregulation will hinder the ability of state regulators to maintain solvency).

"The current heavy-handed regulatory system in many states does not protect consumers it actually disenfranchises them," said Mr. McCartney. "Because of the emphasis on price and product controls in these jurisdictions, USAA is forced to devote enormous resources to responding to these pre-market obstacles rather than developing innovative new products for our members."

He added that "the system, in fact, discourages innovation because the time line for approving new products offered nationally can be longer than the shelf-life of the innovation."

Mr. McCartney said that "equally important, the optional federal charter is just that a choice. Insurance companies that are comfortable with the current state regulatory system are not forced into the new system, while insurers like USAA that prize uniformity and market freedom may elect to be subject to federal oversight."

He said that "similarly, consumers who are comfortable doing business with state-regulated insurers are free to continue to do so. This is not a new regulatory paradigm, but one that is based on the chartering system for U.S. banks."

However, Tom Ahart, representing the IIABA, rejected Mr. McCartney's proposed solution. "State regulators and legislators, many consumer groups, independent insurance agents and brokers, some life insurance companies, and most property-casualty companies are strongly opposed to an optional federal charter," said Mr. Ahart, a former IIABA president.

In fact, "the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies, which represent property-casualty insurers of all sizes, oppose an optional federal charter," noted Mr. Ahart, president of the Ahart, Frinzi & Smith Insurance Agency in Phillipsburg, N.J.

"The state system has proven that it best protects consumers and can be modernized to work effectively and efficiently for the entire insurance marketplace with the right pressure from Congress," Mr. Ahart said. "Targeted, federal legislation to improve the state-based system presents members of Congress with a middle-ground solution that is achievable something we can all work on together."

This pragmatic approach, he added, "would build on the success of the National Association of Registered Agents and Brokers provisions in the 1999 Gramm-Leach-Bliley Act."

Mr. Ahart said that the IIABA believes the best alternative for addressing the current deficiencies in the state-based regulatory system is a "pragmatic, middle-ground approach that utilizes federal legislative tools to foster a more uniform system and to streamline the regulatory oversight process at the state level."

Indeed, Mr. Ahart added, "to take one example, the so-called industry consensus' federal charter proposal would force the state guaranty funds to accept and backstop federal-chartered insurers there is nothing 'optional' about that. This would be an unprecedented intrusion on state solvency regulation, and in the end, the state system would be responsible for insolvent insurers but could not regulate them to keep them from going insolvent."

But producer groups are not united on this issue, as testimony from the Council of Insurance Agents and Brokers demonstrated.

Albert R. Counselman, president and CEO of Riggs, Counselman, Michaels & Downes Inc. in Baltimore, and past chairman of the CIAB, said that the SMART bill, while welcome, should only be an interim step. "We believe the ultimate solution at least for the property and casualty industry is enactment of legislation creating an optional federal insurance charter," he said. Such a system, he said, "would not dismantle the state system rather it would complement the state system with the addition of a federal partner."

"It is likely that many insurers and producers particularly those who operate in a single state or perhaps a small number of states would choose to remain state-licensed," he said. "Large, national and international companies, on the other hand, would very likely opt for a federal charter, thereby relieving themselves of the burden of compliance with 51 different regulatory regimes."

J. Robert Hunter, director of insurance for the Consumer Federation of America in Washington, said that while there are many problems with state oversight, "consumer organizations strongly oppose an optional federal charter, where the regulated, at its sole discretion, gets to pick its regulator. This is a prescription for regulatory arbitrage that can only undermine needed consumer protections."

He added that "if elements of the insurance industry truly want to obtain 'speed to market' and other advantages through a federal regulator, let them propose a federal approach that does not allow insurers to run back to the states when regulation gets tougher. We could all debate the merits of that approach."

Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 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.