Senate Eyes New Optional Federal Charter Proposal Amid Split Within Industry

Legislation was introduced in the U.S. Senate last week to create a parallel federal option for regulation and supervision of insurers as well as agents and brokers that is similar to the dual banking system.

The bill was introduced by Sen. Tim Johnson, D-S.D., and Sen. John Sununu, R-N.H., and is based on legislation introduced by the two in the last session of Congress.

The National Insurance Act of 2007 makes clear that insurers and producers would both be free to elect federal or state regulation. Under the bill, states would maintain responsibility of regulating state-licensed insurers and producers. (For more details, see the accompanying infographic.)

Unlike the 2006 bill, the latest bill addresses the surplus lines market, clearly defining nonadmitted and surplus lines insurance, and specifically permits nationally licensed agencies to engage in the placement of policies issued by surplus and nonadmitted insurers.

The 2007 bill also removes any reference to health insurance but allows federally licensed insurance producers to sell health insurance offered by state health insurers.

The new bill specifically directs the insurance commissioner to establish regulations barring unfair trade and claims practices. However, addressing the concerns of insurers about certain bills being proposed in the House and Senate, it exempts all federally chartered insurers and federally licensed producers from Federal Trade Commission oversight of their antitrust and unfair trade practices.

One lawyer and lobbyist said the bill's introduction “continues the momentum toward enactment of meaningful insurance regulatory reform.” However, the lawyer cautioned, “it promises to be a long process, and the legislation that is ultimately enacted into law will no doubt change considerably from the current proposal.”

Industry reaction ran the gamut. The Property Casualty Insurers Association of America, which is neutral on federal regulation, said the bill “shows us that the possibility of federal intervention in insurance regulation is real.” Cliston Brown, director of federal public affairs, added that “it is PCI's hope that the reintroduction of this legislation will spur states to modernize the regulatory environment.”

Joel Wood, senior vice president for federal government affairs for the Council of Insurance Agents and Brokers, reacted by saying “people can talk all they want about the political obstacles facing this legislation and this cause, but one way or another, sooner or later, rabid opposition from the protectionists or not, this legislation is going to pass. The financial services world and consumers will be better for it.”

Justin Roth, a senior director for federal government relations at the National Association of Mutual Insurance Companies, said that “it makes little sense to introduce legislation that would create a system the vast majority of companies and agents in the property and casualty world strongly oppose.”

Mr. Roth said while NAMIC acknowledges “the current regulatory system needs to be reformed, we think those reforms can take place at the state level rather than creating an additional layer of federal bureaucracy the insurance industry and consumers would have to deal with.”

Mr. Roth added that “Congress can play a meaningful role in helping to modernize insurance regulation while not adding additional regulation at either the state or federal level.”

Charles Symington, senior vice president for governmental affairs for the Independent Insurance Agents and Brokers of America, said his group opposes the bill because it “creates a massive new federal bureaucracy.” Instead, he said IIABA supports targeted federal legislation to reform the state insurance regulatory system, “which relies on the over 100 years of skill and experience of states as insurance regulators.”

He cited the federal surplus lines regulation legislation introduced in March, “which would help create uniformity in the surplus lines and reinsurance markets.” (See related story on page 8.)

“There is no question in the insurance market that the existing regulatory system needs to be reformed,” Mr. Symington said, calling change “overdue” and conceding that “virtually every industry stakeholder agrees the existing system can be slow, inefficient and duplicative.”

“The IIABA agrees with the need to update the regulatory system, but a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer,” he said.

American Insurance Association President Marc Racicot called the legislation “critical” because it is rooted in free-market principles that “would allow competition to flourish” because “consumers would be empowered by market-based regulation that would allow insurers to customize products and meet consumer needs more quickly, while retaining strong federal regulatory oversight of market behavior and financial condition.”

He added that the bill would allow U.S. insurers to compete more effectively and would improve the overall competitiveness of the financial services industry.

“This new system would displace the current multistate patchwork regulatory system that lacks uniformity and that has been defined by government price and product controls,” Mr. Racicot said.