Optional Federal Charter Bill Introduced In House

Companion legislation to a U.S. Senate bill creating an optional federal charter for insurers has been unveiled in the House.

Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., introduced the National Insurance Act of 2007. They said they had won a commitment from the Democratic leadership of the House Financial Services Committee to hold hearings on the legislation soon. The Senate's measure was introduced in May.

The OFC legislation is backed by 11 financial institution trade groups, including the American Insurance Association, the Council of Insurance Agents and Brokers, and the Reinsurance Association of America. Corporate buyers represented by the Risk and Insurance Management Society also voiced support.

However, the industry remains split on the issue, with the National Association of Mutual Insurance Companies and the Independent Insurance Agents and Brokers of America reiterating steadfast opposition.

In a statement issued as the bill was introduced, Rep. Bean said that “regulatory obstacles currently discourage insurance innovation and nimble product development to capitalize on emerging growth markets.”

She added that “eliminating the need to coordinate with 51 state regulators and accelerating the time to market potential will foster greater industry innovation and agility.”

Both Reps. Bean and Royce said the current state-based regulatory system for insurance had created a $24 billion trade deficit in insurance markets in 2006. In contrast, they noted that banks–which have a group of federal regulators bankers can choose to be regulated by–have a substantial positive trade position.

The House legislation creates a federal system of regulation and supervision for insurers as well as agents and brokers that is similar to the dual banking system.

Under the bill, insurers and producers would both be free to elect federal or state regulation, charters and licenses, and states would maintain responsibility for regulating state-licensed insurers and producers.

Unlike legislation introduced in the Senate last year, the latest bill addresses the surplus lines market–clearly defining nonadmitted and surplus lines insurance–and specifically permits nationally licensed agencies to place 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 bill, like its Senate counterpart, specifically directs a federal insurance commissioner to establish regulations barring unfair trade and claims practices.

It also states that national insurers, as a general rule, must belong to the state guaranty association in each state in which they offer insurance.

The bill says that if a state guaranty association does not provide policyholders with a level of protection equivalent to National Association of Insurance Commissioners model standards, a national insurer would be required to join the National Insurance Guaranty Corp. created under the law.

This corporation would have separate accounts for property-casualty insurance and life insurance, and similar to state guaranty funds, would be post-funded with assessments of its member companies.

The most controversial provision of the legislation would eliminate rate regulation–a deep concern for Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee. Rep. Frank on numerous occasions said he would support exemption from rate controls for life and commercial property-casualty writers but not for personal lines.

Big corporate buyers are on board with the proposed regulatory change. Terry Fleming, a member of the RIMS board and director of risk management for Montgomery County, Md., said “this important piece of legislation represents a much-needed step forward in the process of insurance industry modernization.”

“RIMS is encouraged that the bill has been introduced in the House,” he added. “RIMS has long supported the idea of an optional federal charter, and believes that a regulatory system structured in this way would hold enormous benefits for the policyholder community.”

However, Justin Roth, NAMIC's senior federal affairs director, said his group “remains steadfastly opposed to an OFC,” asserting that “there is nothing to be gained except more bureaucracy and confusion for insurance consumers.”

The IIABA said rather than creating a massive new federal bureaucracy under an OFC, the producer group instead supports targeted federal legislation to reform the state insurance regulatory system.

IIABA officials cited as an example of such a pragmatic approach H.R. 1065–the Nonadmitted and Reinsurance Reform Act of 2007–which passed the House by voice vote last month. The legislation would help create uniformity in the surplus lines and reinsurance markets.

“We share the belief held by virtually every player in the insurance market that there needs to be reform of the existing regulatory system,” said IIABA Chief Executive Officer Robert Rusbuldt. But he added that “creation of a new federal bureaucracy is not the answer.”