Congressman Sees Momentum For OFC, But Foes Cite Problems

Rep. Royce also harshly criticized the system of elected insurance commissioners, repeating a story he said an attorney friend told him in which his friend's law firm was shaken down by a now imprisoned Louisiana insurance commissioner, and adding his own poor perceptions of former California Insurance Commissioner Charles Quackenbush. "I'm just not convinced that a world-class regulator operates in the manner that I've seen up close," he said.

Additionally, Rep. Royce noted that insurance is alone among financial markets in that many of its primary regulators earned their position through the ballot rather than expertise and experience.

"I don't think there's anyone who thinks it's a good idea" if the same concept were applied to other regulatory agencies such as the Securities and Exchange Commission or the Federal Reserve, he said.

He also contrasted the positions of the SEC and the Federal Reserve with that of the insurance industry in negotiating international policy. When the United States is involved in trade discussions, he said, representatives for the Fed, the SEC and the Office of the Comptroller of the Currency all play a role, while the National Association of Insurance Commissioners does not.

"They are not a part of that process, and it's a problem," he said.

However, another speaker at the event, Illinois Insurance Director Michael McRaith, said while he acknowledged work remains to be done by the states to improve insurer oversight, he disputed the notion that consumers would be better served under a federal regulatory scheme.

"We need to look at the consequences [of federal regulation], and I don't think you need to look very far," he said, noting that federal regulators failed to stop ongoing problems such as the credit crunch, and pointed even more specifically at the problems involving the marketing of Medicare Advantage programs.

As a state regulator, Mr. McRaith is required to pass any complaints relating to Medicare Advantage along to the Centers for Medicare and Medicaid Services. In terms of a response, he added, "there is a deafening silence."

Looking forward, Mr. McRaith also said that the creation of a federal insurance regulator would be the broadest expansion of the federal government since the New Deal in the 1930s. Even simply staffing the agency would require enormous resources, he said, unless the government is willing to accept less stringent regulation.

"Are you going to assume consumers need less protection?" he said. "Do you assume that the solvency standards aren't going to be as strictly upheld?"

For their part, insurance industry representatives remained split on the OFC issue, although how much of a gap exists depended on the speaker's perspective.

Kevin McKechnie, executive director of the American Bankers Insurance Association, said that with the support of his group, the American Insurance Association, the American Council of Life Insurers and others, "an overwhelming majority of institutions and businesses" are in favor of an OFC.

Although he praised reform efforts by the National Association of Insurance Commissioners, Mr. McKechnie said they would never provide the uniformity needed because of the simple reason that the NAIC "doesn't pass laws."

It is ironic, he added, that if the OFC proposal being opposed by the NAIC–which, he said, is largely based on NAIC models–were to pass, "it would be the first time an NAIC model law was passed for the whole country."

Mr. McKechnie also sought to defuse the notion that state premium tax receipts were in danger, noting the similarities between the proposed OFC and the banking system while adding that "if the banks had figured out how to get out of paying taxes, we would done so years ago."

But Gregory Wren, executive director of the Coalition Opposed To A Federal Insurance Regulator, argued that while states are concerned about premium taxes, it is not the main reason why the nation's governors and groups such as the National Conference of Insurance Legislators oppose an OFC. "It deals with local autonomy," he said.

Mr. Wren criticized the notion that a federal regulator would operate any faster to respond to problems than the current state system, asking, "Where was the speed of the federal government" in the wake of Hurricane Katrina?

The OFC proposal, he said, is "unnecessary" and "attempts to throw a 'Hail Mary' when we're nowhere near the goal line."

The AIA's executive vice president for public policy management, Debra Ballen, said time is of the essence for the insurance industry and the federal government when it comes to regulatory reform.

Too often, she said, lawmakers have allowed the issue of insurance regulation reform to languish, or have sought to address it in a piecemeal fashion. "We can't wait for another crisis," according to Ms. Ballen, adding that lawmakers also could not act, "for this niche and that niche"–perhaps referring to current efforts to standardize regulation of surplus lines and reinsurance through a federal bill.

Robert Detlefsen, vice president of public policy for the National Association of Mutual Insurance Companies, said NAMIC remains opposed to the OFC, and questioned whether the proposal would result in better regulation.

While consumer advocates often point to the potential for "regulatory competition" between federal regulators and the states driving down standards, Mr. Detlefsen noted that such a system would only work if companies could "make good on the specific threat" to change their charter freely.

He also pointed out that the concept of regulatory competition could work in reverse, as federal- or state-regulated companies lobby their other regulator to stiffen their oversight in the name of creating a "level playing field."

From an agent perspective, little about the OFC would be optional, according to Thomas Koonce, assistant vice president for federal government affairs at the Independent Insurance Agents and Brokers of America.

"The co-called optional federal charter would not be optional for agents," he said, noting that even if agents chose to remain state-licensed, they would have to work with federally-regulated carriers, and thus have to know the ins and outs of both systems.

He said Congressional efforts would be better spent on "practical" reforms, such as the surplus lines standardization bill, and questioned the image presented by OFC supporters of federal regulation as a "silver bullet" for all problems.

"I'm still waiting to hear OFC supporters say it will solve the problems of global warming or could have stopped steroid use in Major League Baseball," he said.