No Congressional Bills Get the Nod in Treasury Regulatory Reform Blueprint

He also said he would hold another hearing later this month on insurance regulatory issues, and that he believed "the Treasury Department should have a seat at the table at this hearing."

Rep. Kanjorski said he would support a key interim step suggested by Treasury that would create an Office of Insurance Oversight within Treasury to collect information about the industry and advise the Bush administration about insurance policy.

"I have also previously called for the establishment of such an entity," Rep. Kanjorski said. "In today's markets, the federal government needs in-house expertise on insurance policy."

Sen. Charles Schumer, D-N.Y., a member of both the Senate Banking and Judiciary Committees, also said he would support an OFC as opposed to insurance regulation by the separate states.

"This is a national, it's an even international financial market, and to have 50 different states each saying their own thing, that's an idea from the 19th century, not from the 21st century," Sen. Schumer said on CNBC.

The Treasury official under ground rules established by the agency could not be quoted by name. He made his comments today after Treasury Secretary Henry Paulson unveiled the department's Blueprint for Financial Regulatory Reform before a packed audience in an ornate meeting room in the old Treasury Building.

The proposal calls for an optional federal charter for insurance companies and agents–with separate charters required for property-casualty and life-disability.

The provision of the Treasury blueprint Rep. Kanjorski said he would accept would create an interim federal insurance regulator within Treasury to coordinate with the state regulatory officials on "pressing" insurance regulatory issues, an acknowledgment that the OFC debate in Congress is likely to be "difficult and ongoing."

In discussing the insurance component of the blueprint, Mr. Paulson said "insurance presents a clear need for regulatory modernization."

But, the Treasury official cautioned in the media briefing, the document is "aspirational"–in other words, what the department hopes to see evolve in financial regulation over a period of time–and "doesn't endorse a particular piece of legislation," for example, insurance regulatory reform legislation now pending in Congress. "It will be a long, tortuous process," the official said.

He also noted that Treasury believes if an OFC is established, it will become a framework that will be most attractive to large, multinational insurance companies, whether based in the United States or outside it.

There are four insurance regulatory bills pending in Congress. These include bills creating an optional federal charter that have been introduced in both the House and Senate; a House bill that would consolidate regulation of surplus lines and reinsurance in one state; and a fourth bill that would recreate the National Association of Registered Agents and Brokers (NARAB), a national producer licensing scheme.

In explaining the Treasury blueprint, the Treasury aide cautioned that one overall theme is to ensure that consumer protection is consistent. "Consumers should be treated the same when they are buying similar products."

He cited as an example mutual funds and annuities as similar products, which over time should be regulated uniformly in terms of consumer protection.

The blueprint talks specifically about the problems states have in providing consumer protection, which officials of the National Association of Insurance Commissioners continually cite as their strong suit in arguing against federal oversight of insurers.

"Even though the NAIC's accreditation program has succeeded in making solvency regulation somewhat more uniform and effective," the blueprint states, "achieving uniformity in other state regulatory functions, such as in the areas of consumer protection or market regulation, has failed."

Specifically, it said these areas of concern "include regulation focusing on insurer practices, independent of solvency concerns, which might be detrimental to policyholders, such as deceptive advertising, unfair policy terms, or discriminatory or unfair treatment."

Discussing what happens when an insurance company becomes insolvent, the blueprint notes that although all states have instituted guarantee funds to pay unearned premiums and the balance on outstanding claims often up to statutory limits, these payments "are not uniform and can vary by state, type of insurance and net worth of the policyholder."

The Treasury noted that each state has its own laws establishing separate guarantee funds for life and health insurance and for property and casualty insurance for specified lines of business written by licensed insurers.

"However, only one state, New Jersey, has a guarantee fund for surplus lines insurers, (i.e., insurance written by unlicensed companies under special permissive provisions) and there are no guarantee funds covering captive insurers," the Treasury report said.

Regarding licensing of producers, the blueprint notes creation of NARAB pursuant to the 1999 Gramm-Leach-Bliley financial disclosure law.

It recounted the fact that 26 states, a majority, had adopted their own laws creating reciprocity arrangements for producers, which met a threshold target number needed to keep NARAB from going into effect.

"Since successfully preventing the triggering of NARAB by meeting the reciprocity statutory requirement, states have failed to achieve uniformity in licensing standards," the report noted.

The blueprint also mentioned that seven categories of state policy form systems exist in various states. In dealing with forms, the report noted that the NAIC has attempted to achieve a high degree of uniformity and efficiency in form approval by creating the Coordinated Advertising, Rate and Form Review Authority. That unit provides a centralized review of certain life insurance products based on a set of uniform standards.

"However, states have not used the Review Authority due to the standards being riddled with deviations," the report said.

In examining insurance rates, a controversial area, especially with regards to property-casualty personal lines products, the report said the legal standard for rates in all states is that they not be "inadequate, excessive or unfairly discriminatory."

It added that state insurance regulation initially emphasized the adequacy of rates so as to prevent solvency problems. "However, today insurance regulators have used price controls to hold down prices for their constituents by denying proposed rate increases on the grounds that they are excessive," the report said.