Treasury Expects Regulatory Reforms To Be Evolutionary

If congressional reaction is any indication, with some major players voicing reservations about reforms in insurance oversight proposed by the Bush administration last week, any change is likely to be evolutionary rather than revolutionary, a Treasury Department official indicated.

The official--who played a key role in coordinating the drafting of the report, but who remained anonymous under the rules of a background briefing for reporters--said the Treasury blueprint is "aspirational." In other words, Treasury hopes to see an evolution in financial services regulation in general, including insurance, over time.

Moreover, the official said the blueprint should not be seen as endorsing any particular piece of legislation. A number of insurance reform bills are circulating in Congress--some calling for an optional federal charter, while others would set national standards for states to follow.

Indeed, the report recommended creating an interim federal insurance regulator within Treasury to coordinate with state officials on "pressing" insurance issues, an acknowledgment that the debate in Congress to establish a permanent OFC is likely to be "difficult and ongoing."

The first step will be new hearings on the issue--the first likely to be April 16 by the Capital Markets Subcommittee of the House Financial Services Committee.

While sponsors of legislation that would create an optional federal charter for insurers in both the House and Senate lauded the authors of the Treasury blueprint for its OFC support, gatekeepers for congressional action responded far more cautiously.

Both Sen. Christopher Dodd, D-Conn., chair of the Senate Finance Committee, and Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee, declined to embrace the Treasury's call for an OFC, especially for property-casualty insurers.

Sen. Dodd said he would support legislation creating an OFC for life insurers but expressed reservations about similar regulatory oversight for p-c carriers.

"I can make a strong case to you [for an OFC] with life insurance," he said, but on p-c insurance, "it's another matter. There are some very legitimate issues why state regulation makes more sense in the property-casualty area, and why a federal regulatory scheme makes more sense in the life area."

He added, however, that insurance regulatory reform is important to his committee. "That's a matter we're already talking about up here. I have a number of colleagues...[who] care deeply about this issue," he said, citing Sen. Tim Johnson, D-S.D. "We're going to try, in this whole idea of the optional federal charter. We're looking at that, will probably hold some hearings on it," he added.

Rep. Frank, however, said "the [Treasury] plan goes too far in diminishing the role of the states."

Rep. Frank Kanjorski, D-Pa.., who chairs the Capital Markets Subcommittee of the Financial Services Committee, said he would support legislation creating an OFC. "I have worked toward this goal for some time," he said in a statement.

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." The hearing is expected to be on April 16.

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

Sens. Johnson and John Sununu, R-N.H., authors and sponsors of the National Insurance Act of 2007, which would create an optional federal charter, said they "were glad to see" the proposal from the Treasury Department includes a discussion of insurance regulation and also recommends an OFC system.

"An OFC will modernize the current inefficient insurance regulatory structure while enhancing U.S. competitiveness in the global financial services economy, and I commend [Treasury] Secretary [Henry] Paulson and his colleagues for taking a long-overdue step in this direction," Sen. Sununu said.

Sen. Johnson added that "there is increasingly widespread consensus that the status quo for insurance regulation is unacceptable."

Rep. Melissa Bean, D-Ill., and Rep. Ed Royce, R-Calif., authors of companion legislation in the House, also noted the blueprint's call for federal regulation of insurance. Rep. Bean said "our nation's economic leadership in the world hinges upon its global leadership in capital markets."

She added that the Treasury proposal follows previous reports by Sen. Schumer and New York City Mayor Michael Bloomberg, and by the U.S. Chamber of Commerce bipartisan commission, all of which make the compelling case to update the insurance regulatory environment.

Rep. Royce said Mr. Paulson "believes, as many do, that the creation of an optional federal charter should be at the forefront of any initiative intended to improve the oversight and competitiveness of the financial services industry in the United States."