For decades, there has been talk of creating a federal insurance regulator. The industry remains split on the issue, with the life industry generally in favor of federal oversight, but with property-casualty trade groups representing both insurers and producers at odds over the question.
The idea was to create an "optional" federal regulator and let insurance companies choose, much as banks do, who would supervise their operation. Presidential administrations and many Congresses have come and gone, and the debate continued.
As this debate intensifies following the financial market's meltdown, industry pundits on both sides appear to agree that this congressional session will be different, since some version of a federal regulatory bill has the best chance ever of being passed and signed into law.
Major change is coming. It will be far-reaching, and the insurance industry must have a seat at the table as the regulatory environment is reengineered.
Most likely, the change we're talking about will come via H.R. 1065, the National Insurance Modernization Act, which seeks to target issues raised by the current economic climate–including what some see as a lack of accountability and uniformity in the way business is handled here.
Co-sponsored by Reps. Melissa Bean, D-Ill., and Ed Royce, R-Calif., the bill is set to focus on key areas such as consumer access, uniformity, and whether a federal charter would be optional or mandatory for insurers deemed "systemically significant."
The creation of NIMA comes in the midst of unprecedented market turmoil–whose blame is being pinned, in part, on the lack of a systemic risk overseer who would be able to view all aspects of an insurance company and its holdings from 30,000 feet.
At a recent insurance summit in Washington, D.C., sponsored by Indiana State University, Rep. Bean said problems in the current financial climate have more to do with a lack of efficacy and a systemic-risk-detecting structure than they have to do with the need for more regulation.
"I don't hear people saying we need more regulation. I hear them saying we need better regulation," Rep. Bean said. "We're looking for better effectiveness. Consumer protections must be consistent and robust."
Items expected in the latest bill that differ from past versions include:
o Placement of a physical branch of a new Office of National Insurance in each state.
o Creation of a systemic risk regulator for "systemically important" insurance firms.
o A mechanism that will facilitate product innovation and quicker turnaround time in getting policies to market.
Rep. Bean added that under NIMA, insurers would enjoy enhanced free-market pricing and a forum by which they might engage in discussions of national and international import–such as tax policy, transparency and international financial issues.
While legislation of this sort, in some form, may become a reality in the near future, right now there's plenty of room at the table when it comes to defining terms within the mandate.
One is the term "systemically important," which has also been likened to the "too big to fail" label given insurers that would be slated to be regulated by the new systemic risk regulator–there is no mention of an option.
And while the bill's sponsors are still working on firming up who will be overseen by the proposed systemic risk regulator, the question of just what constitutes "systemic risk" is one that is under serious consideration by the House Financial Services Committee chair, Rep. Barney Frank, D-Mass., as well as Sen. Chris Dodd, D-Conn., who chairs the Senate Committee on Banking, Housing and Urban Affairs.
This pair of political powerhouses on Capitol Hill will work with the Obama administration, aiming to unveil their systemic risk plan at the April G-20 summit in London.
Once the "who" and the "what" are decided, then there will be a question of "where" this regulator will be housed. Will it be the Federal Reserve? The Securities and Exchange Commission?
Further, what becomes of state regulators and the National Association of Insurance Commissioners? As NAIC CEO Terry Vaughn argues, it's a system that has a long history of consumer protection and proven solvency oversight.
"Any system of financial stability regulation can, and must, build on this proven regime," Ms. Vaughn testified during a "Perspectives on Systemic Risk" hearing in the House earlier this month.
The issue of federal-vs.-state regulation has been alive for many years, but even those who have staunchly supported a state-based system in the past are conceding that, at the very least, a systemic risk regulator is likely to come to the fore in the very near future. That said, there are many elements of the current proposal that are up for scrutiny and debate.
While it's not realistic to imagine that the whole of the insurance industry will join hands to approach lawmakers in agreement on all the issues, it does make sense for the industry to strive to have an effective voice, knowing that whatever new regulatory regime does surface out of the current debate, it is one that the industry will be living with for many years to come.
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